The Environmental Cost of NFTs: 3 Steps Forward, Many More to Go

Thought Leadership

By Apply Digital Staff | July 20, 2021
Computer screen with NFT art

Non-Fungible Tokens, or NFTs, are here to stay, offering transformative potential to improve the way we transact and protect data online. But there’s another, more controversial side to NFTs — their impact on the environment.

That’s because NFTs rely on blockchains — digital database systems notorious for their drain on the power grid. Blockchains aren’t the first technology to tip the scale in favor of efficiency over footprint. But like the automobile and lightbulb that came before, NFTs are facing pressure from consumers and the public alike to reduce their carbon footprint or lose their stake in the future.

Why do NFTs require so much energy?

NFTs tokenize digital data and keep records of these tokens on a blockchain. The majority of NFTs are connected to Ethereum based blockchains. Blockchains are decentralized (public) databases that protect themselves against fraudulent entries through a process of verification known as ‘proof of work’.

Simply put, proof of work involves testing each piece of new data on a network against a computationally demanding formula. In order to be included in future iterations of the blockchain, this data must result in a unique output (hash). Unfortunately, proof of work uses exceptional computational processing power, requiring multiple powerful computers (nodes) to verify the data and reach a consensus on the result. This process inadvertently draws a substantially hefty share of electricity from larger power grids.

Why is this a problem?

The problem is that these computers are either adding demand on pollution-emitting power plants or reducing the amount of sustainable clean electricity available for other uses. The energy drain caused by proof of work can be so damaging to the environment that several Chinese provinces recently banned blockchain mining.


Power lines

On the other hand, supporters of blockchain argue that the environmental threat is overblown. Earlier this year, researchers released a study claiming that Bitcoin, one of the biggest blockchains globally, only makes up 2.3% of global digital tech emissions. If so, it means that bitcoin has a lower carbon footprint than large-scale networks, data centers, and users watching YouTube and gaming online.

Is there a solution?

While the media debate rages on, blockchain architects have turned their attention to finding solutions that set the future of cryptocurrencies and NFTs on a more environmentally sustainable path.

Solution #1: Divide and conquer

As mentioned, current blockchains require new data to pass proof of work verification performed by multiple node computers in order to be added to the database.

One solution called ‘sharding’ offers an alternative method to proof of work. Sharding streamlines and reduces the amount of power required for proof of work. Instead of requiring all node computers to complete the proof of work formula in full, data verification tasks are spread out across participating nodes. Each node is only responsible for verifying the data it receives, as the nodes work together as parallel processors. Then, each output is sent back to the shared network, the blockchain.

Ethereum 2.0 is one blockchain already being developed to rely on sharding, along with proof-of-stake, in an attempt to build a faster, more environmentally sustainable system.

Solution #2: Put your money where your token is

‘Proof of stake’ is another, more sustainable proof of work alternative. Proof of stake requires all validator nodes on a blockchain to put up a sum of cryptocurrency. This buy-in acts as, well, proof, that the node is invested in entering only true information into the blockchain. If that entry is determined to be fraudulent, the node will lose that crypto buy-in permanently. Otherwise, that crypto fee funds the data verification, to be returned to the node at a later date.

Proof of stake requires less computing power — and less electricity — than proof of work. That’s because instead of forcing multiple node computers to put in the work testing data against a formula, one node does the verification. The trust in that calculation takes the form of the crypto investment. In short, entering fraudulent data into the blockchain just wouldn’t be worth it.

One blockchain proving that proof of stake is secure enough to go mainstream is Cardano. In the world of NFTs, proof of stake is already in play, powering the Flow blockchain that fuels the NBA Top Shop platform.

Solution #3: Layering up to cut down emissions

Another solution enables some transactions to occur off of the main blockchain, with the final transaction sum then communicated to the main blockchain. This is known as layering using a side chain.

In this model, the user transfers crypto or other digital assets to a secure output address. Once this transfer is confirmed, it’s communicated across the chains. Then, the user is free to transact on the side chain. Once all transactions are completed, information about the final state of the transaction is sent back to the main chain.

Side chains reduce the number of transactions the main chain needs to verify to one instead of many, cutting down on its carbon footprint. Side chains also offer another built-in benefit — the option to scale more swiftly and seamlessly.

Computer parts with some coins with cloud symbol

Looking forward

NFTs are still in their early days — the best is yet to come. The solutions proposed above are just a start to the sort of innovation and advancement we’ll see in the NFT and blockchain sectors in the next five years.

But these solutions alone are not the answer to the question of reducing the impact of these technologies. Instead, the true solution hinges on widespread adoption of clean and renewable energy. It’s about more than just NFTs and blockchain — it comes down to evolving our infrastructure to meet the needs of our increasingly tech-dependent world while also protecting our natural environment.

Want to learn more about NFTs? Watch “NFTs: The Best is Yet to Come”, an Apply Insights Deep Dive mini-doc. To discuss NFTs and blockchain in more detail, please contact us at hello@applydigital.com.

Written by Liz Goode