Knowledge Series: The Environmental Impact of NFT's
June 7, 2023
In our first knowledge center article, we offered a primer on NFT’s and gave some high-level information about the technology. In this post, we want to address a common misconception regarded as a drawback of utilizing NFT’s and blockchain technology in general.
NFTs are frequently criticized as environmental villains. This notoriety comes from the significant energy consumption of their underlying technology, blockchain. However, this view is a broad brushstroke, failing to consider the nuances of blockchain technology and its evolution towards more sustainable methods. This article aims to dispel the myth that NFTs are categorically detrimental to the environment and highlight the potential of energy-efficient alternatives like Polygon's Proof of Stake (PoS) network.
Firstly, it's crucial to understand that energy consumption concerns revolve around the consensus mechanism of blockchain networks. Bitcoin, the most widely known blockchain, uses a Proof of Work (PoW) consensus mechanism. PoW requires a network of computers, known as miners, to solve complex mathematical problems to verify transactions. The process is competitive, with the first miner to solve the problem rewarded in bitcoins. This competition incurs significant energy costs, with the Cambridge Centre for Alternative Finance reporting that Bitcoin consumes about 121.36 terawatt-hours per year as of early 2021 - comparable to the annual energy usage of Argentina.
While these figures are indeed alarming, they are not a uniform characteristic of blockchains, nor by extension, all NFTs. Enter Proof of Stake (PoS) networks, such as Polygon. Unlike PoW, PoS selects validators to create new blocks based on the number of tokens they hold and are willing to 'stake' as collateral, rather than their computational power. Consequently, by not requiring nearly as much computational power, PoS networks significantly reduce energy consumption.
Understanding these energy consumptions in a broader context further sheds light on blockchain technology's relative environmental impact. A 2020 study by the International Energy Agency highlighted that data centers worldwide consumed around 200 terawatt-hours of electricity per year. This figure is projected to reach 651 terawatt-hours by 2024 – figures that dwarf the energy consumption of even Bitcoin, let alone Ethereum or Polygon. When considering the vast array of industries dependent on data centers, it's clear that the environmental impact of blockchain technology isn't as unique as many would believe.
Similarly, traditional financial industries aren't entirely green either. A 2019 report by Galaxy Digital compared the energy consumption of gold mining and the traditional banking system to Bitcoin. It revealed that Bitcoin consumed less energy than either of these, further adding to the contextual comparison of energy consumptions.
It's important to understand that, like any technology, blockchain has a carbon footprint. Yet, it's not a 'one-size-fits-all' issue. Not all blockchains consume energy at the same level, and efforts are being made to transition to more sustainable models, as demonstrated by Ethereum's shift to PoS and Polygon's existing model.
Critically, the discussion around NFTs and their environmental impact needs a more nuanced approach. While it's accurate to note that PoW blockchains, like Bitcoin, are energy-intensive, it is a sweeping generalization to label all NFTs as environmentally damaging. Recognizing the diversity within blockchain technologies and their varying environmental footprints is crucial in ensuring a balanced perspective and fostering responsible innovation in this rapidly evolving digital landscape.
Finally, it’s worth noting that all of Uptop’s blockchain infrastructure to date has been built on Polygon, which, thanks to its PoS consensus mechanism, consumes a very small fraction of the amount of energy that a network like Bitcoin does.