Energy and Ethereum: How Non-Fungible Tokens are Overwhelming the Cryptocurrency Space
The recent stratospheric rise of non-fungible tokens, or NFTs, has stormed the realm of digital goods and magnified the growth and accessibility of cryptocurrency. From art and music to GIFs and sports highlights, the digitally exclusive nature of NFTs has been supercharged during the COVID-19 pandemic. The velocity of pricing is driven by scarcity and consumer demand, giving online participants the ability to drastically increase prices, with the current market value of NFTs at $1 billion.
Yet, the core functioning of NFTs on the Ethereum blockchain requires considerable amounts of energy for transactions, which threatens the future sustainability of Ethereum’s logarithm and the current craze surrounding cryptocurrency.
The origin of NFTs popularity began in 2017, when the CryptoPunks project stored its 10,000 digital pixel characters on the Ethereum blockchain. While the first purchase was a zombie creature for $1, the distinctive characters now start at $30,000 and go up to $7.58 million in price.
The character's individuality represents the non-fungible nature of NFTs, which differentiates them from other cryptocurrencies like Bitcoin. Whereas one bitcoin is equal to another bitcoin, each NFT has a unique digital signature that gives its buyer sole authentication and ownership. NFTs derive value from their scarcity, with users holding onto them as collectibles or until value and demand grows.
The majority of NFTs reside on the Ethereum blockchain, which works as a decentralized public ledger where transactions are recorded and verified. “People use computers to “mine,” or solve complex mathematical equations that confirm each transaction on the network and add new blocks to the blockchain.” Participants are then rewarded Ether (ETH), or other cryptocurrency tokens.
The Ethereum network is multi-functional, allowing users to run decentralized applications, complete complex transactions, store data, and self-execute “smart contracts” without the backing of a lawyer. These functions build the network's attractiveness by granting people control over their data without the oversight of a central authority.
Yet, Ethereum’s price history illustrates the volatile and abstract nature of NFTs which began at $730.04 on January 1st 2021, reaching a market high of $4,132.76 on May 11th. This growth led to greater transaction fees called “gas” that users are required to cover, which hit a record high of $23 in February 2021.
The functionality of NFTs remains a contested topic for the average consumer. The confusing nature of virtual value is enriched by the ability to view and share NFTs online without a fee. Their recent popularity has notably shaken the art world when American graphic artist Mike Winkelmann, known as Beeple, sold a piece of 5000 digital images called “Everydays: the first 5000 days,” for $69 million in March 2021.
Nadya Ivanova, CEO of research firm L’Atelier, explains how NFTs have “allowed content creators to actually own the property rights for what they create, which allows them to profit from it in different ways which they can’t do with physical art.” Artists can sell directly to the consumer and program in royalties to receive a percentage of sales when their digital goods are re-sold. Celebrities, musicians, and brands have also joined the virtual bandwagon with American rock band Kings of Leon being one of the first to release a major record titled “When you see yourself” as a collection of NFTs, generating over $2 million in sales.
While the NFT and cryptocurrency bubble is exclusively online, the real-life consequences of carbon emissions haven't gone unnoticed by artists. The Ethereum block chain “proof-of- work” logarithm acts as a security system to oversee online transactions. People add thousands of new transactions or “blocks” to the chain everyday in an energy intensive process called “mining,” that repeatedly uses datasets through downloading and running the chain, creating excess energy consumption from those who don’t solve the block.
The popular “Space Cat” GIF of a cat in a rocket ship demonstrates this energy usage as an NFT, with its carbon footprint “equivalent to an EU resident’s electricity usage for two months.” While individual transactions are less severe, the ability for participants to ignite trends poses difficulty when “many NFT transactions send a stronger economic signal to the miners which may lead to increased emissions.”
Some advocates for cryptocurrency are relaying these concerns, with Elon Musk halting the use of Bitcoin and tweeting on May 12th that “Cryptocurrency is a good idea on many levels and we believe it has a promising future, but this cannot come at great cost to the environment.”
The carbon footprint of Ethereum is partially generated through its proof-of-work logarithm, which is poised to transition to proof-of-stake by the end of 2021. Proof-of-stake picks validators to secure transactions, who put up stake in Ether as collateral, rather than miners racing to process transactions. Vitalik Buterin, co-founder of Ethereum, said in an interview that “Switching to proof-of-stake has become more urgent for us because of how crypto and Ethereum have grown over the last year.” This transition is part of Ethereum’s 2.0 (Eth2) plan in 2021 to address sustainability challenges.
According to the Ethereum Foundation, if successful, this shift to a proof-of-stake model “could reduce Ethereum’s energy use by up to 99.95%.” Yet, since Ethereum’s genesis, the plan to reduce its carbon footprint has been criticized by people waiting for them to execute the change.
“If not everyone agrees to that change, you’re going to be in a situation where the network just falls apart,” says economist Alex de Vries. “It can literally break into multiple chains if not everyone runs the same software. That’s the downside of trying to upgrade public blockchains like Ethereum.”
The shift to a new logarithm is a massive undertaking, and will radically increase the speed of Ethereum transactions. Some artists selling NFTs have also tried offsetting their carbon footprint by donating money based on their revenue, or through cross chain migration onto other NFT supported blockchains. But for cryptocurrency specialist Matt McCall, “This is the future of finance – or decentralized finance to be more precise. We are heading toward not only a digital world but a tokenized world.”
As creators and consumers in the cryptocurrency space advocate for more sustainable practices, the corresponding technology will need to be continuously adapted to support the volatile virtual market. With mainstream companies and entrepreneurs investing in one-of-a-kind assets, prices have dramatically risen and multiplied opportunities for artists' digital goods. As COVID-19 restrictions begin to lift, less people may find themselves circulating the internet for new business ventures, potentially affecting the recent momentous rise of NFTs. But, as the confusing technology enters the common business vernacular, the facility for consumers to steer price and demand in a decentralized market may become more common.
The sustainability of NFT’s and blockchain networks like Ethereum is contingent on improved efforts within the virtual economy to reduce our carbon footprint and create an accessible platform for experts and amateurs alike. Yet, through the growth of digital collectibles and complex online markets, NFT’s prove there is no limit to what people will pay for goods, when someone else is willing to pay more.