Thoughts on NFTs, their Energy Impact, and the Solutions that are Coming
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January 30th, 2022

Note: Published April 13 2021 on LinkedIn

Tomorrow, Coinbase goes public via DPO and Ethereum releases its Berlin upgrade. Projects are announcing new products and rolling out upgrades every day, countries are piloting CBDCs (century bank digital currencies) and NFTs have become a popular topic to both poke fun at and take seriously on its various real use cases.

As a brief intro, a couple use cases for NFTs are outlined below.

Although most NFTs now consist of digital art and collectibles, they offer artists and creators to effectively monetize. This means that for example if you write a research paper or a song, one can split revenue to those who helped collaborate, along with the artist / writer. It’s something that will be immensely helpful as the creator economy increases in size /scale and the prescience of ad revenue as monetization decreases.

Sports teams and concert venues are looking to use NFTs for tickets, and major sports leagues are incorporating them in trading cards and video games such as Sorare for soccer.

A particularly exciting aspect of NFTs is when they are combined with gaming. These already exist digitally, and NFTs (which can be quite customized if the creator desires) can be used to unlock various features. A NFT of a digital house was sold, and there are different digital / VR worlds which already utilize NFTs for ownership.

Other use cases of NFTs include the Uniswapv3 exchange upgrade (a decentralized exchange, or dex) which allows the ability use NFTs to potentially create derivative products and contracts with locked liquidity for projects to incentivize liquidity provisioning.

There’s an incredible amount of potential for NFTs — even though right now use cases may be a bit silly, this is a space that is here to stay and will one day perhaps be a logical and basic aspect of our day to day.

With a little bit on NFTs, let’s talk about energy consumption.

In March, Wired released an article on the energy usage of NFTs issued on the Ethereum blockchain, critiquing its carbon emissions and consumption

After reading, I feel that there are a couple points to keep in mind:

  1. A large percentage of mining operations is done through clean / renewable energy sources — often due to the byproduct of noise and heat generation of these operations. Green energy projects have also been and can use mining to allow faster payback periods

  2. The Ethereum network not supports the creation and distribution of NFTs, but also defi projects and exchanges, stablecoins, storage, and more d-apps. Boycotting NFT issuances won’t necessarily reduce Ethereum’s energy consumption as other use cases increase in popularity, in fact (see bottom) actively participating may help induce faster change due to scalability.

The logical follow-up question is on a critique of energy usage is how does Eth / Bitcoin energy consumption compare to things of similar scale that we use everyday? It’s difficult to call out blockchain / crypto use cases without similarly thinking about the very real impact of other similar entities. This includes payment processors, social networks, and even the infrastructure and energy needed to upkeep the internet.

  1. Mining, as known primarily through Bitcoin’s proof of work has long been acknowledged for its energy inefficiency. Teams have worked on this, such as developing other consensus algorithms based on a Proof of Stake model, which is far more energy efficient.

And these Proof of Stake projects aren’t just concepts, but have been rolled out (with more development) such as Algorand and Cardano. Meanwhile other distributed ledger technology projects rely on various other ways to achieve consensus without the use of miners.

  1. The article calls out Ethereum 2.0 (in its transition from proof of work to stake as a potential alleviation of the energy issue) has no clear deadline to come. The most recent roadmap outlines Ethereum 2.0 for late 2021 or 2022, with phases between that improve scalability and functionality.

It’s important to realize two things: first, most networks have various upgrades in the works (i.e. the “Berlin” upgrade tomorrow May 14th) with various proposals for scalability solutions in place (“layer twos”) and second, the community is ready and dedicated to the Ethereum 2.0 upgrade (with over 3.8 million ETH already voluntarily contributed and locked up by the community to support the epicenter of its architecture)

  1. There are so many blockchains and projects one can issue NFTs on! Many don’t have the same energy consumption issue that Ethereum has right now and offer good interoperability across different platforms. For example, projects like Binance smart chain, Polkadot, Tezos, and more offer NFT capabilities.

What’s been particularly interesting is seeing the quick response to the article from the NFT marketplaces — demonstrating the validity of criticism but also the fluidity of an ecosystem in which projects are very much a work in progress where a community is able to help shape its direction. To name a few events that have happened in the last month:

  • Various developers have outlined some helpful practices for eco-friendly NFTs: https://github.com/memo/eco-nft
  • Opensea is using Immutable X, an Ethereum scaling solution, to help significantly lower transaction fees and handle higher volume, thus reducing the direct impact to the Ethereum network
  • Nifty Gateway is buying carbon offsets
  • Super Rare is both buying carbon offsets and contributing to Eth scaling research
  • Enjin, an Ethereum based NFT and gaming centered project, released its on new scaling solutions to tackle the expensive (and energy intensive) transactions on Ethereum

It’s easy to view cryptocurrency as just tokens, but the exciting part is the technology, community, and projects that are being built, of which cryptocurrency plays just one part. Development is active and ongoing, with ample opportunity to contribute and help shape the transition to Web3 — the best thing to do is get involved and learn.

Disclaimer: None of the above is to be taken as financial advice, and represent my views only

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