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❄Tackling the environmental costs of the NFT boom🌎

In the final instalment of our series on NFTs, we look at perhaps the most significant limitation the NFT space faces at present: its environmental impact. If NFTs are to form the cultural and economic foundation for Web 3.0, the sustainability problem will need an innovative solution. In this post, we’ll look at where that solution might be found — as well as how the emergence of Web 3.0 might itself become part of the fight against the climate crisis.

For a recap, here are our previous posts from the NFTs series.

NFTs are transforming the art market by solving the problem of digital scarcity

How NFTs provide the economic foundation for the emerging metaverse

2021 will likely be seen, in retrospect, as a major turning point for the crypto space. From Beeple’s $69 million NFT sale to Adidas’ collaboration with Bored Ape Yacht Club, 2021 saw a wide range of major brands and legacy institutions dipping their toes into the space — or taking a head-first dive. Any future crypto’s mainstream adoption timeline will have to set aside plenty of space for the past twelve months.

But this increased attention was not universally positive. Some of the criticisms were familiar and misleading — those focusing on Bitcoin’s supposed centrality to money laundering operations, for instance. But others deserve more careful attention. For instance, Moxie Marlinspike’s recent criticism of web 3.0’s already-evident tendency toward centralised platforms should give the most ardent enthusiasts pause.

But perhaps the most powerful and insistent criticism that accompanied the upsurge of interest in crypto — and NFTs in particular — was the environmental impact. At the same time as Beeple’s history-making sale was bringing NFTs to wider public attention, a number of major publications were highlighting the significant carbon emissions associated with their minting and trading.

To date, this has failed to dampen the surging interest in NFTs significantly. As of mid-January, OpenSea looked set to begin the year with its highest-ever monthly trading volume. In late January, mainstream interest reached new heights when Paris Hilton appeared on The Tonight Show with Jimmy Fallon to launch her new NFT collection.

Nevertheless, the widely discussed climate impact of NFTs continues to loom over space. For those who are optimistic about the role NFTs could play in building a truly decentralised web, it’s not something that can simply be dismissed as the cynicism of sceptics. The UN’s landmark climate change survey, released in January 2021, found that 64% of the 1.2million respondents considered climate change a global emergency. For under-18s, the percentage rose to 72%. Needless to say, if there is hope that NFTs will act as the foundation for a re-decentralised web, then concerns over their environmental impact must be carefully addressed.

In this post, we’ll look at the source of the widespread fears over the carbon footprint of NFTs, and the impact these fears have already had on the NFT space. Next, we’ll consider how the blockchain protocols supporting the NFT market can be made more environmentally friendly and examine how Cudos’ innovative solution can play a role in building a sustainable future for Web 3.0.

The proof of work problem

Though NFTs have borne the brunt of recent attacks on crypto’s environmental impact, the problem itself is not new, nor is it confined to NFTs. Bitcoin has long been on the receiving end of criticism over its energy costs — even when the relatively limited number of users made this a theoretical concern rather than a practical one.

But the early sceptics were ultimately justified. As the price of Bitcoin began to surge in 2018, so too did its energy consumption. The record highs it hit in 2021 made matters even worse. The predictions that Bitcoin would come to consume more energy than whole countries were proven correct — by February 2021, it had matched Argentina. As of January 2022, Bitcoin consumes approximately 131.12 TWh per year — about the same as Sweden.

This connection between coin price and energy consumption is due to the basic design of Bitcoin. The Bitcoin blockchain uses a consensus mechanism called proof of work to keep transaction speeds steady and avoid unresolvable disagreements over the current state of the chain. In simple terms, proof of work involves users competing to solve a cryptographic puzzle, with the winner getting to add the next block to the chain. The difficulty of the puzzle scales based on the speed at which it is solved to keep the rate of block generation steady. To incentivise people to participate, the user who solves the puzzle and adds a block to the chain is rewarded in Bitcoin. The process is referred to as “mining”.

The consequence of this arrangement is that, as the price of Bitcoin increases, so too does the value of the reward for mining blocks. And as the reward increases, so does the competition to mine the next block. This competition — both in terms of the number of users and the quantity of computational power at their disposal — results in the proof of work puzzle being solved more quickly and thus scaling in difficulty to maintain the block generation speed.

The unintended side-effects of this otherwise-elegant solution are enormous. They include the rapid growth of specialist hardware explicitly designed to mine Bitcoin and the establishment of large-scale mining farms dedicated to nothing but solving proof of work puzzles. The development of application-specific integrated circuit chips (ASICs) allowed dedicated miners to significantly outpace those using general-purpose machines while locating farms in countries that offered cheap energy and real estate helped to guarantee profitability. In China, mining operations such as HashCow and BIT.TOP utilised enormous quantities of dedicated, high-end machines to corner some 75% of Bitcoin mining before the country’s crackdown on cryptocurrencies in 2021. Subsequent relocations to Russia and Kazakhstan have been bedevilled by their own political and economic uncertainty, contributing to the overall volatility of Bitcoin’s price in recent months.

Nevertheless, the overall trajectory has been toward the increasing value of rewards for mining and a corresponding increase in computational power devoted to it. Ultimately, this leads to unsustainable energy consumption for the network.

What about NFTs?

So much for Bitcoin, what about NFTs? The dominant chain that supports NFTs, Ethereum, was built on the same proof of work consensus mechanism as Bitcoin, so the same issues apply. Most importantly, NFTs have provided much of Ethereum’s use-value as a chain. As a result, the NFT boom of the past two years massively increased the number of transactions on the network and pushed the value of its native currency, Ether, through the roof. As with Bitcoin, the increase in the currency’s value correspondingly increases the rewards for miners, draws greater competition, and raises the amount of computational power used by the network.

This direct correlation between the growing interest in NFTs and the energy usage of Ethereum was central to the increasingly vocal reservations of artists and others as 2021 wore on. As we discussed in our examination of NFTs and art, the artist Joanie Lemercier played a significant role in drawing attention to the environmental impact of NFTs in early 2021. In the subsequent months, concerns became widespread and began to dissuade potential entrants to the market. The online marketplace ArtStation announced its plans to launch a new platform for NFTs, only to cancel them hours later following significant backlash. And it wasn’t just the art world that expressed discontent. K-pop fans, for instance, struck back against plans for super-group BTS to launch their own NFTs, noting it contradicted their recent address on climate change at the UN.

However, it remains unclear how much the underlying discourse on NFTs and the environment captures the reality of the situation. For example, the process of tying specific carbon emissions to a given NFT drop is complex and vexed. In fact, it is not fully clear that specific NFT drops can be held responsible for Ethereum’s environmental impact at all — or that this impact is as severe as it’s made out to be.

In the first instance, it’s difficult to assess how much mining activity on proof of work chains is powered by clean energy. Even Bitcoin, which has long been associated with cheap coal power to support operations, uses 56% sustainable energy as of mid-2021. Without precise data, it’s complicated to assess the overall carbon footprint of mining even if we have a reliable view of a chain’s energy usage.

By the same token, it’s difficult to associate the transactions taking place on a chain with the energy requirements of the consensus mechanism in anything other than a very broad way. In response to the emerging climate controversy around NFTs, the CEO of SuperRare, John Crain, noted that the carbon emissions of blockchains were much like those of aeroplanes. The plane will take off no matter how many people are on board, just as blocks will be added to the chain regardless of whether or not a given artist mints a token. Thus, blaming specific transactions for the carbon footprint of the block is misleading.

Finally, and perhaps most significantly, the emphasis on the environmental costs of NFTs tends to obscure the existing impact of industries like art and music. The art world, for instance, continues to rely on large-scale art fairs that involve substantial amounts of air travel — not to mention the amount of electricity required to run a large gallery or museum.

On the whole, however, these counterarguments have proven ineffective. The broad correlation between NFT sales and Ethereum’s environmental impact is sufficient for those conscious of sustainability to want to steer clear. And indeed, it’s difficult to argue that, whatever the merits of tying carbon emissions to a specific NFT sale, the involvement of significant artists and celebrities is helping to drive traffic to the network.

This leaves the NFT space in an awkward position. While mainstream adoption is vital to establishing NFTs as the foundation of a truly decentralised digital economy, a continued influx of users will only exacerbate the system’s environmental costs, even if these are currently overstated.

As a result, the last year has seen an all-out race to find solutions to the sustainability issues that risk derailing the widespread adoption of NFTs. A diverse range of proposals have garnered interest, and it may well be the case that no single solution will suffice.

The potential for a sustainable blockchain

There have been several solutions proposed for the sustainability issues of the crypto space. The most obvious is to replace the proof of work mechanism — though this is by no means a simple process. After all, proof of work is essential to ensure the functionality of the Bitcoin and Ethereum blockchains, and any alternative would need to be at least as reliable and secure.

The most popular alternative thus far is called proof of stake, which replaces the cryptographic puzzles with a much less energy-intensive option. In proof of stake mechanisms, miners are replaced by “validators”, who compete to add blocks to the chain by “staking” coins — essentially putting a certain amount of the chain’s native currency up as collateral for a specific period.

Ethereum has been in the process of transitioning to a proof of stake mechanism as part of what had, until recently, been referred to as the Ethereum 2.0 upgrade. The upgrade was initially planned for 2019, but at the time of writing, it has yet to be implemented on the Ethereum mainnet. As recently as December, a major step in this implementation — the “difficulty bomb” that would make proof of work mining untenable on the chain — was pushed back to June this year.

While Ethereum’s transition from proof of work is being delayed, other chains that already utilise proof of stake mechanisms have stepped in to capture the climate-conscious NFT enthusiasts. But proof of stake is just one of the ways that Ethereum — and blockchain protocols more generally — can be made more efficient and environmentally friendly.

As we’ve seen above, a key driver for Ethereum’s energy consumption is the number of transactions that take place at a given time. Core to this issue is that Ethereum is ultimately not built to support the sheer demand it has begun to experience since the start of the NFT boom. Much like Bitcoin, Ethereum regulates the speed at which blocks can be added to the chain. By extension, only a certain number of transactions can be verified at a time. This inefficiency is counterbalanced on Ethereum by what are known as “gas fees” — financial rewards for validating a transaction offered to the miner by the person looking to make this transaction.

Gas fees increase during busier times as more users compete to have their transactions included in the next block. This incentivises competition on the part of miners — and thus, as we discussed above, drives up the computing power required to solve the proof of work puzzle.

One way to limit this issue — and one that remains valuable even on proof of stake chains — is to utilise a layer 2 solution. This refers to a secondary protocol established on top of an existing blockchain, allowing transactions to take place “off-chain”. These off-chain transactions are then bundled together to form a single transaction on the base chain, radically increasing the throughput and reducing issues like spiralling gas fees.

The combination of proof of stake consensus mechanisms and layer 2 scaling solutions is a major step toward solving the environmental issues that are turning people away from the NFT space. But this is just the first step, and we should have bigger ambitions. So why not look at how blockchains and other decentralised protocols can actively support our struggle against the climate crisis?

And this is what Cudos is aiming to do.

Cudos’ sustainable solution for web 3.0

The Cudos network has sustainability at its core, utilising a proof of stake mechanism that makes it significantly more efficient and environmentally friendly than Ethereum. This is an enormous benefit for artists, game designers, and others looking to enter the NFT space. What is more, the Cudos network offers substantially lower gas fees than Ethereum, helping to reduce barriers to entry for the people that NFTs are most able to help. In addition, Cudos has also partnered with ClimateTrade to ensure that any environmental costs of the network are offset and that the chain is fully carbon neutral.

But Cudos’ goals go far beyond this. As it develops, the Cudos network will become the basis for a radical, decentralised alternative for cloud computing — yet another industry beset by environmental issues. As we’ve discussed elsewhere, the current, highly centralised cloud infrastructure relies extensively on hyper-scale data centres owned by a small number of providers. By democratising the cloud computing market, we can avoid the need for energy-guzzling hyperscale providers and allow users at all scales to lease their idle computing resources. As a result, the environmentally damaging accumulation of unused devices and electronic waste can be significantly limited.

By pursuing this project, Cudos is tackling the environmental issues of blockchain technology and innovating ways that the decentralised web can be used to oppose the climate crisis actively. And as with any decentralised solution, the more people who take part, the better.

How can you help Cudos build an environmentally friendly future for Web 3.0?

By joining our pilot, you’ll help us validate your hardware compatibility before deployment. You’ll receive free computational resources for a time to help us optimise the platform. By collaborating, we can create a more sustainable planet. We’d love to hear from you if you want to buy or sell spare compute.

Can you please register your interest now?

About Cudos

Cudos is powering the metaverse bringing together DeFi, NFTs and gaming experiences to realise the vision of a decentralised Web 3.0, enabling all users to benefit from the growth of the network. We’re an interoperable, open platform launchpad that will provide the infrastructure required to meet the 1000x higher computing needs for the creation of fully immersive, gamified digital realities. Cudos is a Layer 1 blockchain and Layer 2 community-governed compute network, designed to ensure decentralised, permissionless access to high-performance computing at scale. Our native utility token CUDOS is the lifeblood of our network and offers an attractive annual yield and liquidity for stakers and holders.

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