Reusable energy in the NFT market: a brilliant case of symbiosis?
Written by Coudy Wane, Kema Yacob, & Jim Dude
In February 2021, a digital remastering of the famous Nyan Cat meme was auctioned and sold for 300 Ether, the equivalent of almost $600,000, to celebrate its 10th anniversary. This might lead one to question why anyone would pay that much money for a meme that can easily be copied and downloaded with a quick google search. But that is the magic of NFTs.
To put it simply, Non-Fungible Tokens (NFTs) are digital assets that can be traded for money, which derive their value from the fact that each token contains code that makes it completely unique and distinguishable from other NFTs. Therefore, although digital content may be available for anyone to replicate, an NFT is able to authentically prove original ownership. This verifiable scarcity that NFTs provide is what has allowed their recent rise in popularity in the digital art and collectibles market. However, their commercial success has been accompanied by some concern over their environmental sustainability.
The majority of this concern comes from the fact that a lot of NFTs currently operate on blockchains that use a consensus mechanism called Proof-of-Work (PoW). The Proof-of-Work system requires miners to compete to solve mathematical problems in order to create new blocks that validate transactions on the network. If successful, miners are then rewarded through newly minted cryptocurrency. This mechanism is what allows Bitcoin and Ethereum to remain secure and decentralised. However, the “work” that miners put in requires computational energy that consumes a lot of electricity.
A less energy-intensive consensus mechanism alternative is Proof-of-Stake (PoS). Proof-of-Stake works through miners staking cryptocurrency for the opportunity to build new blocks. Miners are chosen at random to be validators on the network depending on how much collateral they have staked. They are then rewarded through transaction fees or punished for misconduct through the slashing of their deposit. Since the mining competition associated with PoW is removed, PoS requires far less computing energy making it the more sustainable choice. In fact, there has been a lot of talk about making an Ethereum 2.0 that would entirely be based on PoS. But the likelihood of that happening in the near future remains ambiguous.
Furthermore, the discussion surrounding NFTs, on Bitcoin, in particular, brings up other inferences. Decentralized apps and smart contracts on Bitcoin are made possible through Stacks which is an open network that is secured on the Bitcoin blockchain. Stacks works through a new consensus mechanism called Proof-of-Transfer (PoX). This algorithm uses Bitcoin that has already been mined and converts it, through the PoX mining process into a programmable token called STX. Once Bitcoin has been transferred onto the Stacks blockchain, it is able to operate without any new energy demands. To illustrate this, the relationship between Bitcoin and Stacks can be compared to water and ice. Bitcoin mining is freezing security into blocks of ice that are secure and inflexible. The Stacks network is able to melt these blocks down into a liquid form which is flexible and programmable (STX). Stackers on the network are then able to re-freeze their STX back into Bitcoin when they no longer need the flexibility of programming. Therefore, when NFT smart contracts are created on the Stacks blockchain they do not consume additional energy but rather operate on the security that the Bitcoin network already provided.
Some would argue that energy use is not inherently damaging whereas its origin might be. Thus, it is important to make the distinction between energy consumption and energy production. Dealing with the root problem needs to start with regulating energy production. Accordingly, renewable energy sources are a proposed solution for reducing the carbon footprint of NFTs. The answer to how many cryptocurrencies are mined using renewables stands contested. Some estimate that clean energy sources fuel 70 per cent of mining operations, although that number varies seasonally. Today, a number of Bitcoin mining giants are investing into solar as well as hydroelectric energies. The process goes from connecting the blockchain to a solar farm or windmill for example to incorporating the data flows collected into the distributed network. Because of the demanding nature of those operations, engineers are taking into account decentralized physical assets to re-think our architecture of energy management. In this context, new emerging models for local energy markets result in microgrid systems like this:
Generating from local renewable energy sources is a good solution to empower consumers with the ability to play a more active role in the energy market and monetise their assets. On a larger scale, smart grids could also help reduce carbon emissions in the electricity supply chain. By decreasing the amount of greenhouse gas used in the networks and drawing from renewable sources, smart grids go beyond their initial purpose of providing a faster-automated service and contribute to the location of large-scale renewable energy power generation. But the added value also works the other way around: smart grid applications can actually benefit from data standardisation enabled by blockchain technology, all of this amounting to reinforced synergy. Indeed, thanks to the cleaner and more resilient electricity grids, Bitcoin mining can facilitate the global energy transition to zero-carbon. But the notion of reinforced synergy can actually be applied much more broadly, seeing that the value of a network lies in the amount of value that it is securing. In that sense, every single innovation or singular store of value that is secured directly or indirectly by the Bitcoin blockchain is an example of reinforced synergy.
However, renewable energy generators come with their own set of challenges: experts argue that relying on them isn’t a perfect solution. Indeed, issues with supply, demand and wastage have raised some concerns. Proof-of-Work mining remains highly competitive, thus some NFT markets operate off coal-fired power plants, judged more reliable than intermittent access to renewable generation. Taking this into account, renewable-sourced trading platforms were created to ensure that demand is met with supply in a granular manner, with rapidly-changing local energy prices. As stated by the creator of CryptoArt.wtf — a website that roughly estimates the carbon footprint of NFT artworks — Memo Akten, “the issue of sustainable platforms not only needs to be part of the crypto conversation, it is the conversation — into which systems, functional applications, and power structures are all enmeshed”. On the other hand, the transportable nature of digital currency systems can actually help solve the shortcomings of renewable energy by encouraging decentralised energy use through geographical arbitrage. Many miners in search of cheap electricity rates may choose to set up shops in places, like China, that have excess capacity in their renewable power systems (electricity supply exceeds electricity demand). This means that green energy that would otherwise be curtailed and wasted is then put to use by blockchains like Bitcoin. In Colorado, for instance, communities have revisited this idea by having miners co-locate with cannabis growers and utilize the waste from the heat that is used to keep the plants warm. Nowadays, some Bitcoin mining farms also capture vented methane produced by oil industries and use it for power by combusting it through a process called flaring. This prevents the natural gas from slowly being released into the environment over time. The flaring process does produce CO2 (a greenhouse gas), but in this particular circumstance, it is 23–28 times less damaging to the environment than the methane that would otherwise be released into the atmosphere.
Finally, on an individual scale, people are able to capture all the waste energy from a single household with the help of the Internet of Things. In this situation, mobile phones, which can usually be fully charged in under an hour, tend to stay plugged in all night, using additional unnecessary energy. Future mobile phones, with built-in ASIC chips, will be able to efficiently convert the other seven hours of charge time into hashing power for the Bitcoin network. The owner of a single phone will only be providing a fraction of hashing power away from the network in a proportional way, but combined, the amount of lost power across the planet each day just from fully charged phones left plugged in overnight is approximately 6,5 kWh per year per phone (for about 5 billion phones last year). Not only is this a very valuable resource of lost energy but it is also paying the users of Bitcoin for helping to secure the network with their phones each night. And that’s just phones, our own individual wasted energy can be put to work with many different power sources within the household, like TV’s that are left on standby. On a global scale, waste energy represents 10% of the total energy production. The network can utilize this excess to mine Bitcoin, or even to leverage the intermittent energy provided by renewables.
Ultimately, reusable energy, through PoX, renewable sources or waste energy, comes with multiple implications that need to be apprehended, especially in light of the lack of updated and diversified research about the varying degrees of cleaner alternatives. With all of the improvements made possible by reusable energy, there are still the questions of sourcing materials, electronic waste or even sunk ecological costs, which leaves room for progress.
The ecological impact of NFTs in relation to the overall carbon footprint of Ethereum and Bitcoin still remains a controversial topic within the community. However, the scale of the problem has been sensationalized to a certain extent. Bitcoin only accounts for 0.07% of the world’s total carbon footprint and Ethereum 0.02%. Additionally, it is important to note that the energy consumption of these networks does not depend on the number of transactions at a given time but rather on the price of the cryptocurrencies. Therefore, the minting of NFTs does not actually add to the carbon footprint of Bitcoin and Ethereum but only borrows the security that they provide. Yes, a smaller problem is still a problem, and it should be addressed. We should strive to make these networks more efficient. But in the context of a global energy grid that is primarily occupied by fossil fuels, the need for improved energy production systems seems to be the more prominent issue.
A simple Glossary
Cryptocurrency: digital asset designed to work as a currency. Bitcoin (BTC) is the most well-known cryptocurrency and the oldest. Ethereum (ETH) is another well-known cryptocurrency. There are thousands of other cryptocurrencies.
Blockchain: distributed ledger storing digital data. Each participant gets a copy of the existing data and the opportunity to confirm new data, resulting in a decentralized database. There are many different blockchains (e.g. Bitcoin, Ethereum, Cardano, Algorand, Polkadot etc), and usually, each blockchain has its own (crypto)currency.
NFT: Non-Fungible Token. Refers to a unique entry on the blockchain. They can represent items that cannot be replicated, such as original works of digital art, original songs, unique images, trading cards, etc…
Mining blockchain: Essentially means running a calculation with slightly different data over and over in order to reach an agreement on the net based on the transactions which can be considered valid. The mining process may take place off-chain, only requiring miners to submit their “proof” as a transaction when they are successful.
Validator: participant in a PoS blockchain that helps out by validating blocks in exchange for rewards. As do miners for PoW blockchains.
Consensus Algorithm: The algorithm that underlies the blockchain. Proof-of-Work (PoW) is the most common one today. For familiarity, here are some other consensus algorithms: Proof-of-Transfer (PoX), Proof-of-Work (PoW), Proof-of-Stake (PoS), Delegated Proof-of-Stake (DPoS), Proof-of-Authority (PoA), Byzantine Fault Tolerance (BFT), Delegated Byzantine Fault Tolerance (dBFT), etc.
Carbon footprint: A carbon footprint is the total greenhouse gas (GHG) emissions caused by an individual, event, organization, service, place or product, expressed as carbon dioxide equivalent.
Electric grid: interconnected network (made of wires, poles and power plants) that deliver electricity from producers to our homes and business.
Microgrid: local energy grid that’s capable of running independently from the main power grids that supply wider areas. Microgrids typically consist of generators or renewable wind or solar energy sources. Some could say that the modern-day microgrid is a mini-version of the electric grid, only smarter and more efficient.
Smart grid: electricity network, based on digital technology, that is used to supply electricity to consumers via two-way digital communication.
Internet of Things (IoT): A giant network of multiple devices such as physical devices, home appliances, vehicles and other embedded devices, communicating with each other to connect and collect data.
