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Why Are NFTs Bad for the Environment?

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Written By
Dan Buckley
Contributor Image
Written By
Dan Buckley
Dan Buckley is an US-based trader, consultant, and part-time writer with a background in macroeconomics and mathematical finance. He trades and writes about a variety of asset classes, including equities, fixed income, commodities, currencies, and interest rates. As a writer, his goal is to explain trading and finance concepts in levels of detail that could appeal to a range of audiences, from novice traders to those with more experienced backgrounds.
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Updated
Oct 27, 2023

NFTs are often criticized for their environmental impact.

The process of creating an NFT can be very energy-intensive, and the Ethereum network – which is currently the most popular blockchain for minting NFTs – is estimated to use as much electricity as the entire country of Chile.

This has led some to believe that NFTs are not sustainable in the long term, and could actually contribute to climate change.

There are also concerns that the rise of NFTs could lead to more energy-hungry Proof-of-Work (PoW) blockchains being created, as they offer a way to monetize digital art and other digital assets.

How NFTs Impact the Environment

The biggest way that NFTs impact the environment is through the amount of energy that they consume.

The process of creating an NFT – known as “minting” – generally requires a lot of computational power, which in turn uses a lot of electricity.

According to one estimate, minting a single NFT can use as much electricity as it takes to power three US households for an entire day.

This is because the minting process usually involves verifying a large amount of data, which takes a lot of computing power.

So, while the actual physical NFTs themselves don’t use much energy or resources, the process of creating them can be very energy-intensive.

 

The Environmental Impact of Non-Fungible Tokens (NFTs)

 

NFTs Via Proof-of-Work vs. Proof-of-Stake

Proof-of-Work (PoW)

Proof-of-Work (PoW) blockchains are the most popular type of blockchain for minting NFTs.

The Ethereum network, which is currently the most popular platform for minting NFTs, is a PoW blockchain.

The problem with PoW blockchains is that they use a lot of energy.

This is because miners need to solve complex mathematical problems in order to add new blocks to the blockchain, and this requires a lot of computational power – which in turn uses a lot of electricity.

So, while NFTs themselves may not be very energy-intensive, the process of creating them on a PoW blockchain can be.

Proof-of-Stake (PoS)

Proof-of-Stake (PoS) blockchains are an alternative to PoW blockchains that are becoming increasingly popular.

Unlike PoW blockchains, which use a lot of energy, PoS blockchains are more energy-efficient.

This is because miners on a PoS blockchain don’t need to solve complex mathematical problems in order to add new blocks to the blockchain.

Instead, they can simply stake their coins – which means they lock them up and agree not to sell them – in order to validate new transactions.

So, while NFTs created on a PoW blockchain can have a significant environmental impact, those created on a PoS blockchain will be more energy-efficient.

 

Can ESG Investors and Environmentalists Invest in NFTs?

The short answer is yes, but it’s complicated. Let’s take a closer look.

NFTs are digital assets that are stored on a blockchain.

They can represent anything from an image to a video to a piece of music. NFTs are unique and cannot be replicated, making them valuable commodities.

Some people view NFTs as a way to invest in the future of the internet. Others see them as a way to support artists and creators who may not otherwise be able to make a living from their work.

And still others believe that NFTs could help reduce environmental impact by incentivizing more efficient use of resources.

However, there are also some serious concerns about the environmental impact of NFTs.

Because they are stored on a blockchain, NFTs use a lot of energy. And because they are often traded on secondary markets, there is a risk that they could become financial assets and be subject to speculation.

So, what does this all mean for ESG investors and environmentalists?

There is no easy answer.

On the one hand, NFTs have the potential to support important goals like reducing environmental impact and promoting creativity.

On the other hand, their environmental impact is a real concern.

As with any investment, it’s important to do your research and understand the risks before you commit.

But if you’re looking for a way to support artists and creators or reduce environmental impact, investing in NFTs could be worth considering.