Are NFTs environmentally unfriendly?

One of the most common questions we face at?katalyst.earth ?is whether our regenerative NFTs (Non-Fungible Tokens) are environmentally unfriendly. There is a misperception that NFTs consume an extraordinary amount of energy that outweighs their usefulness. This article aims to clear up a few points around blockchain technology. We show that NFTs can be climate positive and that their potential use cases far outweigh the negativity we see spread on this topic.

     What most people think an NFT is - Paris Hiltons Bored Ape #1294        

To start with, let’s clarify what an NFT is. An NFT is not a JPEG file of an ape making funny faces worth millions of dollars. It is, in fact, a type of “smart contract” that stores data on a blockchain. Its non-fungibility makes each NFT unique and authentic. They can represent anything that can take a digital form through a process of “tokenisation” putting assets onto a blockchain in the form of a token. This tokenisation helps improve transparency and reduce fraud as all data relating to the underlying physical tangible asset is stored on a blockchain that cannot be altered.

What an NFT actually is — a unique code identifying individual traits sitting on an immutable blockchain        

Being such a new technology, applications for NFTs are just starting to be explored. Art has been the most documented use case of NFTs thus far due to the large sums of money being transferred for pixels. But the true value of NFTs lies under the surface where the smart contracts provide a way to authenticate proof of identity and/or ownership.

I firmly believe that one day we will all interact with NFTs in such a way that we will not even notice them. Applications that require the highest level of security and trust, such as passports and government-issued identity cards, are obvious use cases. Having personal information stored on an immutable blockchain will seem like a no-brainer in the not too distant future.

Estonia , a great case study in the deployment of blockchain technology, has had such a system in place for many years. This system allows citizens to store all their personal data on a digital ledger helping them to do everything from file tax returns, vote and make hospital visits.?Officials report ?that?Estonia saves?over 1400 years of working?time?and 2% of GDP annually. It frees up citizens and government agencies from the bureaucratic administration so prevalent in other countries, to focus on more productive tasks.

At katalyst.earth we are applying the same technology to allow individuals to participate and be rewarded in environmental and climate action. Our NFTs will grant owners access to?regenerative projects ?that provide economic returns. This provides a way to put a price on those projects that are superior to how they are currently valued for alternative uses such as clearing a forest for lumber or cattle grazing. We do this by tokenising the physical underlying?natural capital ?and leveraging carbon markets to value their positive climate impact.

So, how about that environmental impact?

Many people point to the energy intensity of NFTs as an argument against them. What they often don’t tend to realise is that they are referring to a type of blockchain that uses Proof of Work (POW) rather than Proof of Stake (POS). The difference between the 2 has been well covered in several?articles ?but to make it simple here’s a quick breakdown:

POW is employed in blockchains such as bitcoin which uses “mining” as a way to prove a math puzzle that creates new tokens or coins. This requires dedicated “mining rigs” focused solely on these mathematical eqations. On the other hand, POS blockchains such as?Polygon ?(formerly known as MATIC), reward validators who stake their own crypto to verify a transaction. It does not require dedicated mining rigs and can be carried out by standard desktop computers who maintain network security with a distributed network that process far less equations.

This all means that POS consumes much less energy than POW as itremoves the duplication inherent that requires many POW participants to race to complete the same problem. The?Ethereum Foundation ?reports that POS consumes 99.95% less energy than POW. For a regular NFT transaction on the Polygon blockchain, this equates to 0.026kWh per transaction. As a comparison, it requires about?0.5 k Wh of energy to produce a cup of coffee.

Polygon is a Layer 2 sidechain on the Layer 1 Ethereum network. It was developed as an Ethereum-compatible blockchain to provide lower transaction fees and significantly quicker transaction speeds. and as a layer-2 solution. But whilst Polygon is POS, Ethereum is in the process of transitioning from POW to POS. This means that the Polygon transactions bridging to Ethereum remain at a higher energy and carbon intensity. The transition of Ethereum from POW to POS cannot come soon enough to support the needs of the ReFi community.

              Polygon (MATIC) L2 sidechain is POS and carbon negative        

Polygon is accounting for the Ethereum transition away from POW and has announced that they will be?carbon negative ?from this year. In addition, our Katalyst NFTs lock away 1 ton of carbon each. They will have embedded in their code an immutable carbon ton that cannot be removed, taking that carbon credit off the market permanently. This allows us to turn our Katalyst NFTs into a regenerative platform to accelerate climate solutions.

NFTs by themselves are not polluting. As a digital asset, they need nothing more than electricity for the proof of stake verification process to occur. Energy use is strongly correlated to the development and advancement of human civilisation. Energy consumption is directly proportional to the quality of life of an individual. The more energy available to consume, the higher someone’s quality of life. This ability to use energy to improve one’s livelihood has occurred throughout history and has been part of the evolutionary story of humankind. The earliest uses of energy (fire to cook meat), gave rise to the birth of agriculture (animals to plough fields) and eventually industrialisation (coal to manufacture and process materials) providing the ability to transport oneself (cars) and the development of machines to process huge quantities of data (computers). An abundance of energy and its application is not a bad thing.

The issue is the source of that energy and in the case of NFTs where how the electricity is produced is critical. We are a decarbonisation first organisation and strongly support the move to 100% renewable energy. The continued growth of clean forms of electricity, such as solar and wind firmed by batteries, is critical to achieving the regeneration of our planet. But the utility of the applications of that electricity must also be reviewed.

Like a smart contract, an NFT provides the ability to automate activities used to process a typical transaction. In the simplest form, the smart contract contains code that states “if x event happens, then trigger y action”. This ability to automate processes improves the energy efficiency of transactions. Let’s think about some of the applications for such technology.

Buying a house is a complicated and lengthy process. It involves the development, sharing, storage and replication of contracts as well as the transfer of funds. Imagine if a portion of the process of transferring the title of the house could be automated through a smart contract. “If a contract is signed, then trigger the transfer of funds to the escrow”. This automation saves time and energy to make such a transaction more efficient.

In addition, as an NFTs core application is a proof of ownership, it provides the ability to tokenise a physical asset. This means that a piece of real estate, like a house, can be divided into multiple, smaller units of ownership on a blockchain. Each of these NFTs is a unique token representing an individual ownership stake in the fractionalized asset and is referred to as tokenisation.

It could be argued that this fractionalization drives further energy efficiency as it provides the ability for a larger number of individuals to share in the ownership of a real asset. This optimisation provides the ability to move away from a core concept of individual ownership to collective ownership allowing people to pool resources in an efficiently managed collective. It is a way to democratize access to collective resources.

In summary, NFTs use energy, there is no denying it. But that energy use is becoming rapidly more efficient through POS. Energy use in itself is not a problem but we must support zero-carbon sources of electricity to minimise the impact of NFTs on climate. Whilst we are early and the utility of NFTs is still being explored their applications already far outweigh their environmental impact. At katalyst.earth we are focused on building regenerative NFTs that have a positive impact on our environment.