Although some NIFs take a more efficient approach from an environmental point of view, they are still far from being considered as responsible investment vehicles.
Like many assets, NFTs (“non-fungible tokens” in French) do not escape this green boom of distinguishing sustainable and responsible investments from traditional investment vehicles. More and more companies are aspiring to surround their token creation with a set of green convictions to allow NFT holders to enhance their investment portfolio while giving meaning to their investments.
But taking a virtuous approach is one thing. Being able to qualify as a responsible investment is another thing. Especially since, on paper, there is no single definition to explain what green NFT is. It also brings together a range of approaches aimed at making NFT manufacturing processes more environmentally friendly.
Energy-intensive creative process
Unlike for example money, NFTs are not interchangeable, meaning they are unique and therefore irreplaceable. NFTs designate a certificate Digital original (or digital title) attached to a digital file. More specifically, NFT takes the form of tokens issued in a file blockchain. Each NFT is unique and cannot be reproduced. The digital file alone is said to be “replaceable”. Thus, the associated NFT is not replaceable. NFTs are used in the art or luxury sector, or for trading cards in sports.
However, what’s a problem with NFTs isn’t so much their configuration, but more of the process of creating them. Like cryptocurrencies, NFTs suffer from a catastrophic environmental picture. First, because cryptocurrencies are necessary to buy NFTs, and the latter already has a fairly large impact on the environment. To go back to the example of Bitcoin, mining it (the process of creating it) involves a huge energy consumption.
According to a real-time estimate by the University of Cambridge, the current annual electricity consumption of Bitcoin is approximately 153 TWh. For comparison, global electricity demand in 2021 was 26,444 TWh, according to the latest estimates from the International Energy Agency (IEA). Thus, Bitcoin accounts for about 0.58% of global electricity consumption.
However, most NFTs are instead backed by the Ethereum blockchain. This represents an annual electricity consumption of about 106 TWh, according to estimates by the technology analysis website Digiconomist. This represents about 0.4% of global electricity consumption. From this amount, it is difficult to know exactly what the NFT ecosystem on Ethereum represents in terms of electricity consumption (since many non-NFT projects also use the blockchain). But its environmental impact is far from negligible.
The mechanism for producing NFTs is actually very energy-intensive. To convert a digital file to NFT, the holder must go through a step called “Minting” in English (“frappe” in French). SDK is the process of copying a digital file to a server and then generating a cryptographic token that contains a link to that file on the blockchain. So between creating and selling an NFT, the bill for the environment can peak.
According to Business Journal Quartz, printing a work of art would generate 2.5kg of carbon dioxide emissions, while creating and selling an NFT would require 100 times higher emissions. It is also difficult, under these circumstances, to attach the concept of environmental responsibility to NFTs. But from there to reduce investor enthusiasm for this support, it is not.
A market worth 40 billion dollars
In 2021, investors spent the same amount on digital art as they did on traditional art. The NFT market is now valued at more than $40 billion, according to crypto-analytics group Chainalysis. And this is only in regards to the amounts paid on the Ethereum blockchain contracts. This does not include other blockchains such as Solana. According to Gauthier Zuppinger, COO of NonFungible.com (a site that specializes in data on the NFT market), the NFT market should reach $100 billion by the end of the year.
By comparison, last year, the global market for classic art was valued at just over $50 billion, according to Art Basel. This indicates the interest of investors and especially individuals in NFTs.
In the face of this boom, but also taking into account this growing desire of investors to give meaning to their investments, a certain number of players have taken a measure of the environmental problem to try to remedy it.
Less Energy Efficient Solutions
Among the options considered for green NFT support, there is one that consists of dispensing with the ethereum platform. The idea is to put the business on other platforms like Cardano. The platform that uses a different authentication system (technically “Proof of Stake” instead of “Proof of Work”). It is less energy consuming.
An initiative that above all allows us to assess the fact that a new generation of NFTs is emerging today which, because they are designed differently, are less harmful to the environment. Other observers, for their part, believe that it is up to blockchain developers to commit to trying to reduce the environmental footprint of their technology. Furthermore, in 2022, the Ethereum blockchain will experience a major development, as it moves from “Proof of Work” to “Proof of Stake.” As estimated by the Ethereum Foundation, a non-profit organization in favor of developing this crypto asset, this should reduce Ethereum’s electricity consumption by more than 99.9%.
In addition, other projects focus on technologies aimed at reducing the minting of new crypto assets. The so-called idea of ”lazy” minting where, for example, money is not minted before it is bought, is beginning to emerge. This, again, would limit the environmental impact of these assets.
Ultimately, the belief that we are investing responsibly by betting on NFTs is irrelevant. To prepare an investment portfolio, it is better to avoid relying on these tokens. But as with other asset classes, the ecosystem is trying to improve.
Measures are being taken for green production processes and could increase in the coming years, given investors’ appetite for green investments.