The popularity of NFTs, or non-fungible tokens, exploded in 2021. Six months ago, I had never heard of them. Now, hardly a day goes by that I don’t hear something about them, and their impact on the environment. Today’s post will look at what NFTs are and how they work. Finally, I’ll explore the true environmental cost of NFTs.
What are NFTs?
NFT stands for non-fungible token. Forbes defines an NFT as a digital asset that represents real world objects like art, music, in-game items and videos.
In reality, they have become a popular way for independent artists to sell digital artwork. Beyond original artwork, other popular examples are NBA Top Shot that lets you own the rights to video highlight reels, and Cryptokitties where you can collect and breed virtual cats.
NFTs are bought and sold online, often with cryptocurrency. They live on a blockchain—a distributed public ledger—like Ethereum.
Why do NFTs exist?
Unlike other digital items that can be easily duplicated, an NFT lets an artist create a one-of-a-kind or limited-run item with a unique identifying code. The digital signature means it can’t be exchanged.
NFTs are extremely valuable to artists because they provide a mechanism to monetize their products and sell them directly to consumers. The artist can also make money on subsequent sales.
For collectors, NFTs offer a few advantages.
First, there are bragging rights. Like a rare sports card or valuable painting, owning the rights to a rare NFT is something you can talk about to your friends.
Then, there’s the potential investment value if you can sell your NFT for more than you paid for it. Some NFTs are worth millions—yes, millions—of dollars.
Finally, many people like the idea of supporting independent creators.
Is there a risk with buying NFTs?
Like any investment, NFTs aren’t without risk.
The Forbes article I mentioned earlier points out that, like stocks, what your NFT is worth comes down to supply and demand. Liquidity is a concern. If you can’t find a buyer for your item, you could be stuck with it.
As they’re still a relatively new phenomenon, there isn’t a lot of history to support their long-term investment value. Will the bubble burst? Or will they continue to increase in value? Time will tell.
Finally, before investing educate yourself on the tax implications of buying and selling NFTs in your country. They could be taxed as capital gains or business income—but any profits will be taxable.
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What is the environmental cost of NFTs?
There has been a lot written about the environmental cost of NFTs. Because they are invisible, digital assets that don’t require transportation, it’s easy to overlook the environmental impacts. But storing all those unique records takes a lot of energy. Let’s take a closer look…
As I mentioned earlier, NFTs are stored on a blockchain like Ethereum. According to a CBC news report, verifying and processing a typical transaction uses 50 kilowatt hours of energy. How much is that? Well, it’s enough energy to power a typical Canadian home for two days.
Earth.org reports that the carbon footprint of one NFT transaction is 14 times the cost of mailing an art print. It’s equivalent to over 70,000 credit card transactions. And environmental research and education watchdog Frontier Group says that selling two pieces of artwork is equal to 21 years of a US household’s electricity use.
With their increased popularity and growing volume, the environmental impact of NFTs is under a magnifying glass. The current focus on reducing carbon usage has pushed issuers to find lower energy solutions.
Greener solutions are on the horizon. Ethereum plans to switch to a new proof-of-stake system in the second quarter of 2022. This change will significantly decrease the carbon footprint of NFT transactions.
Ultimately, from an environmental perspective, the decision to invest in NFTs is no different than any other choice we make as consumers. We need to do our homework, and then make a decision we can live with.
Environmental cost of NFTs aside, while I understand their appeal, I’m not ready to put down my hard-earned cash to buy them.
What about you? Would you buy NFTs? Tell me your thoughts below.
I now know more about NFT’s by reading your post than all of the material I’ve seen put together. Thank you for explaining this phenomenon Michelle, especially its environmental impact. Cher xoxoxo
You’re welcome Cher! There is a lot of confusing material out there.
😊
Wow! This was eye opening. I never thought of the environmental aspect. I wouldn’t invest in them but my husband was considering making some.
It’s so easy to overlook the environmental aspects of our digital lives. It’s something I am trying to be more aware of.
I’d never even heard of these before. It’s amazing the things we aren’t aware of or don’t understand the cost of.
They are relatively new. I hadn’t heard of them until late last year—and I work in the investment business.
Well I’m certainly not investing in them, never fear.
Ha ha. It’s highly unlikely I will either.
Thank you for your explanation of NFTs and their environmental impact — which is VASTLY more than I had imagined. Selling two NFT pieces uses the equivalent of YEARS worth of a household’s electricity?!?!?! Astounding… I became aware of the huge negative environmental consequences of cryptocurrency last summer, when I learned that unused power plants in upstate NY were getting re-started (using natural gas in the instance I read about) solely to provide electricity for a particular company’s blockchain technology. At a time when we all need to be radically reducing our carbon footprint, I am amazed that fellow human beings are creating and marketing this (currently at least) environmentally profligate phenomenon (and in this comment I won’t go into the anti-government, don’t-want-to-be-held-accountable, secrecy concerns that blockchain technology also creates for our human societies here on planet earth…) Deep breath in. Deep breath out.
Thanks Will. I had heard of NFTs, but hadn’t given much thought to the environmental cost until my daughter mentioned it when she was home from college at Christmas. I did some research and was shocked at what I learned.
I shared this on Facebook and a friend, who is a talented artist and photographer, said NFTs are not art. She feels they are purely for financial and social media gain. So, ultimately a sell-out. It’s an interesting perspective that I can’t really disagree with.
Kudos to Ethereum for at least trying to reduce the environmental impact. Sadly humans are attracted to shiny baubles without understanding their full impact. And we wonder why we find ourselves in the mess we’re in.
As much as they cost I doubt I’ll ever consider it. I never thought of the environmental impact until you just pointed it out! Thanks for the lesson!
I am fascinated and keeping an eye on this, but I definitely won’t be investing my retirement savings in NFTs.
I agree, too risky as well!
Usually I embrace new technology, but I don’t think I will ever buy into this technology.Also seems very risky.
It is still evolving. I don’t think I would invest my life savings. I read an article the other day that said most major pension funds will likely be investing in NFTs within 5 years. It will be interesting to see how it evolves.
Interesting. Are they associated with crypto currency or are they 2 separate things?
They run on the same underlying technology—blockchain—but they are different.
Guess we will see how they evolve and become more environmentally friendly.