This piece assumes you have read Part 1 of our exploration into the world of NFTs.
After NFTs took a hold of headlines earlier this year, the narrative shifted.1
Let’s dig into some of these concerns.
Global Warming
NFTs require blockchain databases because they guarantee:
Anyone can see you own the item in question (i.e. it is public); and
No single entity can take your ownership away from you (i.e. it is decentralized).
Updating this type of database is difficult because we want honest information, but can’t always guarantee users will act in an honest way.
The solution is to use a cleverly designed system that works similarly to a lottery. The winner of the lottery gets to update the blockchain. Other participants check the update given and if they agree, they’ll move onto the next blockchain update.
Just like a real lottery, the winner of the blockchain lottery gets a monetary reward, and this reward is what incentivizes people to provide honest updates.
Currently, Ethereum, the most popular blockchain used for NFTs, chooses the winner by selecting the first participant to solve a computer science problem. The best strategy is guessing, and you guess by running the same computer code over and over again until: “Woohoo! I won!” or “Darn it, let’s try again for the next update.”
Running computer code over and over again uses electricity. And just like the lottery, there are no rules against buying more lottery tickets to increase your chances of winning. Or in this case, computers.
Over the years, the process of gathering transaction information and proposing updates to the blockchain, or mining, has evolved from using a spare computer in the basement to companies running sophisticated large-scale operations, similar to real mining.
The electricity needed to run these computers needs to come from somewhere, and the majority of global electricity is generated by fossil fuels. Although, the source of electricity is highly dependent on where you live.
In Canada, about 80% of electricity comes from non-greenhouse gas emitting sources. In China, the spring rainfall means cheap electricity from hydro-electric dams. Not knowing everyone’s energy source makes it difficult to accurately assess the carbon footprint of blockchains.
Each year, the Ethereum blockchain uses about as much energy as the entire country of Ireland. This includes more transaction data than just NFTs, but there’s no doubt they play a role.
There are two proposed solutions to the global warming issue.
1. Use Renewable Energy
Who cares if we have thousands of computers constantly running computer code to update the blockchain if they are powered by solar, wind or nuclear energy?
This is the argument some put forward and others are pursuing. As easy as it sounds, there are concerns that the pursuit of cheap electricity might lead these miners back to fossil fuels, discouraging investment in renewable energy.
We also have to ask if using renewable energy to constantly play a guessing game is the best use of energy that could otherwise power a factory or our homes. For this reason, the second proposed solution seems more desirable.
2. Redesign the Blockchain
In 2021, Ethereum plans to introduce a new way for users to update the blockchain that will essentially eliminate its carbon footprint.
Rather than have computers guessing the solution to problems all day, Ethereum will choose the winner of the lottery based on how much of their own money they have put up as collateral, or staked.
If they propose to update the database with fraudulent transactions, other users will object and the network will automatically remove a portion or all of their collateral. The idea is that the threat of having your stake slashed will deter dishonesty.
Skeptics argue that because the winner is chosen based on how much money they have in the communal pot, the system design is less secure and more centralized, and there is certainly some truth to that.
The minimum stake Ethereum requires is somewhere around $100,000 USD at the time of writing, which is an amount the vast majority of people wish they had, and would certainly not post it as collateral to a blockchain if they did.
However, when a single home computer is up against a warehouse of specialized computers, we have to wonder if a similar argument applies to the current system.
If consumers decide less energy intensive blockchains are sufficiently decentralized, this is great news. One thing is certain: environmental concerns will have to be addressed for NFTs to become widespread.
Plagiarism
Artists can use NFTs to sell their works online without having to share the profit with an auction house or art dealer. There are also features that allow them to set up automatic royalties. Every time my friend’s NFT is sold, he’ll automatically collect 10% of the proceeds.
Unfortunately, there are plagiarism issues in the NFT world. If you wanted to copy and paste my friend's artwork and sell it as your own NFT, nothing is stopping you. This has happened to artists already.
The value of an NFT comes from knowing it was issued by the legitimate artist.
Currently, the system works fine for popular artists, because buyers care about the issuer of the NFT, but less so for artists whose work is relatively unknown. It will take time for consumers to attribute value to lesser-known artists.
High Fees
In addition to the lottery reward, Ethereum miners collect fees, called gas, for updating the blockchain. We can think of these fees just like the gas we buy for cars.
Each update to the blockchain, called a block, has a maximum size in order to ensure the system doesn’t seize up and stop working. From an economic perspective, this means that block supply is limited. Just like gasoline at the pumps, if demand is high, and supply is limited, the price of gas rises.
This is exactly what has happened with Ethereum lately. So many people want to use the blockchain that the price of using it has increased, forcing many users to question using Ethereum at all.
For example, it cost me about $15 to transfer $300 between my accounts the other day. Imagine if your bank charged that.
An NFT project on the Solana blockchain, a cheaper and greener alternative to Ethereum, recently called out the issue of high fees (check out the hat):
If NFTs are going to become mainstream, the fees can’t outweigh the fun.
Technical Details
Storing data on a blockchain database can be expensive. Thus, the digital files that most NFTs represent ownership of (JPEG, GIF, MP3, etc.) are not actually stored on a blockchain directly.
In reality, the computer code of NFTs refer to a link to a website that holds the file itself. This link is maintained by a company that runs the website. If the company goes out of business and the website gets shut down, the file that your NFT represents ownership of will also disappear.
The core point of NFTs is having a record of ownership everyone can see and no one can control. So the risk of having an authentic piece of artwork or collectable sport GIF disappear is not desirable.
Filecoin is a project looking to address this technical detail by creating a new blockchain specifically designed for file storage.
Summary
NFTs are records that represent ownership of digital files stored in a database that no single entity has the power to control. For people and companies interested in creating authentic digital items, NFTs are a promising technology.
Like all new technologies, issues have to be worked out before they are adopted by the masses. High fees and plagiarism threaten their usefulness for artists. Their contribution to global warming, via blockchains, is something few can get behind.
In the end, it seems the desire for digital authenticity and scarcity are worth pursuing, as community members continue their attempt to address these issues.
Thank you for reading! If you enjoyed, please consider sharing with a friend, or subscribe to keep the knowledge coming.
Please contact me at justin@nojargon.org if you have any questions, comments or suggestions for future topics: I’d love to hear them!
I am always looking to learn new things, refine my understanding, correct any errors and expand on the sources that influence my thinking.
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Digital NFT Art Is Booming—But at What Cost?, Time
NFTs Are Shaking Up the Art World. They May Be Warming the Planet, Too, New York Times
NFTs Were’t Supposed to End Like This, The Atlantic
The Climate Controversy Swirling Around NFTs, Verge
Is the new boom in digital art sales a genuine opportunity or a trap?, MIT Technology Review