While art NFTs had been gaining insider momentum since 2020, Beeples’ $69 million sale in March 2021 put art NFTs on the mainstream map and sparked a speculative bubble in art NFT sales.
As they always do, the bubble burst, and sales volume dropped 92%. Art NFTs are not dead, though; the market continues to transition and mature post-fallout.
One side effect of rising public interest in NFTs is widespread mainstream doubts about cryptocurrency sustainability. Millennials and Gen Z, the generations that comprise the bulk of NFT artists and buyers, are also the most eco-aware. They were the first to flag cryptocurrency’s energy consumption problem.
But how are cryptocurrencies, NFTs, and blockchain sustainability related? Let’s take a closer look.
Roots of the Art NFT Sustainability Controversy
The NFT sustainability controversy was an Ethereum problem at the time of the bubble. Still, even before that, the real issue had its roots in bitcoin mining energy consumption. Below is a simplified overview:
- Art NFTs are small digital files stored on the blockchain that describe a piece of artwork like a receipt or authenticated proof of ownership.
- The digital file of the artwork itself is not usually stored on-chain.
- Most NFTs are minted on Ethereum blockchains, which charge a “gas” fee in ether, the cryptocurrency of Ethereum.
- At the time of the 2021 bubble, Ethereum miners still used an extremely energy-intensive process called Proof-of-Work (PoW) to mine ether.
- (PoW) is the original consensus mechanism invented by bitcoin’s founder, Satoshi Nakamoto, where miners compete to win the right to mint cryptocurrency and receive rewards in return.
Next, we look at consensus and why it matters.
Consensus is Key
One benefit of blockchain is allowing peer-to-peer transactions without involving a third party. To do so, public blockchains like Bitcoin and Ethereum need a “consensus mechanism” that enables the blockchain network participants to agree (reach a consensus) on a transaction.
Bitcoin miners still use PoW, the original consensus mechanism.
In the above diagram, the environmental hot spot is the “nodes validate the transaction” step. In PoW, miners compete against one another to solve complex puzzles to win the right to create a new block. Solving the puzzle takes excessive computing power from all the nodes. The first miner to solve the puzzle wins, creates the block, and earns a reward.
As you can see, since only one miner wins, all the energy the losers used trying to solve the puzzle goes to waste. So why did anyone think PoW was a good idea in the first place?
First of all, when Bitcoin’s founder invented PoW, there was no Ethereum or NFTs, just the Bitcoin coin and a few early evangelists in a nascent alt-currency space.
The second answer is security. PoW is one of the most secure ways to protect against attacks on blockchain networks. The growth of bitcoin mining also makes it increasingly difficult for malicious actors to succeed with attacks aimed at taking control of the network or committing double-spending. Attacking or hacking the network would require a prohibitive amount of computing power and energy investment from any individual or group.
Proof of Stake (PoS): Fixing the Ethereum Energy Crisis
After Bitcoin, Ethereum was the second major blockchain. Ethereum enables diversity in transactions using something called smart contracts. Smart contracts are what make NFTs possible. Smart contracts allow for more diversity in transactions than simple peer-to-peer currency exchanges.
When art NFTs took off in a big way, Ethereum miners still used PoW to validate transactions. In Oct 2021, NFT collectors and artists minted 98% of NFT on the Ethereum blockchain.
Because “minting” NFTs dramatically increased energy-intensive transaction volume and the demand for the ether for gas fees, the energy demand also increased. In September 2022, Ethereum completed a long-awaited switch to a Proof-of-Stake (PoS) consensus mechanism, achieving 99% more efficiency almost overnight.
In PoS, miners don’t compete to solve the puzzle. Instead, PoS is an energy-efficient algorithm where token holders can stake their coins to become validators. Validators are responsible for securing the network by validating new blocks, receiving rewards for doing so, and deterring malicious behavior such as double spending or mining empty blocks.
POS is popular because it is about 2000 times more energy efficient than PoW and processes transactions much faster. Because nodes participating in validation must have a stake in the network, they are accountable when something goes wrong or malicious actors target the system.
Most users see PoS as a more eco-friendly way of processing crypto transactions without compromising security and decentralization. Many major blockchains use PoS as the basis for their consensus mechanism, including Polkadot, EOSIO, Cardano, Ethereum 2.0, and Polygon.
Delegate Proof of Stake (DPoS) is the third most popular consensus mechanism. DPoS tweaks the PoS mechanism by allowing network members to vote for delegates using their coins. DPoS ensures that trusted representatives are responsible for confirming and efficiently propagating transactions.
EOS, Lisk, Ark, and Tron are three popular coins that use the DPoS mechanism.
Consensus Innovation Continues
As blockchains attempt to differentiate on sustainability, developers have created several other consensus mechanisms. Below are a few, along with the blockchains that use them:
- Proof of Importance (PoI) – New Economy Movement
- Proof of Capacity (PoC) – Burstcoin, Storj, Chia, and SpaceMint
- Proof of Elapsed Time (PoET) – Hyperledger Sawtooth
- Proof of Activity (PoA) – Decred and Espers blockchains
- Proof of Authority (PoA) – VeChain
- Proof of Burn (PoB) – Slimcoin
- Byzantine Fault Tolerance (BFT) – Hyperledger Fabric and Zilliqa
Eco-Friendly Blockchain Networks
Eco-friendly blockchain networks are an essential step towards environmental sustainability. As the digital currency market expands, these networks are increasingly attractive investments for individuals and companies.
The most environmentally friendly blockchains include Chia Network, Algorand, Solana, and Avalanche.
The Chia Network is a blockchain platform that uses smart contracts to enable user financial transactions. Chia uses the Proof of Space and Time (PoX) consensus mechanism. It also allows users to rent out unused storage space even if they don’t participate in the consensus algorithm process.
Algorand is a permissionless blockchain platform open to anyone and has no single entity controlling the blockchain. Users can also remain anonymous. Algorand facilitates fast, secure, low-cost transactions without requiring high energy consumption for miners or other participants. It utilizes a unique consensus protocol called Pure Proof of Stake (PPoS), which makes transaction verification faster than traditional Proof of Work models.
The Solana blockchain platform uses a novel consensus mechanism called Proof of History (PoH). PoH works by securely tracking time on its network without relying on external sources such as GPS or atomic clocks. Solana enables thousands of transactions per second without wasting energy on unnecessary calculations or computations.
The Avalanche blockchain uses a version of PoS that enables scalability while ensuring fast transaction processing times with minimal energy consumption. Unlike other blockchains, Avalanche doesn’t rely on miners or staking rewards, eliminating the need for expensive hardware and equipment and the wasteful power expenditure usually associated with mining operations.
Tezos uses a proof-of-stake consensus and a unique self-amending mechanism that avoids energy-intensive hard forks on chain. It also contributes to scaling efficiency as the number of users increases. The self-amending mechanism enable stakeholders to update the rules of the Tezos network over time, without having to stop the network or create a new one. Tezos estimates the 2021 electricity requirement per transaction to be 30% less than in 2020.
Cleaning Up Cryptocurrency Mining
Innovating different consensus models for validating transactions and mining cryptocurrency coins is like tinkering with an engine under the hood. Cryptocurrency entrepreneurs innovate externally to make crypto mining more sustainable, especially bitcoin.
Cryptocurrency mining companies are transitioning as much as possible to use renewable energy sources, such as solar, wind, and hydroelectric power. In the US, some mining companies are setting up in rural and northern states, taking advantage of several months of cold weather to cool down server farms. Others use underground housing to reduce or eliminate the need for air conditioning.
Further south, Texas, a state not known for long cold winters, is actively recruiting cryptocurrency mining. There are two main reasons miners are interested in Texas. First, the state’s deregulated electricity grid allows miners to obtain long-term electricity contracts. 20% of Texas’ energy comes from wind power, too. Secondly, miners can capture and use the natural gas by-product from oil drilling that was simply burned off and wasted in the past.
Other mining innovations include pool mining, which allows multiple miners to share computation tasks and split the rewards accordingly. Merge mining, on the other hand, enables miners to piggyback mining a secondary coin with a primary coin, like bitcoin, when the two coins share a similar algorithm. By producing more than one coin, merge mining increases the efficiency outcome of the mining activity.
Finally, cloud-based hosting services are increasingly popular among cryptocurrency miners. With cloud-based mining, miners don’t have to buy or maintain hardware or mine from one location. Cloud mining helps lower electricity costs while allowing users to scale up operations efficiently, depending on market conditions.
Solving the energy crisis in cryptocurrency continues to evolve. Bitcoin and other PoW holdouts must continue increasing efficiency gains from alternative energy sources. In the meantime, experts in the space continue to develop ingenious, energy-efficient, “under the hood” ways to provide consensus and reward validators.
If you trade crypto assets, ZenLedger can help you aggregate transactions across exchanges, compute your capital gain or loss, and auto-fill the IRS forms you need each year. You can even use our tax loss harvesting tool to identify ways to save throughout the year.
The above is for general information and should not be interpreted as professional advice. Please seek independent legal, financial, tax, or other advice specific to your particular situation.