Nonfungible Tokens are Shaking up the World, But at What Cost?

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The blockchain has provided a landscape for several different products, including Nonfungible tokens (NFT) to proliferate. An NFT is a string of programming code that is stored on a digital blockchain. Video, pictures, digital art are all products that have made their way to becoming an NFT. NFTs are shaking up the world. The price of some of the art and sports videos has surged to record levels. In 2021, an NFT by a digital artist named Beeple sold for more than $69-million at Christie’s during an online auction. The concept is relatively simple. Collectors want something that they believe cannot be replicated and can be verified on the blockchain. The blockchain is also used in crypto trading when mining for Bitcoin.

What is an NFT?

An NFT is programming code that makes up a digital imprint of video and lives on the blockchain. A blockchain is a virtual ledger where each modification is added to the register and kept forever. Blockchain technology stores NFTs and forms the basis for crypto trading with cryptocurrencies like Bitcoin and Ether. When artists create a product and want to generate an NFT, they will initially mint their product onto the blockchain. This process will begin the mining method, where complex algorithms will attempt to discover a proof of work that creates the non-fungible tokens. Most of the NFTs that are generated take place on the Ethereum platform. When this process is complete, the miners who perform the work process are rewarded with the cryptocurrency ether.

Beeple sold for more than $69-million
Beeple sold for more than $69-million

What Occurs During the Mining Process

Mining on the blockchain is the process of adding transaction records. To successfully add an asset to the blockchain’s ledger, miners need to solve a complex puzzle. They are competing globally with other miners who are also trying to solve the puzzle using high-powered computers. Most of the race to perform these proof-of-work puzzles are trial and error. This takes up a considerable amount of computing power. As of April 2021, miners were attempting 170 quintillion attempts a second to produce new blocks.

The miner who solves the puzzle first gets to add the NFT to the blockchain and is awarded Ether (or the blockchain’s currency where the NFT will eventually live). The proof-of-work concept is meant to be very difficult and very transparent and is also used in crypto trading. The goal is to prevent cheating and make it extremely difficult to place an NFT on the blockchain. Unfortunately, the proof-of-work model is very rigorous, and adding a product to the blockchain is very enter energy-intensive.

How Much Energy is Used in Proof-of-Work?

The volume of electricity used in the proof-of-work method is staggering and is one of the few drawbacks to using blockchain. Sources say that generating an average NFT creates a carbon footprint of 200 kilograms of planet-warming material. This amount is equivalent to driving 500-miles in a typical combustion engine. Researchers at Cambridge University have estimated that mining Bitcoin uses more electricity than entire countries like Argentina.

An NFT is not the only item that falls into this category. Many of the cryptocurrencies that are popular and gaining traction as payment methods like bitcoin use blockchain technology. These cryptocurrencies, unfortunately, come with enormous greenhouse gas emissions.

An Alternative to Blockchain for NFTs

Another strategy can be used to keep a blockchain secure that might not generate as many greenhouse gases. An alternative to proof-of-work is a system called proof-of-stake. An NFT video marketplace called the NBA’s Top Shot features collectibles of NBA highlights as NFTs. This blockchain operates on the Flow blockchain. This system still requires users to be part of the process to dissuade lousy behavior. But instead of having to pay for vast amounts of electricity to create proof-of-work, they instead have to lock up some of their cryptocurrency tokens in the network to prove they’ve got a stake in keeping the ledger accurate. If there are any suspect outcomes on the blockchain, those who added to it are penalized by losing those tokens.

The Bottom Line

The upshot is that NFTs have become a popular way to create digital images, including video highlights that cannot be duplicated. NFTs are added to the blockchain where they cannot be modified using either a proof-of-work or proof-of-stake method. The most popular place to find NFT products is on the Ethereum platform. To add an NFT to the Ethereum blockchain, you need to go through a proof-of-work method that uses a considerable amount of electricity. The process takes time as miners solve a puzzle that will allow them to add an NFT to the blockchain. The process is similar to the blockchain process of crypto trading.  The use of NFTs as a way of creating original digital products is only just beginning. Still, there is likely a need for an alternative way to add this product to the blockchain without using a considerable amount of energy.