Environmental impact of blockchain - NFTs and the environment Pt 2

As blockchain use-cases such as cryptocurrencies and non-fungible tokens (NFTs) have surged in popularity over the last few years, serious concerns have been raised about the energy and resources required to maintain and use them.

How bad is it?

Clearly all economic activity causes some level of environmental impact. The world’s fiat currencies have a carbon footprint of approximately 400 billion kg of CO2 annually, including minting and processing physical coins, powering mobile and electronic payments etc. This suggests that each dollar transacted is responsible for approximately 10g of CO2.

Blockchains, however, certainly seem to be more resource-hungry than most other forms of commerce, with the Cambridge Bitcoin Electricity Consumption Index (CBECI - https://ccaf.io) calculating the average carbon footprint of a single NFT to be 200kg of CO2. This threatens to place an unsustainable burden on the environment. Is there anything that can be done to make blockchain more eco-friendly? Or are sustainable cryptos and digital artworks simply an unrealistic prospect?

Effects of mining on the environment

In the context of blockchain as a whole, NFTs are not inherently better or worse than other use-cases, but the sheer scale of the NFT marketplace makes them a significant contributor to blockchain’s overall environmental footprint. The underlying technology is still very much in its ‘gold-rush’ phase, with speed and cost too often prioritised over sustainability, but there is no reason in principle why blockchains should not be operated in an environmentally friendly manner.

One obvious solution would be to make better use of renewable energy. A good example of this is El Salvador (the first country to adopt a crypto as legal tender) where the government is proposing to harness volcanic energy to power its ‘Bitcoin City’. Likewise, Iceland, with its vast supplies of geothermal power, initially held out the prospect of genuinely green crypto.

It has also been suggested that suitably located mining operations could make a positive environmental contribution by helping power plants balance grid loads, mopping up excess energy production. It is certainly no coincidence that a significant proportion of early Chinese Bitcoin miners were located near the country’s hydroelectric dams which often run a surplus of cheap, green power.

However, in reality, even renewably powered blockchains impose hugely variable demands and unpredictable strains on electricity infrastructure. This, coupled with other political and economic concerns, has seen Iceland, China and other states close their doors to large-scale blockchain operations.

Low energy blockchain

If green energy cannot be relied on as a magic bullet, can crypto be made less wasteful? It may sound counterintuitive for something so ground-breaking, but the technology underpinning many blockchains is increasingly obsolete and there is considerable room for innovation and improvement.

First-generation blockchains (such as that used for Bitcoin) are based on ‘proof-of-work’ (POW). This requires computers to race to solve difficult mathematical puzzles, with the efforts of all save the eventual winner being inevitably – and deliberately – wasted.

This feature of POW prioritises security over economy and ecology, and does not lend itself to cost-effective scaling. In our previous article we discussed various second-generation alternatives to POW which strike a more sustainable balance between security, cost, and scalability.

One such alternative, ‘proof-of-stake’ (POS), does away with these wasteful competitions, instead selecting one node at random to validate each blockchain update. This validation is then ‘attested’ by the remaining nodes who decide by consensus whether or not to accept it. This simpler process may be notionally less secure than POW but uses 99.5% less energy per transaction. It also significantly cuts the electronic waste created by crypto. The need for POW miners to constantly outcompete each other leads to an arms race for ever more powerful processors. In addition to its energy requirements, Bitcoin therefore cycles through 11,000 tonnes of hardware every year, giving each single transaction an e-waste footprint equivalent to two C-size batteries. POS does away with this waste almost entirely.

So what can be done?

In the wake of China’s high-profile 2021 crackdown on crypto, Chinese ‘crypto-refugees’ went looking for new sources of cheap energy. Many relocated to neighbouring Thailand and Laos, but these destinations were popular more because of their proximity and affordability than on account of their abundant renewable solar and hydro power. Tellingly, another favoured bolthole was oil-rich Texas with its lightly regulated energy market and its strong emphasis on personal liberties. In short, we cannot look to the market alone to solve this problem: in the absence of external regulation, blockchain’s free-market and anti-authoritarian instincts tend to override environmental and other factors.

Governments have seemed historically inclined to either ignore blockchain or ban it outright rather than try to tame it. But if Web3.0 is indeed to be built on blockchain, there will have to be change and we are likely to see blockchain coming under pressure from two angles:

  • Users will increasingly require evidence of sustainability, and blockchains will therefore be incentivised to demonstrate their environmental credentials in order to maintain relevance and market share.

In addition to renewable power, blockchains will look to technological innovations to reduce their consumption of energy and hardware. Transitioning away from POW (as Ethereum, the second biggest blockchain, is proposing to do over the course of 2022) is an obvious start. Other options include increasing information density (i.e. packing more information into each block) and storing non-essential data off-chain.

There may also be a backlash against unnecessary use of blockchain in situations where it is not technically required and where its cost cannot be justified in place of less energy-intensive solutions.

  • Government regulation will also come into play. Having taken time to get to grips with blockchain, many national governments are finally moving to impose some level of scrutiny and control, especially over cryptocurrencies. In the wake of COP26, environmental concerns are likely to be prioritised, without concerted legislative action, as there may be no way to accommodate blockchain within agreed climate change targets.

We will be monitoring developments in both technology and regulation throughout 2022. If you would like to discuss any of these in more detail, please contact Graeme Fearon graeme.fearon@moulislegal.com 07 3367 6900.

This memo presents an overview and commentary of the subject matter. It is not provided in the context of a solicitor-client relationship and no duty of care is assumed or accepted. It does not constitute legal advice.

© Moulis Legal 2022

Key contacts
Graeme Fearon
Special Counsel