NFTs — A Bright Future or a Burden?
But while NFTs have seen their popularity skyrocket over the last year — with trading volumes for NFTs increasing 200 fold between H1 2020 and H1 2021, and the number of holders of popular NFT lines increasing by a massive degree — they also suffer from several major challenges.
Here, we take a look at the facts to help tease out whether NFTs are simply a temporary fad, or are here to stay.
Why NFTs Are Gaining Popularity
As provably scarce blockchain-based assets, NFTs have been adopted for a variety of purposes over the last few years. Most notably, they have been used to represent ownership of unique works of art — including purely digital artworks and tokenized physical pieces.
Some NFT-based artworks have fetched upwards of 7 figures at auction — with one particularly prominent piece known as “EVERYDAYS: THE FIRST 5000 DAYS” by renowned artist Beeple selling for a staggering $69 million via Christie’s. Beyond this, dozens of crypto-collectibles, including CryptoPunks, Axies, CryptoKitties, and more, have sold for substantial sums — owed in large part to their desirability and provable rarity.
Trading volumes across major NFT marketplaces have multiplied considerably in recent years. This is largely due to the increased attention NFTs have been receiving as a result of major brands entering the NFT space — such as Coca-Cola, Marvel, Audi, as well as pop icons including Steve Aoki, Kings of Leon, Grimes, Eminem, and more.
But more than this, a major part of their meteoric growth comes down to their increased accessibility and utility. Thanks to the advent of NFT fractionalization protocols, it is now possible for users to own a fraction of otherwise prohibitively expensive NFTs — much in the same way that users can co-own real-estate or other physical assets. Likewise, with NFTs now able to represent real-world assets, thanks to platforms like Convergence, Epix Industries, WiV, etc., they can now be used to denote ownership of both physical and digital goods.
As a result, they now represent an emergent asset class, which savvy investors are now beginning to work into their portfolios — oftentimes to dramatic effect. This was recently demonstrated with the recent purchase and sale of the below Pudgy Penguin, which was bought for 0.0475 ETH and then sold for 29.96 ETH 11 days later.
Given that NFTs are powered by smart contracts and their authenticity and provenance can be easily verified over the blockchain, they are incredibly difficult to destroy, tamper with, or counterfeit. This makes them particularly well suited to applications where uniqueness, rarity, and authenticity are paramount — such as for collectibles, identity documentation, medical records, and more.
It is widely acknowledged that NFT technology is still in its infancy, which means the true capabilities of the medium are still yet to be unraveled. Nonetheless, the future is promising as far as adoption and utility are concerned.
But There Are Challenges
Though NFTs have exploded in popularity in recent months and years, the increased focus on this emerging asset class has also shed a spotlight on some of its shortcomings and limitations.
Much of this scrutiny has been centered around the amount of electricity required to create, store, and transfer NFTs — particularly as they relate to the Ethereum network. According to a recent study, the power footprint of a single NFT transaction is somewhere in the order of 52 kWh of electricity, while minting the NFT to begin with required almost three times as much power — at around 142 kWh.
Overall, when you factor in minting, bidding, canceled bids, sales, and ownership transfers, a single NFT has an average footprint of around 340kWh.
To put this into perspective, this is similar to the energy consumption of driving 1,000 miles in a petrol-powered car or the total electricity consumption of an EU resident for an entire month.
While excessive energy usage is a problem in and of itself — particularly in regions where there is an energy shortage. It’s not the major issue at hand here. Instead, it’s the amount of CO2 that is produced as a result of this, since the Ethereum blockchain is still largely powered by non-renewable energy sources. As a major contributor to greenhouse gas emissions, it is commonly agreed that this contributes to global warming.
Indeed, the average ecological cost of a single NFT is a staggering 211 Kg of CO2, while the maximum observed value can be as high as 5,170 Kg of CO2 emitted over its lifetime (a number that will likely continue to grow as the asset is used/transferred).
Check your CO2 output at carbon.fyi
Understandably, this is a serious cause for concern — since blockchain and its derivative technologies are primarily designed to improve efficiency and provide a better way of doing things. Unfortunately, NFTs fall short of this vision when it comes to remaining environmentally friendly.
Beyond this, NFTs may still have a sizeable usability gap to overcome before they can really be considered accessible to the masses. Right now, users will generally need to be at least somewhat familiar with blockchain technology, Web3 wallets, and cryptocurrency transactions to get their hands on an NFT — whether that be by buying one on a NFT marketplace, winning one on a game or other DApp, or leveraging an NFT that was gifted to them.
NFTs represent an attractive new asset class that is being rapidly developed thanks to a growing ecosystem of platforms, protocols, and products.
Admittedly, it’s still got its growing pains. Though there is an argument that NFTs are incredibly energy inefficient, there is a major concerted effort underway to mitigate these concerns. For now, these include temporary solutions like ClimateTrade, which allows users to buy carbon credits to offset their emissions, and Aerial — which works with North American environmental efforts to help users offset their NFT carbon emissions.
Further down the line, there are plans to migrate the Ethereum blockchain to a new, far more energy-efficient consensus mechanism, known as Proof-of-Stake (PoS). This is expected to dramatically decrease the energy requirements to conduct transactions, and hence reduce the CO2 burden of NFTs and the Ethereum network as a whole.
According to preliminary estimates, the network is expected to use less than 1/2000th of its current energy requirements — which would reduce the average energy footprint of an NFT to around 170Wh. This is around the same amount of energy needed to power a modern iPhone for a month. Likewise, with more efficient NFT-capable networks like Polkadot and Cardano on the horizon, and a major drive towards clean energy among cryptocurrency miners, the energy concerns might be short-lived.
Given the massive utility offered by NFTs and the clear push to address their limitations, it appears likely that the future of the NFT industry looks promising.
About Master Ventures
Master Ventures is a blockchain-focused venture studio helping to build the next generation of blockchain-based Web 3.0 system innovations within the crypto industry. Launched in 2018 by Founder and CEO Kyle Chassé, the company’s ethos can best be summarized in the acronym #BeBOLD: Benevolent, Open, Love, Decentralized.
Master Ventures co-creates with entrepreneurs and businesses worldwide to turn the best ideas into innovative and disruptive products. They do this by investing as strategic partners through offering advisory services to the projects they believe in. To date, Master Ventures has invested in over 40 crypto projects, including the likes of Kraken, Coinbase, Bitfinex, Reef, DAO Maker, Mantra DAO, Thorchain, and Elrond.
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