Beeple sold his most renowned piece of NFT artwork for a whopping $69.3 million! That’s more money than most of us will earn in a lifetime! But it wasn’t the art itself that was lauded, it was the technology behind the sale. The technology that made the digital art as limited edition as an authentic Mona Lisa.
NFT (Non-fungible token) allow digital artifacts to be labeled with a small side-note, allowing proof of ownership and authenticity on the internet. It doesn’t mean that it can’t be copied, just that everyone knows what the original is.
It sounds like an amazing concept and one that has helped the digital artist community become appreciated for their work, in a world where only physical art was thought to have value in the millions $$.
NFTs are everything that’s wrong with how we think about resource allocation
At least, that’s what I thought for the longest time. They use massive amounts of energy, and in a world where fuel is a scarce resource, do we really want/need NFTs?
What am I even looking for?
Okay so let’s actually define the problem. I think that NFTs are useful, but their benefits do not outweigh the harm it brings to the planet.
Quick overview of NFT technology
NFTs are based on blockchain technology, which essentially allows computers around the world to keep a list of all transactions/events. What this does is create a system where any ownership can be verified by tracing back through the list of transactions and determining who finally has it. This is reinforced by the fact that the list is not just maintained by one computer. So the computers have to reach a consensus to ensure the final answer is valid.
This is the same technology used to power Bitcoin and Ethereum. Part of the process involves the computers who keep these lists, to do a lot of power-consuming calculations (mining). It’s not that these calculations are needed, but that the effort is used to ensure people cannot game the system.
To put into perspective, a single transaction of Ethereum or NFTs, currently uses an average US household’s 1.63 days worth of energy.
Biases
Before I can start analyzing NFTs, I need to state some of the biases, to try and reduce their influence on the outcomes.
- I love sustainability and trees. I’m of the belief that if something isn’t sustainable, there is something wrong with it. Okay, so maybe something can be an interim solution, but finite resources for anything need to be considered before making assumptions that the world will just figure out a way like it always has. Why? Because the impact is usually not felt by those people. But I will admit that my life was built in large part thanks to things that probably harmed others to some extent. Visiting my family back in Pakistan requires me to travel by plane which already has a massive CO2 footprint.
- I’m super skeptical of things with hype. Maybe this shouldn’t actually be a bias, but it is. If I see enough people jumping on a train with more passion than their understanding allows, I tend to draw away. This means I tend to look at the object with more scrutiny, as opposed to just the people.
- I am extremely privileged. The fact that I can even write about this topic means I have access to resources a lot of people don’t. So when I evaluate technologies like Bitcoin and NFT, there might be value there that could provide acute assistance to people less privileged than me.
Consequences? ⚖
Okay, so let’s actually try to break down the problem.
The problem NFT solves
NFT makes it possible to attach authenticity to a digital artifact, whether it’s an artwork, or a document identifying ownership of something physical. And it does this in a decentralized manner so that we don’t have to worry about a single entity having a monopoly over transactions.
So far, its popularity has been stuck on digital art. And while that does present many benefits to the artists, it is still based on speculation, just like physical art. To a collector, or in the modern case, influencer follower, it is worth it. But the resale value will be tied to those who are also in that world. If I had the money and means, I’m not sure if Van Gogh’s art would be any more of a desire for me.
Beyond the digital art world, its real value is still ensuring validation of authenticity. Which is inherently a part of blockchain technology. The question is, what is the price for this new feature on the web? And is it worth it?
The case for(against) NFTs? ❎
It’s too easy for the individual. There is a massive amount of electricity used for each transaction, but the cost of that transaction isn’t borne by the user, nor is it centralized to one entity running the computers. This makes the scale of the cost much more difficult to grasp by the individual on a day-to-day basis.
Usually, when we want to limit harmful effects, we can add friction to the activity, causing the individual to reduce the enjoyment/ease in undergoing that activity. Think of how difficult it is to cancel gym memberships.
Okay, even if the resource consumption was felt by the individual, would that change anything? Probably not, and it would likely make things worse since only those who could afford it would be able to pay the bill for it.
But then the actual problem is still the massive amounts of electricity usage for something with relatively less value. It doesn’t matter how expensive the NFT is, the cost of the resources is dependent on the transactions that take place.
There are two main arguments that try to resolve this issue.
- The world has been built on technology and fuel, this changes nothing.
- Relative to other systems (like systems of trading physical art), it’s not much worse since there is cost in physical activities.
I do agree with both actually, but I think one of the missing pieces is the scale and the growth potential.
The curse of software 👾
Software has this anomaly, different than anything else we as humans have been exposed to (at least the part of the world with access to technology). It, along with the internet, has made scaling a product/service exponentially easier. The reason software engineering is becoming so popular, and why there is currently a hot market for it, is the scale at which software can operate.
But what does this have to do with NFTs? Everything. Unlike physical art, the level of growth and the scale of transactions is unfathomable. This isn’t just tied to the transactional process, but everything from the creation of an NFT to the number of transactions that can occur. Trading of a single NFT can happen multiple times a second, whereas the volume of trades for a physical item involves more friction.
This means that although we can compare one transaction of an NFT to one transaction in the real world, the volume makes NFTs a dangerous solution in their current state. This is why it also becomes more urgent to tackle this problem, rather than other issues with comparable negative environmental impacts.
NFTs are an investment. Not for individuals but for society 💲
This, however, does not mean that NFTs don’t have potential. When technology scales, it can make amazing things happen. It increases economies of scale, reducing inefficiencies that are usually caused by lack of well, technology.
A very simple example is irrigation systems. If we want to increase farmland efficiency and reduce the marginal cost of growing more food, developing a more advanced irrigation system is a no-brainer. It costs resources, but it is an investment!
Similarly, NFTs can be thought of as an investment in the potential barriers they will break down. If we can figure this technology out, other places where we spend a lot of resources, such as physical effort for the validation of official documents. Maybe the business of notaries will be greatly impacted by this 😬
As more solutions roll out though, we get back to our original problem. Scale. The level of consumption still increases drastically. And in the time we switch away from more ineffective systems, we will be taking a massive toll on the global resources.
There is an argument made that NFTs and cryptocurrencies help those who need financial assistance where banks cannot provide for them. I would argue that those are also the same communities that won’t be growing as quickly when resource consumption starts affecting the import of energy and silicon-based devices. There will be anecdotal success stories, but if we want to make NFTs/cryptocurrencies a success, it HAS to be a system-level solution.
Final stage of Grief: Acceptance ✌🏾
Did I end up seeing the truth about NFT 🚀? I think it definitely has value, especially currently for a community that has usually struggled to get recognition. But the problem with technology is that it benefits those who use it, not those not able to use it.
NFTs, or more generally, blockchain technology, might be enjoying hype, but there is the actual value to it, similar to every other paradigm-shifting technology (internet, motor vehicles etc), which don’t come without the cost.
I think my bigger issue is that in the solutions we pose, it always seems reactive. Planting trees takes time to work, switching to sustainable energy has a dark side to it (Check out Green Rocks), and carbon offset credits don’t really matter if the net resource consumption increases.
So what did I accept? I guess that it’s a difficult problem, and I can’t say that we must absolutely get rid of NFTs. I accepted that technology usually takes time to figure itself out, and even then it might have unforeseen issues.
We do like binary answers though, and even now I’m trying to come to a definitive answer. I will say though that the NFT rollout didn’t have to be as bad as this. There is talk of a better algorithm to improve power consumption. But if NFTs had started with a problem that had a marginally larger social benefit, maybe the decision would have been easier. Unfortunately, those ideas aren’t as sexy to become pilots.
- Featured Image Credits: Network vector created by pikisuperstar – www.freepik.com