💻 NFTs and the broader crypto industry experience dilemmas with environmental challenges. NFTs exist on the blockchain, and blockchains need energy to function. Most NFTs exist on the Ethereum blockchain which uses a proof-of-work consensus mechanism to confirm each new block. This means that all the nodes (computers/miners) on the network will work for the right to confirm the block and collect the gas fees from each transaction as well as a reward. Miners are incentivized to invest more in computational power to confirm blocks which consume energy from power grids. Depending on where the energy comes from and whether or not there are carbon neutral or carbon negative offsets, this can have a negative impact on the environment.
🖼️ NFTs represent a small number of transactions on the Ethereum blockchain and it is a bit unclear on the direct environmental impact NFTs have. While they likely do not have a zero impact, it is not as big as cryptocurrencies and decentralized finance in general. There are multiple blockchains supporting NFTs that do not have as big of an impact on the environment as Ethereum such as Solana, and Cardano. It is likely that more environmentally friendly blockchains will support NFTs in the future. The biggest difference in energy consumption is that Ethereum uses proof-of-work and other blockchains use a proof-of-stake consensus mechanism. Ethereum plans to migrate to proof-of-stake in the near future and this migration should help with energy consumption.
♻️ The crypto space in general is exploring more renewable sources of energy for mining as well as other consensus mechanisms such as proof-of-stake that drastically cut energy consumption and greenhouse gas emissions attributed to cryptocurrencies and NFTs. Other solutions include using a second layer on the blockchain, which is known as a Layer 2. This allows anyone to make transactions outside of the blockchain and then batch process them all at once in a larger transaction resulting in less energy being used.
⛏️ PoW and PoS are common consensus mechanisms which are methodologies used to achieve agreement, trust, and security across blockchains and other decentralized networks. Remember no third parties are involved so agreement has to happen programmatically.
TL;DR (too long didn’t read) version of PoW vs PoS is that PoW requires miners to solve a cryptographic puzzle in order to validate a transaction on the blockchain.
Think of the miners racing against each to solve a puzzle (confirm blocks) and the answer to the puzzle is the hash. Every transaction that miners validate results in a reward. This consensus mechanism is complex and requires tons of computational power.
PoS replaces the computational power used in PoW with currency power which means that the ability for a miner to validate a transaction depends on how many tokens/currency the miner has. In other words, how much “stake” you have in the network. Miners only exist in PoW and are referred to as “validators” in a PoS implementation. This is because there are no block rewards and validators collect the transaction fee as their reward.
Both mechanisms have economic consequences that will penalize miners/validators for network disruptions. The penalties are different for each and PoW penalties involve miners losing computing power, time, and energy and PoS involves funds being “slashed” as a penalty.
PoW vs PoS