Cryptocurrency, NFTs, and the Environment

CNN

If you’ve been online in the past few years, you’ve probably noticed an increase in the phrases ‘NFT’ or ‘cryptocurrency.’ Among the general public, it’s not very clear what these terms actually mean without diving down the deep rabbit-hole of forums and large thesaurus-requiring articles on the topic. So, here’s a simplified outline of what those terms mean and how they’re used.

At its core, cryptocurrency is a form of currency that is decentralised and built on encrypted code. The value of a cryptocurrency is determined by the demand and participation from online users into their investments in the specific currency. Since they aren’t widely accepted as valid forms of transactions for regular goods, most uses for the assets are through stock market investments. 

There are two ways in which someone can earn more cryptocurrency after an initial investment, both requiring the usage of something called a blockchain. A blockchain is a record that contains transactions of that specific cryptocurrency. These must be verified with proof before they are added to a blockchain, and verifying transactions is also how users increase their cryptocurrency amount. This can be done using proof of work or proof of stake.

Proof of work is a process in which users will get their computer to participate in a mathematical competition. Computers will get added to a blockchain where an algorithm will come up with a maths problem that the computers race to solve. Whichever computer solves the problem first is then given a small amount of cryptocurrency in return. 

This process requires an astronomical amount of electricity to run computers, meaning that winning competitions may not even gain anything compared to the amount of money one is spending on running the system. 

Proof of stake is the other option which uses significantly less power. With this method, one determines how many transactions they can verify by the amount of cryptocurrency they’re willing to put forth at “stake”. 

This guarantees that everyone who stakes cryptocurrency is going to be able to verify transactions, but putting forth larger amounts often means you will be chosen to do so more. If a stake owner is given a group of transactions to verify and they deem it valid, they will be given more cryptocurrency in return. However, in order to prevent fraudulent verifications, if a transaction turns out to be invalid, they must give back in return a part of what they originally put forth.

In any case of verifying transactions, each will be checked by multiple users in order to find a general consensus. If a transaction is verified by a majority, it will be officially considered a non-fraudulent one.

As of now, crypto can be considered an unstable form of currency because of its drastic fluctuations in value. According to CNBC, during April of 2021, the price of Bitcoin had more than doubled from where it started in the beginning of the year, however all of that gain had been lost by July only 3 months later. Then Bitcoin almost doubled in value again in November, and then dropped by a third of its value at the end of 2021. 

Investing in a cryptocurrency can be extremely lucrative if you time your transactions right, but it can also become detrimental to your bank account just as quickly.

NFTs are similar to cryptocurrency in the regard that they are digital and hold value, however, this is where the main similarities between the two end. Standing for “Non-Fungible-Token”, NFTs explain in their name how they differ from a crypto, like Bitcoin. 

Fungible, by definition, describes something that can be exchanged with another item retaining the same value. Dogecoin, Bitcoin, and even the Canadian Dollar are considered types of fungible currency because while the value of a single unit may increase or decrease, it will always be equal to another of the same currency ($1 CAD will always be exchangeable with another $1 CAD). Therefore, the ‘non-fungible’ portion of NFT stands for the fact that every individual NFT has a different value and cannot necessarily be exchanged with another just because they both are NFTs, mainly due to the fact that each one is usually an individual piece of art. 

NFTs operate similarly to real-life collectable items like Pokemon cards or limited edition coins, with the exception that their existence is purely digital. This is the focal point for a lot of confusion surrounding NFTs, since it seems impossible to claim that one person “owns” an image. But using algorithms that require equally as impossible levels of password protection, only the people/person who buys the NFT will show to be the owner of the asset. So while anyone can have a screenshot of it, data will show that only a select amount of people truly own it. It’s just like how anyone can have a painting of “The Starry Night’’ on their wall, but that doesn’t mean they own the real painting.

Environmental Impact: 

Besides their fluctuating values that the long-term life of both cryptocurrency and NFTs are uncertain due to their environmental impact. As mentioned before, both of these assets require tons of electricity to run. Transactions that are run using blockchains, which works as a brute force strategy, require a lot of power. And in a society where the majority of energy production stems from the use of fossil fuels, which are depleting at an alarming rate, the usage of these resources on cryptocurrencies is questionable. According to an article by Forbes, the daily carbon footprint of Bitcoin alone is the same amount of electricity that the average North American household uses over the course of 3 and a half weeks.

This is why researchers are looking into finding ways to make cryptocurrency and NFTs more sustainable, and the most impactful way seems to be by reinventing the blockchain system that is currently used. Suzanne Köhler, a technology researcher at Aalborg University in Denmark, offered one plausible short term solution for increasing sustainability. She suggests that not every transaction needs to simultaneously be on the blockchain. Auctions could be implemented into a held-off chain then be resubmitted to the blockchain in batches, meaning that the amount of transactions per blockchain would decrease exponentially. However, this solution is not foolproof, and leads to the competition that blockchains rely on decreasing. In order to ensure that carbon emissions from cryptocurrency and NFTs are decreased, further research needs to be conducted at a fast rate.