The buzz around non-fungible tokens (NFTs) benefits from flashy valuations, the cryptocurrency wave, increasingly digital lifestyles, and attention from an investment industry pondering otherwise uninspiring return outlooks for conventional assets. In total, collectors, investors, and traders committed $22 billion to NFTs in 2021, far exceeding the $100 million recorded in 2020.

Amid the parabolic growth, however, climate concerns have surfaced: what are NFTs’ environmental impact? A single transaction uses 261.79 kWh, equivalent to the amount of power consumed by the average U.S. household over 8.85 days. This has spurred innovation on that front as investors with ESG concerns weigh the role of NFTs.

What Are NFTs?

NFTs are digital assets embedded within the world’s blockchain technology. Although the digital files—which may represent digital art, music, GIFs, video game skins—can be copied and shared endlessly, the holder of the single ownership token is entrenched on the blockchain, essentially eliminating counterfeit claims.

Seeing NFT Values Skyrocket

Cryptocurrency developers had been toying with unique identifiers on digital images and recordings for a couple of years before digital artist Kevin McCoy created what’s considered the first NFT, Quantum, in 2014. The piece consists of an octagon that pulses through a variety of colors and designs in an endless loop.

The blockchain supporting the Ethereum cryptocurrency emerged as the standard for NFT recordkeeping about a year later, as the older Bitcoin blockchain wasn’t flexible enough. Digital artists jumped on the Ethereum platform to develop one-of-a-kind images and games, some tied to version launches of the cryptocurrency or promoted by online platforms looking to attract funds.

NFT values largely tracked the volatile Ethereum until 2021, when:

• On March 12, the artist known as Beeple sold the NFT Everydays: the First 5000 Days for $69.3 million in an auction conducted by Christie’s.
• On March 23, Twitter founder and CEO Jack Dorsey sold an NFT of the first tweet ever posted for $2.9 million.
• On June 10, McCoy’s Quantum NFT sold for $1.47 million, and a CryptoPunk NFT sold for $11.7 million at an auction conducted by Sotheby’s

Furthermore, more than half of memorabilia collectors expressed interest in NFTs, led by millennials, and the digital assets gained traction as holiday gifts.

Merging into the Mainstream

Interestingly, after expanding more than 200-fold between 2020 and 2021, growth expectations are more measured over the next decade. One research firm projects the NFT market will record an average annual growth rate of about 19% through 2031, while another calls for average annual growth of 39.6% through 2030.

Further developments have lent credence to the validity of the NFT market, including:

• Independent insurance broker IMA Financial Group’s plans to offer NFT insurance through its metaverse presence.
• NFT stories are regularly published in the 120-year-old ARTnews, an industry stalwart in 124 countries.
• Serious cryptocurrency fundraising events led by NFT creators have helped support Ukraine and related humanitarian relief efforts.

Nonetheless, not all buy into the NFT story. Some market observers question the long-term value of an asset only backed only by a digital record, calling the market’s soaring value a bubble that may be prone to popping if average prices decline or trading volumes sink on OpenSea, the largest NFT marketplace. The negative climate impact of NFTs and crpytocurrency have also raised concerns.

Exploring the Greening of NFTs

Whether NFT values are destined to persevere and appreciate like the S&P 500 Index over the decades or wilt like a Dutch bloom in the tulip mania crash of 1637, the creations themselves carry an environmental problem.

Fully integrated into the Ethereum blockchain, NFTs may be linked to the energy consumed by the cryptocurrency’s miners, who are responsible for defining and maintaining the ever-growing blockchain. One researcher found that the average NFT emits as much greenhouse gas as an average European resident does in a month. However, others question whether the NFT-related emissions are above and beyond what would be consumed by miners anyway.

More broadly, the Ethereum community acknowledges that the broader blockchain efforts that support NFTs have a long way to go environmentally, although it says an upcoming change in its recording and validation process will reduce its energy consumption by 99%.

Until then, some NFTs community members have taken matters into their own hands, creating new digital assets such as:

• CarbonLand Trust ESG NFTs, which are backed by carbon removal credits from forest land
• Non-fungible sustainability tokens, which may be offered by individual entities that validate ESG-related accomplishments
• Teilur’s ESG NFTs, which finance technology training for individuals in developing countries

Given the dramatic price swings and pop culture elements that currently define NFTs, it can be easy to dismiss the creations from investment discussions. Yet for those who believe that blockchain technology and cryptocurrency are at least part of the future, addressing climate change concerns sooner than later seems like a prudent move—and one more item on the list of Sustainability Trends for 2022.

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