One of the most remarkable market developments in 2021 was the explosion of non-fungible tokens (NFTs). The vast growth of NFT transactions has drawn the attention of the art market to the environmental impact of blockchain technology, through which all NFT transactions are made.
With CO2-related deaths attributable to NFT transactions, social pressure from the art market has helped to progress the switch from high-polluting forms of blockchains to more sustainable methods, according to a study conducted by Qatar University Centre for Law and Development.
The research claims that carbon emissions caused by NFT transactions in October 2021 will kill 18 people, a figure that is just a fraction of the 8,326 “unnecessary future deaths” caused by Ethereum’s annual emissions or the 18,818 deaths caused, more generally, by Bitcoin’s blockchain in 2021. In response, recent global policy interventions have employed legal and fiscal tools to reduce the carbon impact of some or all types of blockchain technology.
Regulators and policymakers around the world are increasingly willing to intervene in the market to restrict or outlaw the most polluting types of blockchain, namely its all-important verification system known as ‘proof of work’.
Proof of work is a consensus mechanism used to confirm that network participants, called miners, calculate valid codes (called hashes) to verify Bitcoin transactions and add the next block to the blockchain.
“Pressures on energy supply, the carbon impact, and economic concerns have shown policymakers from China to New York to take decisive regulatory measures to limit [blockchain’s environmental impact],” Dr Jon Truby, lead author of Qatar University’s report, told Investment Monitor. “With NFTs, social awareness of the environmental costs of verifying blockchain transactions is seeing the industry switch to more sustainable blockchain designs.”
This is why a growing number of platforms supporting NFTs, such as Palm and Cardano, now advertise their environmental credentials, avoiding proof of work in favour of energy-efficient consensus protocols.
Positive changes such as these are not happening across all types of blockchain, however, including many digital currencies. In response, regulators are increasing costs, restricting or outright banning miners especially, for proof of work blockchain.
“Regulatory responses have disrupted the industry, with miners relocating to friendlier countries, which has caused shocks in the hashrates and impacted severely upon digital currency prices,” said Truby. “The clampdown in China had perhaps the most severe impact upon digital currency prices, and saw the industry relocate masses of mining devices to destinations from Kazakhstan to Canada.”
The scale of the blockchain mining industry will pose a challenge for energy markets and regulators in countries receiving the exodus of relocated mining devices from China’s prohibition – but certain emerging markets may see these shifting sands as an opportunity, for better and for worse. On the flip side, Bitcoin miners and investors will be concerned by comparable energy prices and the increasing willingness of regulators to outlaw polluting blockchain, particularly proof of work blockchain, in both developing and industrialised countries, according to Truby.
In short, investors in new designs of blockchain are beginning to favour more sustainable designs as the policy backlash against blockchain grows. Allowing and investing in proof of work blockchain is, as Truby puts it, “a suicidal act” for the planet. Policymakers must double down on the momentum catalysed by NFTs.