By: Fletcher Lyon
What would you do with $580,000? One anonymous buyer recently decided to spend that amount of money on a nonfungible token (NFT) containing a digital rendition of the Nyan Cat meme made famous in 2011.[1] You read that right. One savvy investor spent $580,000 on the “original” digital rendition of a Pop-Tart bodied cat running through space, leaving a rainbow trail that you can watch for free on Youtube instead of purchasing a house, a boat, an IPO, or anything else worth having.[2] The market is HOT for NFTs right now as cryptocurrencies backed by blockchain are becoming more widely understood and accepted as global tender.[3] However, that heat may be cooled by environmental concerns surrounding blockchain transactions, particularly as it relates to Ethereum, the primary source of NFTs and the second most popular cryptocurrency behind Bitcoin.[4]
What are NFTs?
NFT is short for non-fungible token.[5] The catchy term is just a fancy way of categorizing a specific digital fixture as the original.[6] The owner of the NFT can verify ownership through a blockchain ledger, which is like a digital contract showing the various transactions of the file from one owner to the next.[7] This method is the same method used by cryptocurrencies to verify transactions.[8]
Try not to be confused because NFTs are virtual rather than physical objects that consumers are accustomed to trading.[9] Imagine the famous masterpiece, The Scream, by artist Edvard Munch.[10] There is only one pastel-on-board version of the masterpiece painted by Munch, but there are also millions of physical copies floating around the world.[11] The pastel-on-board version of The Scream sold for $120 million in 2012, but you can easily obtain a copy of the same print for less than $5 at a store near you.[12] What makes the original so much more expensive is that it is verifiably the original work of art that has been bought, sold, stolen, and recovered since 1895.[13]
Likewise, blockchain ledgers make it possible to verify that digital works of art are original.[14] You can still find copies of the digital images with a simple google search, and like the cheap poster copies of The Scream, the digital images do not have any real value. Ultimately, what I am saying that people love scarcity, and NFTs make scarcity possible in the digital world.
Powering Blockchain
One of the greatest challenges facing blockchain is the verification method’s significant reliance on energy consumption.[15] Verifying blockchain can be done by utilizing proof-of-work, which is like showing your work on a math problem in high school.[16] However, comparing proof-of-work to a high school math equation is an extreme oversimplification. Instead of a high schooler solving for X, computers run algorithms to solve incredibly complex equations created by other algorithms to verify blockchain transactions.[17] Executing this command for one transaction can leave the carbon footprint equivalent of watching YouTube videos for 10,498 hours.[18] That means that each Ethereum transaction leaves the same carbon footprint as watching YouTube videos nonstop for over a year.[19]
What’s the Solution?
Ethereum has decided to replace proof-of-work with proof-of-stake in the near future.[20] Proof-of-stake is rumored to consume less energy to process transactions.[21] When that happens is unclear, but it is good news. Suppose Ethereum and other blockchain platforms do not reduce energy consumption. In that case, regulations may be necessary to reduce the burden on already struggling power grids in states like California, Texas, and beyond.[22] If researchers can find a way to pump out blockchain transactions without using up all the power, NFTs will play an exciting role in our digital future.
[1] Erin Griffith, Why an Animated Flying Cat With a Pop-Tart Body Sold for Almost $600,000, The New York Times (May 27, 2021), https://www.nytimes.com/2021/02/22/business/nft-nba-top-shot-crypto.html?auth=login-google1tap&login=google1tap [https://perma.cc/YUG8-AJSU].
[2] Id.
[3] See Natasha Mascarenhas, NFTs don’t need crypto, but crypto needs NFTS, TC (March 13, 2021 2:00 PM), https://techcrunch.com/2021/03/13/nfts-dont-need-crypto-but-crypto-needs-nfts/ [https://perma.cc/S2PL-KMC6].
[4] Tatiana Cirisano, So You Want to Mint an NFT: A Guide for Artists & Music Execs, billboard (March 19, 2021), https://www.billboard.com/articles/business/tech/9542708/nft-how-to-guide-music-artists-executives-minting/ [https://perma.cc/6DGQ-YPEU].
[5] Id.
[6] See Id.
[7] Id.
[8] Luke Conway, Blockchain Explained, Investopedia (June 1, 2021), https://www.investopedia.com/terms/b/blockchain.asp [https://perma.cc/S2HW-X8A4].
[9] Bernard Fickser, How Non-Fungible Tokens Work: NFTs Explained, Debunked, and Legitimized, Expensivity (July 20, 2021), https://www.expensivity.com/how-non-fungible-tokens-work/ [https://perma.cc/G9LG-GKTW].
[10] The Scream, 1893, by Edvard Munch, Edvard Munch https://www.edvardmunch.org/the-scream.jsp (last viewed July 24, 2021) [https://perma.cc/7CM2-L2CS].
[11] Edvard Munch, artnet http://www.artnet.com/artists/edvard-munch/ (last viewed July 24, 2021) [https://perma.cc/3M2U-QZSN]
[12] Supra note at 10.
[13] Id.
[14] See Luke Conway Blockchain Explained, Investopedia (July 1, 2021), https://www.investopedia.com/terms/b/blockchain.asp [https://perma.cc/R89M-JQY4].
[15] See George Kamiya Bitcoin Energy Use – Minded the Gap, iea (July 5, 2019), https://www.iea.org/commentaries/bitcoin-energy-use-mined-the-gap [https://perma.cc/UQ7U-29VU].
[16] Bhavishy6 Proof-of-Work, ethereum (May 11, 2021), https://ethereum.org/en/developers/docs/consensus-mechanisms/pow/ [https://ethereum.org/en/developers/docs/consensus-mechanisms/pow/].
[17] Id.
[18] Ethereum Energy Consumption Index, digiconomist https://digiconomist.net/ethereum-energy-consumption (last viewed July 24, 2021) [https://perma.cc/2VBD-RWJN].
[19] How Many Minutes and Hours in a Year, Knowhowmany http://knowhowmany.com/how-many-minutes-and-hours-in-a-year/ last visited July 24, 2021 [https://perma.cc/WP4B-HRGA].
[20] Ozora Ogino Proof-of-Stake, Ethereum (April 15, 2021), https://ethereum.org/en/developers/docs/consensus-mechanisms/pos/ [https://perma.cc/7AVJ-F6N7].
[21] Id.
[22] David Koenig & Michael Liedtke Why the Power Grid Failed in Texas and Beyond, Los Angeles Times (Feb. 18, 2021 1:03 AM), https://www.latimes.com/world-nation/story/2021-02-18/explainer-why-the-power-grid-failed-in-texas-and-beyond [https://perma.cc/Y4UZ-BZMB].