By Mallory Harrington*

The meteoric rise of cryptocurrencies and NFTs significantly contributes to the global climate crisis due to energy-guzzling mining practices. This blog post provides an overview of the relevant technologies and frequently suggested policy interventions.

Blockchain, Bitcoin, and NFTs

A Bitcoin is a digital token that can be exchanged between users.^[1] It is fungible, meaning that it is both replaceable and interchangeable.^[2] It is analogous to paper cash; one Bitcoin can be exchanged for another.^[3] Bitcoin is also the name of the decentralized network on which Bitcoins are exchanged.^[4] Since Bitcoin emerged, many other cryptocurrencies—also referred to as virtual currencies—have been developed and are traded on computing networks (including Ethereum) using similar mining structures.^[5]

Nonfungible tokens (NFTs) may also be traded on these networks. These tokens are unique “digital asset[s] that establish[] authenticity and ownership[.]”^[6] Possession of an NFT essentially proves that you “own” the underlying file. However, this is not legal ownership; NFTs offer no protection for intellectual property, and conversely, copyrighted materials are sometimes sold as NFTs without the author’s consent.^[7] NFTs, also referred to as “cryptoart,” are valuable because they are unique, “[l]ike beanie babies without the beans.”^[8] While some NFTs are “playful or irreverent[,]”such as images of popular memes, scholars note that NFTs have the potential to increase the security of transactions involving real world goods, such as cars and real estate.^[9]

Decentralized networks are designed to cut out the middleman in Bitcoin transactions (traditionally the role of governments or banking institutions) and utilize blockchains, which are communally maintained databases of digital information.^[10] We can think of a blockchain as a ledger, broken up into smaller pieces (blocks) and spread out across different computing devices (nodes) in a network. The structure of this system gives it three important attributes: 1) the transactions on the system are irreversible; 2) much of the network’s data is redundant; and 3) the network’s data is highly accurate and secure.^[11]

Blockchain-based networks are maintained by miners. Bitcoin mining is “the process through which new Bitcoins are created and given to computers helping maintain the network.”^[12] When an individual opens an account with a Bitcoin exchange, they create a digital wallet to store their Bitcoin.^[13] When they spend or exchange that Bitcoin, the transaction must be validated by the Bitcoin network.^[14] Bitcoin miners then compete to validate the transaction and enter it into the public blockchain ledger.^[15] If a Bitcoin miner successfully validates the transaction, they are rewarded for that effort in new Bitcoin, a huge financial incentive to participate in the mining process.^[16]

But how do miners “win?” That is, how is a certain miner chosen to validate the transaction? That depends on the validation system of the blockchain. The most widely used system across blockchain networks (including Bitcoin) is called proof-of-work.^[17] In this system, miner’s computers work to solve complex puzzles, essentially racing to be the first to find the solution.^[18] The more computing power the miner has, the more likely they are to win the verification.^[19] The idea behind this system is that only “trustworthy” computers—devices belonging to those who have invested massive amounts of money, computing power, and electricity into participation—will validate the majority of the network.^[20]

Market Growth and Environmental Impacts

The meteoric rise of cryptocurrencies and NFTs relying on blockchain networks has a significant environmental impact. Since the initial use of Bitcoin in 2009, prices rose dramatically, and cryptocurrencies captured widespread attention. Bitcoin’s value skyrocketed; $100 worth of Bitcoin in 2009 was valued at nearly $500M in 2021.^[21] The pace of NFT transactions is also rapidly increasing; NFT sales jumped from $1 billion to $10 billion between the second and third quarters of 2021.^[22] Despite valuation drops in 2022, the story of crypto is characterized by growth.^[23]

This continual growth allows participants in the crypto market to reach profitability without striving for energy efficiency.^[24] Successful miners require machinery, storage space, and cooling power to keep the hardware running, so mining tends to occur in large data centers that guzzle electricity.^[25] In a market analysis, Alex de Vries estimated that the Bitcoin network in 2019 consumed about the same amount of electrical energy as the country of Belgium as a whole.^[26] The energy-intensive nature of cryptocurrency and NFT transactions make them a key contributor to the global climate crisis.

Potential Interventions

Finding meaningful interventions to abate energy consumption is a priority for many scholars, scientists, and politicians.

First, there are design-based interventions. Not all blockchains are equal polluters; depending on the protocols used to verify transactions, some blockchains have significantly lower levels of energy consumption.^[27] Therefore, incentivizing a design switch from the popular proof-of-work verification system to more efficient verification methods could powerfully impact environmental outcomes.^[28] Instead of putting miners into fierce competition based on computing power, alternative verification methods function more like a lottery system, doling out chances to participate in the verification process. How those lottery tickets are distributed depends on the model:

• Proof-of-stake models distribute lottery tickets based upon how much crypto a participant already owns. Participants stake a certain amount of their savings to enter the lottery.^[29]
• Proof-of-capacity models distribute lottery tickets based upon hard drive availability.^[30]
• Proof-of-assignment models distribute lottery tickets based upon the number of devices a participant has that are capable of participating in the blockchain.^[31]
• Proof-of-donation models distribute lottery tickets based upon charitable donations.^[32]

All of these alternative models have the potential to reduce energy consumption. However, proof-of-stake models have gained the most traction. In 2021, the U.S. Congressional Research Service proposed proof-of-stake as a more sustainable alternative to proof-of-work models.^[33]  On September 15, 2022, Ethereum executed a highly anticipated switch to a proof-of-stake model, and the company claims a reduction of energy consumption by approximately 99.95%.^[34] Although Ethereum is just one network, if their switch to a proof-of-stake model proves successful, other networks, many of which were reluctant to make a change from the tried-and-tested security features of proof-of-work models, may follow suit.^[35]

However, if crypto networks are reluctant to voluntarily switch away from proof-of-work models, regulatory and fiscal tools could be impactful. In 2021, New York established a two-year moratorium on proof-of-work mining operations, requiring a full environmental impact assessment on the practice.^[36] Fiscal tools, such as varied transaction sales taxes or capital gains / income taxes based upon the energy consumption, are frequently proposed to incentivize greener blockchains.^[37]

It is important to note that these alternative systems of verification still perpetuate many financial inequalities. Particularly in proof-of-stake models, only participants who already own crypto assets may participate in the verification process.^[38] Critics note that there “is not a schema that doesn’t reward those who [] are already wealthy, who are already bought in, who already have excess capital or access to outsized computational power.”^[39]

Next, there are interventions aimed at the crypto miners. Some of these interventions incentivize miners to utilize more efficient computing devices and energy sources, while others disincentivize participation in the mining system.^[40] Fiscal interventions aim to increase energy costs for miners.^[41] In New York, power companies can charge premium prices for electricity consumptions for miners; this tactic pushes some of the environmental costs onto the miners themselves – a.k.a., the polluter pays.^[42] China has taken a different approach, imposing a taxation strategy based upon usage of electricity.^[43] Regulatory interventions may also be used to push miners out of national markets. In May 2021, China took a “blunt but effective” approach, prohibiting financial institutions from providing services relating to cryptocurrencies and significantly restraining mining, pushing about half global miners offline.^[44] These measures proved effective in lowering the national energy consumption, but had a limited global effect as miners relocated to more hospitable regions.^[45] Meaningful restrictions on mining will likely require international coordination. While cryptocurrencies and NFT face an uncertain future, it is clear that change in the crypto market is environmentally crucial.

* Note & Comment Editor, J.D. Candidate – University of Minnesota Law School, Class of 2023

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[1] New to the Crypto World? Here Are the Terms to Know, N.Y. Times (June. 8, 2022), https://www.nytimes.com/explain/2022/cryptocurrency-guide;

[2] Everest Pipkin, Here is the Article You Can Send to People When They Say “But the Environmental Issues With Cryptoart Will Be Solved Soon, Right?”, Medium (Mar. 3, 2021), https://everestpipkin.medium.com/but-the-environmental-issues-with-cryptoart-1128ef72e6a3.

[3] Id.

[4] N.Y. Times, supra note 1.

[5] N.Y. Times, supra note 1.

[6] Id.

[7] Pipkin, supra note 2.

[8] Id.

[9] Jon Truby, Rafael Dead Brown, Andrew Dahdal & Imad Ibrahim, Blockchain, climate damage, and death: Policy interventions to reduce the carbon emissions, mortality, and net-zero implications of non-fungible tokens and Bitcoin, 88 Energy Research & Social Science 3 (2022), available here.

[10] N.Y. Times, supra note 1.

[11] Adam Hayes, Blockchain Facts: What Is It, How It Works, and How It Can Be Used, Investopedia (Sept. 27, 2022), https://www.investopedia.com/terms/b/blockchain.asp (“If one user tampers with [the] record of transactions, all other nodes would cross-reference each other and easily pinpoint the node with the incorrect information. This system helps to establish an exact and transparent order of events. This way, no single node within the network can alter information held within it.”).

[12] N.Y. Times, supra note 1.

[13] Hayes, supra note 13.

[14] Id.

[15] Jon Huang, Claire O’Neill & Hiroko Tabuchi, Bitcoin Uses More Electricity Than Many Countries. How Is That Possible?, N.Y. Times (Sept. 3, 2021), https://www.nytimes.com/interactive/2021/09/03/climate/bitcoin-carbon-footprint-electricity.html.

[16] Id.

[17] Pipkin, supra note 2.

[18] Id.

[19] Id.

[20] Huang, O’Neill & Tabuchi, supra note 15.

[21] Pipkin, supra note 2.

[22] Truby, Brown, Dahdal & Ibrahim, supra note 9, at 5.

[23] Alex Gailey & Ryan Haar, The Future of Cryptocurrency: 8 Experts Share Predictions for the Second Half of 2022, NextAdvisor (Dec. 21, 2021), https://time.com/nextadvisor/investing/cryptocurrency/future-of-cryptocurrency/.

[24] Alex de Vries, Bitcoin’s energy consumption is underestimated: A market dynamics approach, 70 Energy Research & Social Science (2020).

[25] Huang, O’Neill & Tabuchi, supra note 15.

[26] de Vries, supra note 24.

[27] Truby, Brown, Dahdal & Ibrahim, supra note 9.

[28] Id.

[29] N.Y. Times, supra note 1.

[30] Pipkin, supra note 2.

[31] Id.

[32] Id.

[33] Truby, Brown, Dahdal & Ibrahim, supra note 9, at 6.

[34] The Merge, Ethereum (Jan. 31, 2023), https://ethereum.org/en/upgrades/merge/#:~:text=The%20Merge%20was%20executed%20on%20September%2015%2C%202022.

[35] Truby, Brown, Dahdal & Ibrahim, supra note 9, at 6.

[36] Id.

[37] Id. at 7.

[38] N.Y. Times, supra note 1.

[39] Pipkin, supra note 2.

[40] Truby, Brown, Dahdal & Ibrahim, supra note 9.

[41] Id.

[42] Id. at 8.

[43] Id.

[44] Id.

[45] Id.