How Brands Can Avoid The NFT Sustainability Paradox

To keep on-trend, brands across the globe have turned their heads to web3, the metaverse and non-fungible tokens (NFTs). Meanwhile, we’re experiencing the most environmentally-conscious, digitally-driven era yet. So, what are the implications of mixing this energy-intensive tech with sustainability-driven entities? And how can brands avoid conflicting positioning? Amy Brooks, consultant at Frog (part of Capgemini Invent), explores further.

Ah, NFTs. A world of carbon-guzzling blockchains and altruistic goodness – and yet another article occupying web estate on a digitally-saturated topic? Think again. For more information defining NFTs, check out our earlier blog or podcast. Otherwise, let’s begin.

What are NFTs used for?

With many organizations hopping on the bandwagon, NFTs are revolutionizing how brands connect with consumers, their success arguably driven by the notion of digital scarcity and programmable tech. Three key use cases include tapping into new audiences, driving loyalty and creating phygital brand experiences.

Interestingly, most NFT-driven initiatives have corporate social responsibility (CSR) rooted at the core, with brands frequently donating the proceeds of NFT auctions to philanthropic projects, thereby building positive brand perception, equity and PR. Some brands even encode their NFT collectables to ensure perpetual NFT donations. For example, Macy’s released 9,500 limited-edition NFTs as part of its 95th annual Thanksgiving festivities. Not only did it donate the auction proceeds to the Make-A-Wish Foundation, it also ensured 10% of all future sales would be rewarded too.

So NFTs are CSR gold, right?

Not quite.

Most NFTs exist on the Ethereum blockchain and are sold on Ethereum-based marketplaces such as OpenSea, which operates as the world’s most established centralized marketplace today. Ethereum has generated over 97% recent NFT sales and dominates the NFT market with an 80% share. It’s also one of the most environmentally-detrimental blockchains around, with one single NFT transaction consuming up to 229.51kWh – the equivalent of a household’s typical energy usage over eight days. This is due to operating on the Proof of Work model.

What happens is this:

  • A digital marketplace is selected for the NFT listing: The blockchain determines how energy-intensive the ‘minting’ will be.

  • NFT is purchased and mined: With Ethereum, mining takes place using a PoW system where multiple miners compete to solve complex algorithms using energy-intensive machines, pumping greenhouse pollutants into the atmosphere.

  • NFT is stored or transferred following purchase: If stored, no more power is consumed. If transferred to another unsustainable digital wallet, the energy-guzzling cycle repeats.

Put simply, the greater the blockchain activity, the more complex the algorithm and environmentally devastating the mining process.

Could this be a brand sustainability crisis in the making?

The PoW mechanism underpinning Ethereum is ecologically costly by design and, despite plans to phase out in favor of the greener Proof of Stake alternative, this transition has been in the works for almost as long as it’s existed.

Naturally, promoting an NFT that’s transacted via a blockchain with an energy consumption equivalent of running two-to-three coal plants doesn’t paint the most environmentally-friendly picture. During a time of unprecedented temperature increases and other catastrophic climatic changes, one could argue it completely offsets a brand’s CSR efforts in the first place.

But are brands aware of this paradox?

Maybe not. Let’s take another look at Macy’s NFT initiative. Its preferred NFT platform, Sweet, supports among others the Ethereum blockchain. With an entire segment of Macy’s website dedicated to sustainability, a consumer might suspect conflicting brand intentions.

Similarly, Adidas revealed its first collaborative NFT together with Prada earlier this year. Most of the profits were donated to climate-focused charities, however the one-of-a-kind NFT was auctioned via SuperRare – another marketplace on the carbon-pumping Ethereum blockchain.

Mounting consumer expectation for brands to demonstrate their commitment to sustainability compounded with pressure to remain relevant, innovative and deliver cut-through in a saturated world is indeed a challenge. Concerningly, however, when it comes to incorporating NFTs into brand strategies, only a handful of marketers cited environmental impact as a major concern. Thus, Ethereum-based marketplaces seemingly benefit from a lack of both consumer and brand awareness in this department.

So, do NFTs have a place in 2022 and beyond?

Absolutely. Arguably, to ignore the ever-evolving space of NFTs could be equally harmful for brand growth. Nevertheless, the environmental impacts of the blockchain tech that underpins NFTs is impossible to ignore. The good news? It’s hopefully short-term.

Nevertheless, as consumer awareness increases and moral compasses preside, brands must start prioritizing selection criteria for the blockchain tech supporting NFT initiatives or risk putting their reputation on the line. Opting for carbon-neutral or carbon-negative blockchains, such as Algorand, is one interim solution. Another relatively unexplored concept is for brands to exclude their NFTs from being traded between specific energy-intensive blockchains. Although seldom documented, interest is ramping in this space as chains wish to appear more interoperable.

One thing’s for certain. Those that ignore the NFT CSR paradox risk revealing contradictory brand promises and positioning, negative customer perception and the potential alienation of key target groups.

To learn more about Frog, part of Capgemini Invent, get in touch.

.

Leave a Comment