The Spin: So About Those SEGA NFTs… (Updated)

Update: On May 4, Double Jump.Tokyo announced plans to move onto an Asset Mirroring System to diversify cryptocurrency payment sources and move towards environmentally sustainable options.

Almost a week ago, TSS reported on SEGA buying a stake in Double Jump.Tokyo and announcing plans to mint and sell NFTs. According to the official press release, SEGA expects to sell NFTs of art and music assets from classic SEGA IP, and plans to incorporate the technology into new IP – to which the reaction from Sonic fans on social media were mainly negative.

Debates have since ensued over what does and doesn’t constitute an environmental impact, and whether or not NFTs themselves contribute to that environmental impact. The short answer is, no, SEGA’s NFTs won’t dramatically contribute to the massive global resource sink that is crypto mining. However, this investment indisputably moves SEGA into that economy, and that itself has caused concern for many fans, including myself with regards to what direction their business is moving. In this article, we will address what exactly the technology is, why it’s controversial, and why I personally am concerned.

So let’s address this by first starting with the baseline. What is the blockchain, what is cryptocurrency, and what is an NFT?

Blockchain technology is a manner of storing data where all new data is grouped into chunks (or “blocks”) and added to the end of a long running chain of data. Each chunk has a unique ID or a “hash,” and the blockchain knows what order all the blocks are in because each block contains the hash of the previous block. Because you can only add new blocks at the end of the chain, blockchains act as a running record, or a timeline, of the data. Every person participating in the blockchain keeps copy of the blockchain and becomes partially responsible for helping maintain the blockchain.

Bitcoin and Ethereum are two of the most widely used cryptocurrencies today, and they both currently require “mining” to sustain themselves. The currency itself is the reward users are issued for helping create new blocks and, in turn, helping maintain the blockchain. But the process of creating new blocks is like having your computer play a guessing game with every other mining computer.

I’m oversimplifying this, but here’s basically what happens:

The blockchain needs to get its next block because it contains all the new transaction data that it needs to store (stuff like “Sonic transferred 0.01 Ethereum to Tails”). It does so by incentivizing miners to figure out what the next block’s hash will be. Using an algorithm, your computer processor churns out guesses as quickly as it can. If it can correctly guess what the new hash will be, the new block is created, and the first person to do it gets awarded with some cryptocurrency for doing so. To find the “right” guess for the next hash, miners could be attempting tens of millions of incorrect guesses before a new block is made.

So if you have a computer that can process hash guesses faster than others in this constant worldwide lottery, you have a better chance at “winning” the next block’s reward. Or if you have a really nice GPU capable of mining. Or a whole rack of computers. Or an entire warehouse. Or an industrial complex strategically located near a cheap coal-fueled power grid. All of those processors doing all that computing work to produce tens of millions of wrong guess calculations just so the blockchain can process another ten or fifteen seconds of data, and only one person or business (or pool of people) gets rewarded each time.

Much like cryptocurrency, NFTs are a kind of data that can be stored in a blockchain. NFTs are a piece of metadata that specify a URL to a file, and an owner. So, for example, if I’m a digital artist, and I want to sell my work, I can host it on a server (or find a hosting service), use a service to create an NFT of that art, and sell it on a marketplace with whatever selling rules I choose attached to it. The catch is, it will be bought with cryptocurrency, because NFTs are generally sold in cryptocurrency marketplaces. However, any NFT runs into at least one important risk: if that file specified by the NFT ever disappears from the server, or if the server outright goes away, (or if you run into complications with marketplaces and terms of service) you may eventually wind up owning a dead URL.

Because the whole crypto economy is still in wild flux, a lot of companies are making very public, often cynically motivated moves into crypto to wrangle quick profit out of it, to establish themselves as impact-making players in the crypto space, or to just avoid being left behind. Kodak tried and failed to gain foot in that space, right before moving into pharmaceuticals (no really, they actually did that). You may remember that time years ago when a New York iced tea bottler spiked their stock value by changing their name to “Long Blockchain Corp.” The current NFT boom was in part sparked by the NBA selling collectable video clips, the rarest of which are reselling for literally hundred of thousands of dollars. You can bet every entertainment company is discussing NFTs internally whether they actually intend to mint them or not. And if they aren’t discussing it, their investors are.

Maintaining a blockchain does require a certain amount of power across all the computers working within it, but when people discuss the ecological impact of cryptocurrency and NFTs, they usually mean mining. So long as cryptocurrencies hold significant monetary value, there will be an arms race to get them, and the only ways to compete are through either size or efficiency, and both come with huge caveats.

The majority of mining still uses some combination of renewable and non-renewable energy, with more half of all energy consumption coming from non-renewable sources. More miners and bigger miners mean more demand on power plants. Hydroelectric stations can only produce power at a certain rate, while wind and solar can only generate power when conditions are optimal. However, mining is a process that demands consistent and intensive power 24 hours a day, 7 days a week. Thus miners turn to fossil fuel plants, like coal, oil, or natural gas.

When these fossil fuels burn, they release toxins and great amounts of carbon dioxide into the atmosphere (this is what people mean when they refer to a “carbon footprint”). Far, far more than we normally make with our lungs. More carbon dioxide in the atmosphere means higher global temperature because carbon dioxide traps the heat generated by our sun’s radiation. Higher global temperature means disrupted weather patterns. Hotter hots, harsher and more frequent storms, and the oceans slowly encroaching on coastline. On top of the environmental impact, electricity is subject to supply and demand, so higher electrical demand means higher cost for everyone on that electrical grid.

Continued development of more efficient mining technology may, at best, only briefly mitigate the problem. Many cryptocurrency blockchains are designed in such a way that the complexity of the algorithm needed to find the next hash increases once a certain number of blocks are formed. More complexity means more computing power needed, and thus the only possible way more efficient mining could actually work is if advancement itself outpaces the rate that blocks are mined.

So with ALL that out of the way, let’s get back to SEGA.

SEGA entered agreement with and bought a stake in Double Jump.Tokyo, a blockchain/crypto-focused company whose central game My Crypto Heroes allows users to buy and sell game characters and items on crypto marketplaces. My Crypto Heroes’ economy runs on Ethereum, the second most prolific cryptocurrency, just behind Bitcoin. Ethereum is a Proof-of-Work blockchain where anyone’s chance of getting a payday is proportional to the amount of processing power they’re contributing, thus, it is a currency that encourages competitive mining. Ethereum has expressed interest in moving towards a Proof-of-Stake structure that limits who can mine and how much, but they haven’t fully executed on that yet, plus even Proof-of-Stake systems still requires some amount of mining.

We do not yet know what cryptocurrency system SEGA will be operating in, but Ethereum remains at the heart of the NFT marketplace as we currently know it, and Double Jump.Tokyo itself currently deals in Ethereum. Even if SEGA does not do any mining themselves, they will likely be entering an economy that is built on the back of mining.

Thus, opinion splits here:

Do you believe that any engagement with a wasteful mining system is tacit acceptance or approval of that system? OR do you believe SEGA should only be held accountable for what they are directly doing?

Wherever you fall with that will be purely philosophical.

My personal feelings on SEGA selling NFTs is in how it represents them as a business and how they treat their own legacy of games. There isn’t any need use NFTs to make digital collectables. SEGA has made both physical and digital collectables for years through their mobile games, their MMOs, and their partnerships with toy companies. NFTs in concept aren’t a hot new idea. They’re an old idea in a much more obtuse package with a lot of strings attached.

While most of SEGA’s traditional customers don’t own or use Bitcoin or Ethereum, SEGA still sees NFTs as enough of a priority to buy part of a company and get in on crypto. I don’t know if SEGA legitimately sees a long-term plan for positioning themselves in the crypto space, but if they are, selling scans of classic game art is an unambitious and uncreative start.

Optimistically, I’d say that this is just a business diversification that they can divest out of if (when) the bubble bursts. Pessimistically, this is SEGA joining the blockchain to make investors happy or to chase a big pay off. I am not implying in any way that this is SEGA moving away from publishing traditional video games. But companies build reputation by having a clear, strong philosophy, and using that philosophy to drive decisions; I’m concerned that SEGA is buying into this somewhat dubious one – and hopefully they won’t be following in the shallow footsteps of companies like Atari. Nobody should follow in the footsteps of Atari.