Crypto & carbon: a match made in market chaos
image: This figure represents the net pairwise directional spillovers between NFT and DeFi instruments and CA markets for 0.01, 0.05, 0.95 and 0.99 quantiles. The sizes of the network nodes indicate the magnitude of the net transmission or receipt of shocks. The arrows indicate the direction of an innovation flow from the blue nodes, which represent net contributing variables, to the yellow nodes, which symbolize variables behaving as net shock receivers. The thickness of the arrows represents the strength of the transmitter-receiver interaction.
Credit: Bikramaditya Ghosh (Harper Adams University, UK)， Mariya Gubareva (Universidade de Lisboa, Portugal)， Noshaba Zulfiqar (Namal University, Pakistan), Ahmed Bossman (LUT University, Finland).
The rise of NFTs and DeFi has transformed digital asset markets, but their energy-intensive mining processes have raised environmental concerns. Following China’s cryptocurrency mining ban in 2021, many miners relocated to regions reliant on fossil fuels, significantly increasing carbon footprints. This shift has intensified debates about blockchain technology’s environmental impact and spurred interest in carbon offsetting instruments.
A groundbreaking study published in the China Finance Review International reveals how non-fungible tokens (NFTs), decentralized finance (DeFi), and carbon allowance markets are interconnected, particularly during extreme economic events. The research offers critical insights for investors and policymakers navigating the complex relationship between digital assets and environmental sustainability.
Methodology & Scope:
Using advanced statistical models, the researchers analyzed data from four key indices:
- NFT Index (NFTI): Tracks the performance of major NFT tokens.
- DeFi Pulse Index (DPI): Measures the value of decentralized financial assets.
- KraneShares Global Carbon Strategy ETF (KRBN): Represents global carbon allowance markets.
- Solactive Carbon Emission Allowances Index (SOLCARBT): Tracks EU carbon futures.
The study covered the period from January 2021 to May 2023, encompassing market shocks such as the COVID-19 Delta and Omicron variants, the Russia-Ukraine conflict, and the FTX collapse.
Key Findings:
- Bull Markets: DeFi (DPI) consistently transmits shocks to other markets, while NFTs (NFTI) only transmit innovations at the most extreme quantiles.
- Bear Markets: Carbon markets (KRBN and SOLCARBT) become net shock transmitters, while NFTs (NFTI) act as the primary shock receiver.
- Dynamic Roles: The roles of transmitter and receiver shift depending on market conditions, with systemic connectedness intensifying during extreme events.
- Tail Dependence: Stress events like COVID-19 surges and geopolitical conflicts increase relative tail dependence, amplifying systemic risks.
Why It Matters:
As COP29 debates crypto’s environmental role, this research provides feasible tools to:
- Hedge carbon exposure in Web3 portfolios
- Design crisis-resilient green fintech products
- Align blockchain innovation with net-zero goals
Real-World Applications:
- For Traders: Short-term arbitrage between carbon futures and Ethereum options during network congestion events
- For Regulators: Early-warning system for systemic climate-finance risks
- For DAOs: Protocol upgrades to dynamically offset carbon footprints
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