What does the Ethereum merger mean for NFTs?
We are still days away from the long-awaited Ethereum merger in which the leading dapps and NFT network will move to a more energy-efficient system. The plan has been years in the making, but as the Mid-September target looms, many users are wondering what could go wrong and whether the assets they own will change.
This is especially true when it comes to NFTs. There are now tens of millions of avatar images, collectibles and artworks running on Ethereum, some of which have garnered eye-popping sums driven by the NFT market over the past few years. What happens to your NFTs after the merger?
The simple answer is — — probably nothing happened. They will still be in your wallet and will work as usual in marketplaces and dapps. But the overall picture is much more complicated than that, mainly due to the expected community-led fork of Ethereum after the merger, which will lead to duplicate NFTs and potentially confusion and spoofing.
What do you need to know about Ethereum NFT mergers and what happens afterward? On these issues, Decrypt spoke with Ethereum experts to discuss some of the ups and downs the multi-billion dollar NFT market could face.
About Merge Chains
The Ethereum Foundation says the merger will transform Ethereum from its current proof-of-work mining model, which requires sufficient decentralization to process transactions, to a proof-of-stake consensus system, which is expected to reduce more than 99 percent of the energy consumption.
This is a huge step forward for Ethereum, especially for NFTs, effectively removing one of the biggest criticisms of NFTs.
As mentioned, the merger has been going on for years, and Ethereum’s core developers have painstakingly tested every process and addressed potential issues. While this doesn’t guarantee a seamless transition, developers and creators generally agree that it will be a very smooth process.
“Ethereum is software, and all software has downtime issues — in other words, there’s no way of knowing if there will be any technical glitches,” said Eric Diep, co-founder of smart contract startup Manifold.
However, if all goes by plan, Ethereum NFTs should work fine on Ethereum’s newly upgraded main-net. They will still be kept in your wallet and operate as usual in the market, you don’t need to do anything for the merger. These are all handled by the developers to ensure a seamless transition.
“Users should expect that their NFTs will reside securely on the new Ethereum proof-of-stake chain alongside their ETH tokens,” affirms Johnna Powell, co-head of NFTs at Ethereum-centric software firm ConsenSys.
While the majority of the Ethereum community appears to support the merger and its potential benefits, there are clear critics. Some Ethereum proponents do not want the Ethereum chain to move away from proof-of-work mining, whether based on the security advantages of the energy-intensive process or because of the rewards for miners running the computer platform.
As such, some builders in the Ethereum community plan to fork the blockchain and create a fork chain that continues to advance the current proof-of-work system. The most prominent example so far is ETHPOW, led by well-known Chinese miner Chandler Guo.
ETHPOW will be different from the merged main-net of Ethereum, which is somewhat similar to the original chain that Ethereum itself forked in 2016 in response to the DAO attack, with some users continuing to support the original chain under the new name Ethereum Classic.
As ETHPOW and any other forks split from the Ethereum main-net, they will produce duplicate versions of Ethereum NFTs. An NFT is just a blockchain token that acts as a title deed for digital items such as artwork and collectibles. Therefore, a forked Ethereum chain will have duplicate behavior pointing to the same artwork or media.
What does it mean? If the NFT market supports both the merged main-net and proof-of-work forks of Ethereum, you may see both versions of the token listing, which is sure to cause confusion and there may be scammers selling duplicate versions of famous NFTs like Bored Apes and Beeples to inexperienced crypto users.
“If proof-of-work forks are successful and the market supports them, there will definitely be market disruption and arbitrage that we can’t really predict,” Powell said.
“It is conceivable that more sophisticated NFT traders would sell high-value assets on PoW chains at low prices for quick profits,” she added, “while new traders may not notice the difference.”
In the run-up to the merger, there were some rumors of “Replay Attacks” — transactions made on a proof-of-work fork that could be “replayed” on the proof-of-stake Ethereum main-net.
Here’s a theoretical case — a Bored Ape Yacht Club NFT owner might sell a replicated version on the proof-of-work chain, but if the same transaction is “replayed” on the merged proof-of-stake chain by a malicious actor, the seller may also lose the original version on that chain. This could be a costly lesson for some NFT collectors.
However, none of this is likely to happen, at least for the most prominent proof-of-work fork, ETHPOW. According to Ethereum core developer Marius Van Der Wijden, replay attacks are only possible if the blockchains share the same chain ID. And Guo had confirmed to Decrypt that ETHPOW would use a different chain ID.
“Replay attacks won’t be a problem,” Van Der Wijden said, considering that ETHPOW will have its own unique chain ID.
However, this may not be the case with any other proof-of-work chain forked from Ethereum, opening a window for potential cross-chain chaos. Powell has some simple advice for NFT collectors to follow to avoid problems, but it means they will miss out on potential gains from selling their duplicate assets.
“The best way to prevent replay attacks is to not interact with the proof-of-work chain at all,” she said.
Project and platform decisions
Regardless, due to the ETHPOW chain and other potential forks, duplicate NFTs will exist, and there may be some level of confusion as to which assets are “official” or “legal”. Even so, when NFT owners try to flip proof-of-work versions of their valuable tokens, these copies can spark a frenzy.
This may just be a short window period. Few in the Ethereum community believe that any proof-of-work fork of the blockchain will be a long-term endeavor with significant user support.
We may see an initial shock of NFT sales on proof-of-work chains, but if society pays little attention to the value of on-chain assets, there may be little demand. In the case of popular projects, the price of the duplicate asset may be a fraction of the real transaction, and even so, the price of NFTs on the proof-of-work chain may drop rapidly.
Manifold’s Diep believes, “It is very likely that the final proof-of-work chain is just a shadow of the new proof-of-stake chain, and the amount of extractable value will decrease significantly over time.”
A broader, blockchain-level social consensus is being formed around the merged proof-of-stake chain — making it the “official” seat of Ethereum NFTs. But beyond that, project creators and the market are also signaling that they will only see Ethereum’s merged main-net as legitimate, and the forked copy will be just an unofficial copy.
The founder of the Bored Ape Yacht Club and owner of the CryptoPunks IP, Yuga Labs confirmed two weeks ago that only those with their own NFTs on the merged Ethereum proof-of-stake chain are eligible to benefit from Yuga’s community.
Again, only these owners can commercialize their images for derivative artworks and projects.
The company tweeted on Aug. 17 — “In line with the wider Ethereum community, if a viable proof-of-work fork emerges, Yuga intends to only recognize NFTs on the proof-of-stake ETH chain that are subject to the relevant NFT license, and be eligible to use the utilities provided by Yuga.”
Proof, the startup behind the members-only Proof Collective and Moonbirds NFT projects, expressed a similar stance in a statement.
“When the Ethereum merger is successful, Proof will follow the wider Ethereum community in recognizing the new proof-of-stake chain, including its own NFTs,” wrote Angharad “Harri” Thomas, Proof’s director of product, “any workload after the merger is the Proof that the fork will not be recognized.”
OpenSea, which has a dominant share of the Ethereum NFT market, also said it will only support proof-of-stake chains. By refusing to list NFT assets on the forked Ethereum proof-of-work chain, it could potentially help a large number of collectors avoid confusion and scams.
In other words, the builders of Ethereum believe that NFTs will function normally after the merger, any momentum around repeating NFTs on the forked chain will be short-lived, and the builders and the main market will not even acknowledge such a forked chain Official copy on.
Of course, this doesn’t guarantee that everything will go according to plan. There may be technical issues during the merger, or there may be a lot of interest from users in duplicate NFTs, which could lead to confusion and fraud.
In the coming weeks, the best course of action for NFT collectors may be to stay informed, avoid risky transactions or interactions, and wait for the issue to be resolved.
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(The above information is not intended as investment advice, this article only represents personal opinion)
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