The highly-anticipated Ethereum 2.0, expected to decrease the blockchain network’s carbon footprint, is happening on September 15. However, how will it impact NFTs?
The Ethereum merge, also known as Ethereum 2, which is years in the making, is finally happening. However, as September 15 nears, users anticipate what could go wrong and how the merge would impact NFTs.
Just imagine: tens of millions of profile pictures, collectibles, and artwork pieces run on the Ethereum blockchain. These NFTs don’t come cheap. And even amidst the bear market, some blue-chip NFTs continue to command high prices. So the question arises, what happens to those NFTs once Ethereum 2 takes effect?
Before we delve deeper into that, let’s first review what Ethereum 2 is about. The Ethereum merge will see the blockchain network transition from its current proof-of-work (PoW) model to a proof-of-stake (PoS) consensus system. Why is the transition necessary?
The Ethereum blockchain, and NFTs, for that matter, have earned the brunt of criticism for requiring more decentralized power than necessary to process transactions. People have crucified both for their environmental impact; thus, the need to shift to PoS to dramatically decrease the Ethereum blockchain’s energy consumption by up to 99.95%.
Now that we’ve covered why Ethereum 2 is essential, let us see how the merge will impact NFTs.
Will Ethereum 2 Impact NFTs?
Simply put, Ethereum 2 won’t probably impact NFTs. Your NFTs will still be in your digital wallet. Moreover, these NFTs would work the same as usual on marketplaces or within dapps. Still, the bigger picture appears to be more complicated than it lets on, taking into account the projected rise of forks following the merge.
A fork occurs when a community changes a blockchain’s protocol. As a result of the changes, the chain splits into two, with the second blockchain sharing the original blockchain’s history, although it is headed in a new direction.
In the case of Ethereum 2, the second blockchain will have whatever the original one has. Hence, duplicate NFTs would appear as a result. It could potentially lead to scams and confusion.
Forks notwithstanding, the Ethereum blockchain network’s core developers have been hard at work for years, painstakingly testing every process and working through possible glitches. A seamless transition is not guaranteed, but developers and creators are optimistic about a smooth process ahead.
“Ethereum is software, and all software suffers from the halting problem—in other words, it’s impossible to determine with certainty if there will be any technical hitches,” Eric Diep, co-founder of smart contract startup Manifold, said in an interview. “That said, I wouldn’t bet against ETH’s developer community.”
Ethereum NFTs are expected to function similarly on Ethereum’s newly upgraded mainnet. NFT holders’ digital assets will still be in their wallets. These will still work as usual on marketplaces like OpenSea and LooksRare. Moreover, NFT holders are not required to do anything to gear up for Ethereum 2, mainly because the nitty-gritty is being handled on the developer side.
“Users should expect that their NFTs will safely reside on the new Ethereum [proof-of-stake] chain along with their ETH tokens,” affirmed Johnna Powell, NFT co-head at Ethereum-centric software company, ConsenSys.
What Could Go Wrong?
Nevertheless, things could go awry if the detractors of Ethereum 2 continue with their plans. Apparently, not all are on board with the merge, primarily because they don’t want to leave the PoW model. PoW is energy-intensive due to mining. Many are already crying foul because transitioning to PoS would mean losing out on the rewards earned by miners running the computer rigs.
That is why the aforementioned detractors of Ethereum 2 are planning to fork the blockchain, with the spinoff chain keeping the PoW system. In fact, there is already a duplicate chain called ETHPOW that well-known Chinese miner Chandler Guo leads.
With ETHPOW and other forks spinning off the Ethereum mainnet, there are bound to be duplicate versions of Ethereum NFTs. Hence, NFT marketplaces supporting Ethereum 2’s mainnet and the PoW forks will list both versions of the NFT tokens. It will likely confuse users. Worse, there could be an influx of scammers selling duplicate versions of blue-chip NFTs like Bored Apes or Beeples, passing them off as originals to less-experienced users.
“If proof-of-work forks are successful and marketplaces support them,” said Powell, “[then] there is bound to be market confusion and arbitrage that we can’t really predict, which will play out in the market.”
”One can imagine more sophisticated NFT traders selling their high-value assets on the PoW chain at bargain prices to make a quick profit,” she added, “while new traders may not detect the difference.”
There is also the threat of “replay attacks.” A replay attack happens when a transaction on the PoW fork is “replayed” on the PoS Ethereum mainnet. Why is this a cause for concern?
Consider this scenario: a Bored Ape Yacht Club (BAYC) NFT holder sells a duplicated version of his NFT on the PoW chain. However, a malicious actor “replays” the transaction on the Ethereum 2 PoS chain. When that happens, the NFT holder stands to lose his original BAYC NFT on that chain.
Still, such could only happen if both the forked chain and the merged one share the same chain ID, according to Ethereum core developer Marius Van Der Wijden. Guo has already given assurance that his ETHPOW will use a different chain ID, so that is one less worry for the Ethereum 2 developers.
“The best way to protect against replay attacks is to not interact at all with the [proof-of-work] chain,” said Powell. “If you do not interact with the [proof-of-work] chain, [then] you don’t need to do anything and won’t have to worry about replay attacks.”
Of course, duplicate NFTs are bound to exist because of ETHPOW and other possible forks. Some NFT enthusiasts could still be confused about which NFTs are legitimate. Also, there could be an insatiable demand for such duplicates as NFT owners try to flip the PoW versions of their assets. Still, such could be a short-lived window since only a few members of the Ethereum community believe that a PoW fork will go long-term with considerable user support.
“It is a high probability that the resultant proof-of-work chain will end up being just a shadow of the new [proof-of-stake] chain, and the amount of extractable value will decrease significantly over time,” Manifold’s Diep said. “Something along the lines of, ‘If a tree falls in a forest and no one is there…’”
Support for Ethereum 2
This early, project creators and marketplaces are already expressing their support for Ethereum 2, claiming that they will only treat Ethereum’s merged mainnet as the legitimate one and the forked ones as unofficial copies. With little to no social commitment given to the PoW forks, most users would be oblivious to their existence.
Yuga Labs, the creator of the BAYC and other popular NFT collections, has already confirmed that only holders of their NFTs on Ethereum 2 would be eligible for benefits within their communities. Also, only those owners can commercialize their NFTs for derivative artwork and projects.
“In line with the broader Ethereum community, in the event of a viable [proof-of-work] fork, Yuga intends to only recognize NFTs on the PoS ETH chain as subject to the relevant NFT license and eligible for Yuga-offered utility,” the firm tweeted on August 17.
Kevin Rose’s Proof, the startup behind PROOF Collective and Moonbirds NFTs, expressed a similar stance.
“As and when the Ethereum merge is successfully completed, Proof will follow the wider Ethereum community in recognizing the new [proof-of-stake] chain—including for its own NFTs,” wrote Proof’s Director of Product, Angharad “Harri” Thomas. “Any [proof-of-work] forks made post-merge will not be recognized.”
OpenSea, the world’s leading NFT marketplace, said it would only support Ethereum 2 by not listing NFTs on PoW forked chains so as not to confuse collectors and lay them bare to scams involving duplicated NFTs.
The bottom line is that Ethereum 2 will not impact NFTs, as these will continue to function as usual after the merge. Moreover, any impetus toward duplicate NFTs on PoW forked chains will be fleeting, if at all. Finally, NFT creators and marketplaces will not recognize official copies on the forked chains.
Of course, there could be technical hitches along the way. As a result, not everything about Ethereum 2 could go as planned. There could still be confusion, and users could be exposed to scams. Still, the best thing for NFT collectors is to stay informed, steer clear of risky transactions and interactions, and wait for the core developers to resolve any issues that could arise.
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