Ethereum major upgrade creates big questions and complications for NFTs

Ethereum major upgrade creates big questions and complications for NFTs

what happened

Leading smart contract platform Ethereum underwent its biggest upgrade to date, successfully merging on the morning of September 15th. Often likened to “changing an aircraft engine mid-flight,” the platform has changed the energy-intensive Proof of Work consensus mechanism for an environmentally friendly alternative to Proof of Stake.

While this transition will not affect Ethereum’s performance immediately, it is a necessary first step towards subsequent upgrades that will improve productivity and efficiency. Once these stages are completed, Ethereum will be able to handle thousands of complex platforms and applications that use NFTs.

However, this does not mean that NFT holders, especially those who rely on Ethereum, do not have important decisions to make today. For example, a widely expected Ethereum fork, a derivative that sticks to a Proof of Work, could cause NFT holders to carry duplicates with completely different values. Additionally, NFT prices fell in the days following the merger as part of the overall market sell-off.

wider context

Ethereum is the dominant home of NFT activity and trading 76% of all NFT size. This is followed by the side chain Axie Infinity Ronin with 11% of the turnover, Solana with 7%, Flow with 3%, and Polygon with 1%. The successful integration, along with subsequent updates planned in the coming months and years dubbed Surge, Verge, Purge and Splurge, should help the network protect its startup from competitors offering cheaper and faster transactions.

However, this does not mean that the merge did not leave loose ends. Annoyed by the upgrade leading to their exclusion from the network, a group of Ethereum miners banded together and launched a forked version of the Ethereum Chain that holds Proof of Work, the new chain called EthereumPoW (ETHW). For NFT owners, this means that they may now own duplicates of their assets, but their value will depend on the level of exchange support and general adoption of this forked network.

The largest NFT marketplace, OpenSea, announce It will only support NFTs on the upgraded Ethereum PoS chain. Likewise, the creators of the Bored Ape Yacht Club group, Yuga Labs, announce They intend to only recognize the license and copyright of the group to owners of NFTs in the upgraded PoS chain.

On the contrary, the competing NFT market Rarible has taken the opposite position. Rarible stated that it will recognize any copies of the NFT generated by a fork created at the same wallet address when it was held on Ethereum. Duplicate NFTs may also cause confusion, opening the door to new scams and rug pulls, in a space already rife with bad actors and malicious activities. More companies and projects are expected to make similar decisions as the fate of the ETHPoW fork becomes clearer in the coming days.

While there is no data yet on the value of ETHPoW NFTs, the ETHPoW roller coaster in recent days suggests that NFTs will be significantly lower than their mainstream counterparts.

Since its launch on September 15, ETHPoW reached an all-time high of $60, or roughly 4% of the total value of the ETH network, before rapidly dropping 82% in value to $11, as it trades today. This trend indicates that Ethereum holders receiving an ETHPoW airdrop reward have been dumping their airdropped tokens as exchanges started listing the token and added liquidity.

Assuming this trend continues and EthereumPoS emerges as the winning Ethereum blockchain, we may see similar dynamics among the refined NFTs now living on the EthereumPoW chain. This will lead to significant reductions in the value of NFTs on ETHPoW compared to their EthereumPoS counterparts.

quote key

“The merger can disrupt many NFT projects that are not ready to change and are not against vulnerabilities. Some projects will run into problems due to technical issues, and we may encounter a large influx of scammers. It is likely that there will be more forking of Ethereum, which can lead to confusion and lead to operations Fraud when duplicate NFTs enter the system Alex Obchakevich, co-founder of Misfits DAO, said that as a result of the confusion, NFT holders may lose the original copy of their NFT if they are not careful.

Expectations and implications

Another important implication of the merger, eliminating its carbon footprint, is that it could open the door for developers and investors interested in ESG to enter the Ethereum NFT industry.

However, proof of stake remains untested in such a large network. It remains to be seen if the network can maintain decentralization and avoid gaining institutional value over time as large entities get involved and gain greater ownership and control over the network. There are already concerns that two entities, crypto exchange Coinbase and staking platform Lido, control nearly 40% of the network’s total storage power. Moreover, this week SEC chief Gary Gensler hinted that Ethereum’s switch to proof-of-stake could bring it closer to being a security in the eyes of the regulator.

It is also important to stress that the merger did not affect scalability or transaction throughput, which means that transaction fees for sending and trading NFTs remain unchanged and may remain high depending on gas usage and demand. During periods of high activity, gas fees for NFT transactions can run into hundreds of dollars, pricing many users and encouraging them to adopt tier 2 chains like Polygon and Arbitrum or competing tier 1 chains like Solana, Flow, Tezos, and Avalanche.

Low transaction fees are important because higher fees deduct many NFT use cases, especially in the gaming space and metaverse. It is likely that many NFT gaming weapons, avatars, and skins will trade at relatively low values, requiring faster transaction speeds and lower costs to be economically viable.

In order to lower transaction fees and meaningfully increase scalability, users will need to wait for the Surge, Verge, Purge, and Splurge upgrades.

Much also remains undecided on how or whether intellectual property rights will be transferred to NFT duplicates on forked versions of Ethereum. Most NFT creators will likely only grant rights to NFT holders in the most widely adopted post-fork chain, likely EthereumPoS.

Ultimately, the answer may be decided by the creators of the block, as evidenced by Yuga Labs who announced that they will only recognize the intellectual property rights of NFT owners in the canonical EthereumPoS chain. In this case, new buyers should be wary of the NFT version they are purchasing, as they may believe they are the owner of the asset, but instead discover that they have no claim to any of the associated rights.

If the major players in the NFT ecosystem realize the legitimacy of both the PoS and PoW chains, the forked EthereumPoW chain could dilute the value of the existing NFTs due to oversupply. This will also create chaos over intellectual property and commercial rights, which could lead to major disputes between NFT owners. Ultimately, the market will legitimize valued NFT assets based on liquidity and broader community acceptance.

decision points

Investors who bet on the ESG narrative as a powerful incentive to allocate capital among institutional investors may see the Ethereum ecosystem as the main beneficiary of the ESG movement. This may support the price of Ether, but it will also indirectly support the value of higher NFT pools built on top of the network. The winning smart contract platform will attract the most talent and capital, strengthening the entire original NFT ecosystem for that chain.

It may be wise for investors and traders to wait for the dust to settle before making any decisions about their Ether and NFT assets. This may take several days, weeks, or it can be completely over. In addition, investors should follow the guidance provided by the markets, wallets, and other service providers they interact with regularly to see which chains and assets they will support.

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