How Could the Ethereum Merge Affect NFTs?
The Merge won’t reduce gas fees or improve transaction speeds on Ethereum, but NFT projects may benefit from energy conservation and deflationary pressures.
The Merge Will Impact All Ethereum Projects
Just over seven years after it launched in 2015 as a Proof of Work (PoW) network, Ethereum made the switch to Proof of Stake(PoS) on Sept. 15. The Merge will affect all Ethereum projects, including Non-Fungible Tokens (NFTs).
After the Merge, Ethereum NFTs will undergo two noticeable changes. First, users will see a dramatic reduction in energy consumption. Second, the value of Ethereum may increase as the token becomes deflationary.
NFT Club has estimated that the energy required to add an NFT to a blockchain equates to the addition of about 83 kg of CO2 to the atmosphere.
Whether or not that calculation is accurate, Ethereum’s PoS mechanism will cut the chain’s energy consumption and carbon dioxide emissions by more than 99.9%. The Merge upgrade will also simplify the process of minting and developing Ethereum NFTs and projects.
Future upgrades to Ethereum will also lower the maintenance costs for NFT projects, lowering gas fees and stimulating the broader adoption of NFTs. The ease of minting and maintaining NFTs could predicate a rapid rise for Ethereum.
The world’s largest NFT marketplace OpenSea has confirmed that it will only support PoS NFTs following the Ethereum merger, according to an announcement.
The Merge’s Impact on NFT Supply
One intent of The Merge is to transform Ethereum from an inflationary token into a deflationary token, meaning its overall supply will decrease over time. Before The Merge, Ethereum was more susceptible to inflation than Bitcoin, because unlike Bitcoin, Ethereum has no theoretical cap on total supply.
A deflationary Ethereum could by extension affect the NFT market: An increase in the value of Ethereum could serve to raise the price of NFTs built on Ethereum.
Christine Kim, a lead researcher in Galaxy Digital, said in an interview with Bloomberg that reducing the Ethereum token supply would boost Ethereum’s investment as it could hold its value against inflation. In the long run, these changes will likely positively impact NFT’s price and sustainability.
Potential NFT Security Concerns?
Adam McBride, the NFTnow and rugradio host, warned that the Ethereum Merge might pose a security issue for NFT holders — assuming that at least one Ethereum PoW fork remains.
With two forks of Ethereum existing, users’ NFTs will have two versions, one on the legacy PoW form and one on the new PoS fork.
A user who tries to cash in on the fork by selling their PoW NFT could expose themselves to a “replay attack,” where a transaction on one fork could be replayed on another.
McBride gives the hypothetical example of a CryptoPunk holder selling their PoW NFT for 5 ETHW, and then (with a “replay attack”) someone selling their PoS NFT for 5 ETH.
McBride said, “Ouch.”
Following The Merge, BlockSec was the first analytics service to flag a suspected replay attack that resulted in an exploit of 200 ETHW tokens on Omni Bridge. However, the EthereumPoW team denied this was an exploit of the PoW chain, but rather the result of an error in the contract of the bridge itself.
Impact on ‘Ethereum Killers’
As a result of the new shift, it will be interesting to see what happens in the future in the battle among Solana, Polygon, and Ethereum for NFT dominance.
However, since Ethereum gas fees will not be immediately reduced by The Merge, those other chains will retain that advantage. As it stands now, Solana might have more potential for NFTs than Ethereum, thanks to the high speed and low cost of Solana transactions.
Additionally, BNB Chain continues to exhibit high performance and low fees, while developing its still-nascent NFT ecosystem.
“The sentiment toward PoS chains like BNB Chain and Solana already indicates that some users would prefer to collect NFTs on a greener chain. Whether this will really have a material impact is doubtful,” Luke Rare, Growth Lead at Rareboard, told BSC News. “Growth for NFTs will come from new use cases, better tooling, and platforms with improved user experience and onboarding processes.”
Ethereum’s Merge is likely to go down in history as one of the most significant crypto upgrades ever (or at least, so far). Some initial security threats, such as a replay attack, may manifest themselves, but those are expected to be resolved soon. Most market experts expect The Merge to impact the NFT market positively.
We’ll be back next week with more interesting discussion about NFTs. Until then, stay tuned: Buh-bye!
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