Swivel after all? Duplicates May Disrupt NFT Industry After Ethereum Merge

The expected “merger” of the Ethereum blockchain this week could increase the risk of fraud and scams in the market for non-fungible tokens like Bored Ape Yacht Club as analysts warn original and new versions of tokens known as NFTs could confuse buyers.

The $200 billion Ethereum network accounted for 70% of NFT trading activity in August, making it the world’s leading blockchain for such marketplaces operated by companies such as OpenSea.

However, merging Ethereum into a proof-of-stake (PoS) network from a proof-of-work (PoW) will create duplicates of the NFTs from the original network, which the unscrupulous can take advantage of, Anndy Lian, author of the new book “NFT: From Zero to Hero,” told Discard in an interview.

Fraud is already rife in the NFT industry, which lacks oversight or regulatory protection, and any additional confusion could generate more. Lian said some exchanges or marketplaces may temporarily halt transactions to resolve any complications or confusion that arise.

“This will be a big problem for investors who are not careful,” he said.

The merger

The current Ethereum PoW network involves cryptominers using energy-guzzling data farms to solve cryptographic equations that validate transactions on the blockchain, for which they are rewarded with Ether.

The shift to PoS – where users validate transactions through “staked” ether – is expected to increase speed and reduce energy use on the network, which could undercut some critics who say the blockchain industry contributes to global warming.

However, Ethereum miners are less pleased as they see a business model disappear that leaves them with redundant and expensive data farms that cannot be reused. Therefore, some have promised to split the network and create one at the same time PoW Ethereum network.

“[Miners] everyone is trying to come out with their own ecosystem,” said Lian, “everyone is trying to grab one [slice of the] cake because of this new consensus mechanism.”

This is where the potential NFT confusion comes in. All existing NFTs on the Ethereum blockchain will be duplicated on the new PoS system, but if there is a PoW fork, the original NFTs will continue to exist on that network as well.

And this is not just hypothetical, exchanges have had to explain to users what their policy will be regarding duplicates.

Genuine item

The leading NFT marketplace OpenSea, which had approximately four times the sales volume in the last 30 days of its closest competitor, Magic Eden, announced it was “only supporting NFTs on the upgraded Ethereum PoS chain.”

Yuga Labs, creators of the flagship NFT collection Bored Ape Yacht Club, so their licenses only apply to PoS versions of their tokens.

Competing marketplace Rarible has taken a different approach, saying it recognizes the authenticity of all copies of NFTs created in the same wallet address when held on Ethereum.

Rarible noted another potential problem, saying that the overall number of NFT collectibles could increase, which could reduce the value of collections.

“It is impossible to predict what the actual outcome will be, but it is highly likely that duplicate NFTs will create confusion,” Rarible’s chief strategy officer and co-founder Alex Salnikov said in a ­email to Discard. “Especially for less experienced NFT collectors.”

Déjà vu

This scenario is not without precedent in the NFT market. One of the most popular NFT collections, CryptoPunks, is actually a reissue of the original – now known as V1 CryptoPunks – to fix a bug in their programming.

The replacement V2s were sent to all holders of the originals, and the V1s were left to be forgotten.

However, as V2 CryptoPunks grew to become one of the largest NFT collections, a significant market grew in V1 versions among collectors who wanted to own a piece of NFT history.

The creators of CryptoPunks, Larva Labs, tried to crush this secondary market by legal means, but in the end the V1 community won and both versions can now be traded freely.

Ultimately, Lian believes the market will follow the PoS network as it is recognized as the “official version” of Ethereum.

“Whichever [chain] will gain more traction with the most liquidity will ultimately be the one that everyone will recognize,” Lian said.

The upside

The good news for potential environmentally conscious NFT investors is that PoS is estimated to be approximately 99.95% more energy efficient than PoW, according to the Ethereum Foundation.

“This could bring a new, environmentally conscious user base to adopt the technology which in turn will help increase mass adoption of NFT and Web3 technology,” said Rarible’s Salnikov.

“Increasing activity on Ethereum could also lead to new innovative uses for NFT technology and drive the development of new tools designed for the growing Web3 creator economy,” he added.

The merger could help boost Ether’s price as the network introduces new mechanics that will burn, or remove, 1,600 ETH each day, which is expected to have a deflationary impact on the token’s price.

That could be good news for buyers if NFTs denominated in Ether have fallen in value against the US dollar since a peak in November.

But Lian said he is skeptical that the merger will reverse the current NFT bear market.

“I think that’s very wishful thinking.”