The Ethereum Merge, Explained: What Does it Mean for NFTs?

The Ethereum Merge, Explained: What Does it Mean for NFTs?

by Corporate Trash

8/22/2022

The Ethereum Merge has been an event at least six years in the making, and it’s now finally becoming a reality for crypto and NFT enthusiasts. There is a ton of news around the Merge making the rounds in the NFT space leading up to the Merge on September 15 or 16. Collectors want to know how the Merge is going to affect both their Ethereum NFTs and ERC-20 tokens.

Much speculation about the price of Ethereum leading up to the Merge is happening, as some look to profit from the network update. But will the Merge make a massive difference in the way we use Ethereum every day for NFTs, dApps and smart contracts?

To keep it short: The merge will have an affect the NFT ecosystem on Ethereum, and your NFTs. Let’s explain how.

What is the Ethereum Merge?

Ethereum is moving from its energy-intensive Proof-of-Work (PoW) — an energy-intensive mining process first pioneered by Bitcoin — to a Proof-of-Stake (PoS) mechanism. With proof-of-stake, Ethereum stakers can earn from block creation.

Technically, the Merge is the next step in the upgrade of the Ethereum blockchain as a whole. It is the merging of Ethereum mainnet and the Beacon Chain (PoS)

As @SalomonCrypto put it: “Instead of being secured by the computing power of the computers supporting it, (after The Merge) The World Computer will be secured by the economic value of ETH.” Many say that this is a huge step forward for decentralization.

How will Ethereum merge to PoS?

There are three main phases to the Ethereum upgrade and the full shift from PoW to PoS.

  1. Past: Beacon Chain Go-Live. This went live in December 2020. A “Version 0” of PoS, it involves staking Ethereum in order to activate validator software. Validators process transactions and create new blocks in the chain.
  2. The Merge: Ethereum merging with the Beacon Chain. Official PoS consensus. No more mining — instead, the network is secured using staked Ethereum. This Beacon merge will bring the ability to run smart contracts into the PoS system, plus the full history and current state of Ethereum. 
  3. Future: Shard chains, a multi-phase upgrade for increased scalability and capacity. Sharding is the process of splitting a database horizontally to spread the load. This will reduce Ethereum congestion and increase transactions per second by creating new chains, known as “shards”.
Ethereum Merge from Ethereum Website

Why does the Ethereum Merge Need to Happen?

Ethereum believes it needs to evolve to survive long-term. The Merge is a major step in that direction. By shifting from PoW to PoS, the Merge will make these upgrades to Ethereum:

  1. More Environmentally Friendly. In fact, it is estimated the Merge will bring a 99.95% reduction in energy consumption! A note from the Ethereum Foundation: “Under Proof-of-Stake, when the price of ETH increases, the security of the network does too (the value of the ETH at-stake is worth more), but the energy requirements remain unchanged.”
  2. Reduce Network Congestion. Sharding will eventually increase ETH throughput to about 100,000 transactions per second. Currently, it can handle about 13-20 transactions per second. For those who want to get technical, check out more about “The Surge” phase of the upgrade roadmap.
  3. Improve Scalability. The Merge is the first milestone in a long journey to improve scalability for the chain to help it grow, survive, and thrive.
The Merge Explained. Drawing Credit: https://barnabe.substack.com/p/eth2

Once the Merge happens, no more tokens will get paid out to miners. They will now get paid to validators, who need to stake at least 32 of their own Ethereum tokens (around $50,000 at the time of this post). Keep in mind there is risk that comes with this, so make sure to do your own research before becoming a validator.

Bitcoin is a PoW blockchain. By contrast, Tezos and Solana are PoS. Ethereum will join them as a more energy-efficient blockchain solution.

Will the Merge Solve High Gas Fees and Gas Wars?

It’s unlikely to make a difference. If the Merge ever solves high gas fees, it is going to be a while before it does. Some say it will be several years from now.

This is because the Merge is an upgrade of the consensus layer of the blockchain, not the execution layer, where gas fees are paid. Miners are being removed and validators are being put in their place. But blockspace demand remains the same.

In the meantime, until sharding is fully tested and implemented in future years, we still have Layer 2 (L2) scaling solutions like Polygon & ImmutableX.

The founder of Ethereum, Vitalik Buterin, detailed this more at a recent conference.

Who is Affected by the Ethereum Merge?

The people who are most directly affected by this are miners for PoW Ethereum. Holders of the ERC-20 token do not need to do anything, per the Ethereum website.

Those who hold Ethereum in a non-custodial wallet should not notice a change after the successful Merge. There is no downtime, and the full history will be copied over. Be sure to dive into more FAQs on the official Ethereum Merge site.

How does the Merge Affect NFTs?

What about for our Ethereum NFTs? NFT collectors have been speculating on possible “replay attacks” ahead of the Merge, but note that this information is not confirmed by any official Ethereum source! Be sure to take caution in moving NFTs around or delisting them before the Merge.

If you’re an NFT collector, it’s unlikely you’ll notice a big change when the Merge happens, outside of the rampant community discussion around it. All transaction history from the PoW chain will be merged with the PoS chain. dApps and the blockchain are expected to operate as usual.

It’s important to note that there will be a historical divide after the Merge; there will be PoW NFTs and PoS NFTs — from pre- and post-Merge eras.

Will The Merge Duplicate your NFTs?

Will there be “copies” of your Ethereum NFTs on ETHPoW? Technically, yes. But will anybody trade them or care? Will ETHPoW even be supported by sites like OpenSea or LooksRare? Likely not.

A fork has actually already happened in 2016 with Ethereum Classic, which resulted from a somewhat large hack on the blockchain. Many in the Ethereum community disagreed with how developers handled that hack, leading to a hard fork.

Yuga Labs tweeted that they would not recognize any Yuga NFTs on ETHPoW as official, only the PoS NFTs.

Still, it’s important to do your own research before the Merge so that you feel comfortable with your own unique position. Everyone’s situation is different.

Other Changes After the Merge

Very importantly, the Merge is expected to reduce Ethereum’s issuance rate — or the rewards for validating transactions — by over 90 percent. This will remove millions of dollars of sell pressure on the Ethereum ecosystem by validators on a daily basis.

Some exchanges like Coinbase are planning to temporarily pause new Ethereum deposits and withdrawals during the Merge as a “temporary safety measure.” The main thing to note is to be aware of scammers trying to take advantage of this big crypto event.

What are the Risks to the Merge?

Many are comparing the Merge to replacing a jet engine in the middle of a flight. While this has been worked on and tested for many years, this is crypto, and things could go wrong. However, if it does, many think that it will just be delayed and re-launch later.

Ethereum Fork
Ethereum Fork

There could be bugs and outages, but there will be an Ethereum “hard fork.” This will allow miners to split from the Ethereum chain after the Merge in order to try to continue their income through the PoW chain “ETHPoW.” Once ETHPoW exists, bots are already ready to profit from it in DeFi, leaving most humans in the dust for any such opportunity.

When is the Ethereum Merge?

The Merge is scheduled for September 15-16, 2022, at the time of this post — the first dates that have ever been announced for the Merge. A live countdown is here, though it is always subject to change.

Ethereum Merge and NFTs — TL;DR

Replacing miners with stakers (or validators) isn’t without risk. But it’s also exciting and necessary for Ethereum to move forward to increase speed, reduce transaction fees and scale.

For most users, there is no action needed as the Merge occurs. However, it’s important to stay in touch with the latest news surrounding the event as it gets closer.

For many NFT collectors and Ethereum enthusiasts alike, the event is stressful as it is a major change to the protocol. However, it’s unlikely to have any difference for the NFTs you own.

Most importantly, don’t let scammers take advantage of your Ethereum or NFTs during this time. Any airdrop associated with the Merge is likely a scam and will put tokens at risk.

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The image for this blog was created entirely by Dall-E 2, by OpenAI.