Ethereum merge and its impact on NFTs

What is the Ethereum merge?

The Ethereum merge is a network update, allowing for Ethereum to transition from a Proof-of-Work (PoW) to Proof-of-Stake (PoS) consensus mechanism. It also allows for the further scaling of the Ethereum ecosystem, which is expected to bring about a 99% reduction in Ethereum’s energy consumption. This is because under the PoW system, a large amount of energy is required to mine the next block in the blockchain. For more information about the merger, have a look at this YouTube video.

 

What do these changes mean for Ethereum?

Under the POS mechanism though, all node operators simply need to stake 32 ETH (~55 000 USD at the time of writing) to become network validators. Even if one does not have 32 ETH on hand, they can choose to join a staking pool. Block rewards are then shared among the individuals in the pool proportionate to their contribution to the pool. With the removal of using mathematical calculations to introduce new blocks, Ethereum is able to process and confirm transactions much more quickly compared to before.

 

This merger also allows for a reduction in Ether inflation. Currently, around 13 000 ETH is mined as a reward for creating a new block. However, due to the constantly high demand for Ether to be mined, a large amount of energy is used at any time. This merge will reduce the rewards to around 1600 ETH, reducing the inflationary pressure on ETH. The Ethereum foundation also mentioned that the merger will not have any direct impact on the price of the Ether token. Since the merger also does not influence factors directly influencing the network capacity of the blockchain, gas fees will not be affected by the merger as well. 

 

The effect of the merge on NFTs

Not all miners will switch to the PoS Blockchain immediately, which means the possibility of a hard fork. This means that previously invalid transactions may become valid, and vice versa. In this case, investors will receive the same amount of the ‘forked’ tokens on the new PoS chain that they presently own in the PoW chain Investors will then have an equal number of Ethereum tokens across both blockchains, despite only the PoS blockchain being used. In order to prevent unintended transactions from going through, we urge NFT holders to not transact around this time until miners fully switch to the PoS blockchain. Nevertheless, before the merge was mentioned, the trading of ETH and ERC-20 tokens have been suspended in preparation for the merge. Vikram Subburaj, CEO at Giottus Crypto Platform mentions that in the event of a hard fork, all coins will ‘automatically’ b transferred to the new blockchain. While this is taking place, it is better to refrain from transacting around the merge period.

 

A few reminders

There is also the risk of replay attacks after the merge. Replay attacks happen when a malicious figure sneaks up on a network connection and intercepts it, resulting in transactions being delayed or replaced b another transaction, causing the initial transaction to go awry. What’s worse is that since these messages are directly intercepted from the network, there is no need to decrypt them, and the content of these messages is immediately visible to the hacker. Attackers use such messages to duplicate transactions so that they can take out money from accounts. Replay attacks can occur significantly during hard forks, which is likely to happen during the Ethereum merge. Any transaction that was valid before the hard fork will be valid on the new PoS chain, therefore the transaction is duplicated on both the PoW and PoS blockchain, bypassing blockchain security. The PoS chain will not be able to identify which chain this compromised transaction was for and will be validated on both the PoW and PoS chain, causing you to lose your assets. It is thus imperative to refrain from trading around the time of the merge, or at least until the hard fork issue is resolved. For more information about the merge and replay attacks, have a look at this video.

 

The merge is scheduled to go live on September 15, 2022 after years of delays. This is a huge milestone and we are just as excited to see what’s in store after the merge goes live.

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