Fungible after all? Duplicates may disrupt NFT industry after Ethereum Merge

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

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

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

Scams are already prevalent in the NFT industry, which lacks oversight or regulatory protection, and any added confusion could generate more. Lian said some exchanges or marketplaces might temporarily stop transactions to address any complications or confusion that arise.

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

The Merge

The current Ethereum PoW network involves crypto mining companies using energy-gobbling computer farms to solve cryptographic equations that validate transactions on the blockchain, for which they are rewarded with Ether.

The shift to PoS – in which users validate transactions through “staked” ether – is expected to speed up and slash energy use on the network, which may mollify some critics who say the blockchain industry contributes to global warming.

However, Ethereum miners are less than happy as they see a business model evaporate that  leaves them with redundant and expensive computer farms that cannot be repurposed. Hence, some have pledged to fork the network and create a concurrent PoW Ethereum network.

“[Miners] are all trying to come out with their own ecosystem,” Lian said, “everyone is trying to grab a [slice of the] pie 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 a PoW fork exists, 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.

Real deal

Leading NFT marketplace OpenSea, which had about four times the sales volume over the last 30 days of its nearest competitor, Magic Eden, announced it was “solely supporting NFTs on the upgraded Ethereum PoS chain.”

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

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

Rarible noted another potential issue, saying the aggregate number of NFT collectibles may increase, which could depress the value of collections.

“It’s impossible to predict what the actual outcome will be, but it’s highly likely that duplicate NFTs will cause confusion,” said Rarible’s chief strategy officer and co-founder Alex Salnikov in an ­email to Forkast. “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 re-issue of the original — now known as V1 CryptoPunks — to fix a bug in their programming. 

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

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

CryptoPunks creators, Larva Labs, tried to squash this secondary market using legal means, but ultimately the V1 community won out 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 everybody will recognize,” Lian said.

The upside

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

“This may cause a new, environmentally conscious user base to adopt the technology which would in turn help drive greater mass adoption of NFT and Web3 technology,” said Rarible’s Salnikov.

“Increasing activity on Ethereum may also bring about new innovative use cases for NFT technology and drive the development of new tools designed for the growing Web3 creator economy,” he added. 

The Merge may 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 whose NFTs denominated in Ether have dropped in value against the U.S. dollar since a peak in November. 

But Lian said he is skeptical about the Merge turning the current NFT bear market around.

 “I think that’s very wishful thinking.”