The Ethereum Merge: What Does The Hard Fork Mean For My NFT Licenses? | Insights - DLA Piper

The Ethereum Merge: What Does The Hard Fork Mean For My NFT Licenses? | Insights – DLA Piper

Proclaimed to be “the most significant upgrade in the history of Ethereum,” the long-awaited Ethereum Merge is finally slated to occur in mid-September. The existing execution layer of Ethereum will transition from a proof-of-work protocol (POW) to a proof-of-stake protocol (POS), which is intended to improve the blockchain’s energy efficiency and increase its transaction throughput.  

The consensus protocol is the core element of all blockchains: since it determines the “correct” block in the blockchain, it confirms what data and transactions should be added to the blockchain record.

However, despite the expected benefits of POS many miners who have kept the Ethereum blockchain running in the years since its inception have invested significant resources in the POW model – resources that will be devalued in a POS model.

If a significant number of Ethereum users continue using the POW model, the blockchain could fork into two separate blockchains – ETHPOS and ETHPOW (the Ethereum Merge will not directly affect the existing Ethereum Classic blockchain, which uses POW).

Post-Merge hard fork

If a hard fork does occur on Ethereum, it would raise unique questions for many token ecosystems built on top of Ethereum such as governance tokens; non-fungible tokens (NFTs) and tokens linked to real-world products. Here, we will focus on the effect on NFTs because Ethereum is the dominant chain for most NFT issuances. 

Blockchains have experienced forks in the past, but the Ethereum Merge is unique in many ways because of the many applications built on top of it. For example, the original, and largest, blockchain, Bitcoin, has forked innumerable times since its launch in 2008. However, the Bitcoin blockchain does not have NFTs based on it. And while Ethereum underwent a major fork in 2016 due to a hack that drained The DAO of 3.6 million ether, creating Ethereum and Ethereum Classic, NFTs had not yet become a major application on the Ethereum blockchain.

When a hard fork occurs, the blockchain is duplicated, and every transaction prior to the fork is the same on both blockchains up to the fork. Then, like a tree branching out, future transactions on the separate blockchains diverge and are determined by each blockchain’s separate protocol.

While many people buy NFTs to own an avatar, an artwork, or an eve