On September 15th, 2022, the long-awaited ETH Merge has finally occurred, proclaimed to be “the most significant upgrade in the history of Ethereum”, which has determined a shift of Ethereum blockchain from a proof-of-work (PoW) to a proof-of-stake (PoS) consensus mechanism.
PoW, the original blockchain consensus mechanism popularized by the advent of Bitcoin, is known to deploy large amounts of energy, as virtual miners around the world race to solve a complex cryptographic problem to secure the network and win the right to update the blockchain. Conversely, PoS consensus mechanism does not require high levels of computational power and is 99.9% less energy intensive than PoW. In addition, PoS is faster, more scalable, and can process more transactions per second than PoW. PoS “validators”, like PoW miners, are called upon to secure the network by temporarily “staking” a certain amount of cryptocurrency (32 ETH) in exchange for a reward. Provided, therefore, that less energy is required to secure the network, validators do not require as much compensation which results in lower fees and issuance.
On September 15th, at 6:42:42 UTC, a “difficulty bomb” has been triggered within the ETH system, an update inherent to the protocol which makes PoW calculations exponentially more complex and mining less profitable, on a quest to migrating nodes to PoS consensus algorithm. However, it is argued that if a significant number of users continue to use the PoW mechanism, ETH could fork into two separate blockchains – ETHPOS and ETHPOW (the Ethereum Merge will not directly affect the existing Ethereum Classic blockchain, based on PoW).
Considering that ETH is not only a virtual currency, but above all an ecosystem created for Decentralised Applications (Dapp) as well as all Decentralised Finance (DeFi) protocols, should both mechanisms remain in place, leading to the so-called “hard fork”, NFT (Non-fungible Token) tokenIDs of a skin, artwork, ETH Name Service – ENS (a dedicated protocol for easy-to-read crypto addresses and decentralised domain names), as well as governance tokens within a Decentralized Autonomous Organization (DAO) validated prior to the Merge, will be unduly duplicated, while new NFTs will either be minted on the ETHPOW or the ETHPOS blockchain. Such potential effect, which may look harmless from the outset, certainly raises an array of new unexpected questions for both end users and stakeholders, especially from a legal standpoint.
Many projects may only seek to grant rights to holders of tokens on the most widely adopted version of the chain post-fork, as granting rights to all versions of the tokens across forked chains could be seen as decreasing the uniqueness and corresponding value of such rights. Alternatively, ETH projects could either choose that token rights will only be granted to the less popular chain, or simply rely on DAOs for such determination, or to an external indicator of adoption. Finally, projects with particular business goals might be reluctant to the above solutions and ultimately grant rights to NFT holders horizontally on both the post-Merge ETHPOS and ETHPOW.
Regardless the adopted approach, it is of the utmost importance to provide for ad hoc Terms & Conditions in case of a fork, thus (i) clarifying within the contractual relationship if, for instance, the license of an NFT is stored on both chains, and (ii) allowing for easy mechanisms to determine in advance the ownership of the licence with respect to the purchase and sale of the NFT. Those clarifications would ultimately benefit either party involved in the NFT environment, to the sake of legal certainty.
ETH Merge is only one step in a roadmap of exciting opportunities and innovations to the ETH blockchain. The next scheduled step is named “Shanghai”, which could lead to significant decreases in gas fees relating to on-chain transactions, as well as allowing the withdrawal of ETH tokens staked on the blockchain. After Shanghai, Ethereum expects to go through the “surge”, by implementing a technology known as “sharding”, which is expected to increase ETH's maximum transaction processing rate of 30 transactions per second (TPS) today to approximately 100,000 TPS. Next, the “verge”, foreseeing the implementation of a mathematical proof known as “Verkle trees”, which will allow nodes on the blockchain to operate without downloading the entire history of the chain. Finally, the “purge”, resulting in the deletion of legacy data on the chain. Those upgrades will deliver a smaller, easier to use and substantially faster blockchain.
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