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Way back (if we’re counting tech years) in 2014, artist Kevin McCoy (“McCoy”) created a digital record of his pulsating, octagon-shaped digital artwork Quantum on the Namecoin blockchain on May 2, 2014, thereby minting “the first NFT.” A lot has happened in the digital asset and NFT space since that…

As discussed in Part I of this series, Ordinals are a pioneering new method of utilizing the Bitcoin blockchain that will usher in new and innovative use cases on Bitcoin. As promised, in Part II we will discuss the implications for creators and owners.

Implications of Ordinal NFTs for Creators and Owners

As with most crypto innovation, capable users quickly flocked to the shiny new object. Copies of popular Ethereum NFT projects began appearing on the Bitcoin blockchain after the Ordinals launch. For example, a clone of CryptoPunks, named Ordinal Punks, popped up and is reportedly gaining traction. Further, the owner of Bored Ape Yacht Club (“BAYC”) #1626 permanently removed the NFT from its spot as one of the most valuable in the space by “burning” it, then inscribing the NFT on Bitcoin using Ordinals.  While the owner of BAYC #1626 effectively deleted – or symbolically transferred – the NFT, it appears that some NFT creators are not purists and are willing to experiment on Bitcoin. For example, Yuga Labs, the creator behind the Bored Ape Yacht Club Ethereum-based NFT phenomenon, announced that it would release a NFT project called TwelveFold on the Bitcoin blockchain.

In our December article we asked: what do hard forks mean for my NFTs? In this article we ask a similar question: how does a copy of an NFT on completely different chain (Bitcoin, not Ethereum), affect value and licenses?

A number of questions arise. Does the holder of the copycat Ordinal on Bitcoin require a license corresponding to the Ethereum NFT? What happens to the Ethereum NFT purchaser’s rights granted to it under the license, which may or may not include a commercial right to exploit and sublicense? Does an Ordinal inscription of an Ethereum NFT fall under a purchaser’s general non-commercial use and public display rights that are generally given to purchasers on NFT marketplaces? Does the original Ethereum NFT holder hold one set of rights and the holder of the copycat on Ordinals possess any rights that may be in conflict with the original NFT holder’s? Generally speaking, would the value of the NFT be affected if two identical copies exist on two different blockchains? Does the NFT owner or project have a say in which blockchain to recognize? Has any IP infringement occurred?

At 2:43am EST on September 15, 2022, the first Ethereum block was validated using Proof of Stake, signaling the success of the Ethereum Merge, one of the most anticipated events in blockchain and computer science history. The Merge shifted the Ethereum blockchain (native token ETH, or ether) from a proof-of-work (PoW) consensus mechanism to a proof-of-stake (PoS) consensus mechanism, which has reduced the network’s energy usage by about 99.5%. Ethereum now facilitates a 7-day average of over one-million transactions per day, at a volume of over $600 million per day, making the Merge an engineering feat akin to swapping a car’s engine while it’s driving on the Autobahn.

As of this writing, the Ethereum “Merge,” one of the most anticipated events in blockchain history, is finally expected to occur in September 2022. The “Merge” will shift the Ethereum blockchain (native token ETH, or ether) from a proof-of-work (PoW) consensus mechanism to a proof-of-stake (PoS) consensus mechanism that uses over 99.9% less energy. Technically, the Merge involves transitioning the current Ethereum proof-of-work Mainnet protocol (the blockchain used for ETH-based transactions) to the Beacon Chain proof-of-stake network.  As a result, transactions will be conducted on the new proof-of-stake network and new ETH tokens will be minted by nodes on the network staking a fair amount of ether tokens into a pool to secure the network and validate transactions. Post-Merge, the practice of ether cryptomining on the Ethereum 2.0 network will end, either forcing miners to pivot to mining on Ethereum Classic or find a new endeavor.

While the move to Ethereum 2.0 is being closely-watched, akin to the countdown to the New Year’s Eve Times Square ball drop, it’s a little more complicated and more of a series of actions (and accompanying benefits) that will happen over time. The Merge is but the first step in a series of five (notably followed by upgrades titled ‘the Surge,’ ‘the Verge,’ ‘the Purge,’ and ‘the Splurge’) that intend to make Ethereum faster, more scalable, more powerful, more energy efficient and more robust.

On January 20, 2022, the U.S. House Committee on Energy and Commerce (the “Committee”) held a hearing on the energy consumption associated with cryptocurrency activity. In announcing the hearing on January 12, 2022, Committee Chairman Frank Pallone (D-NJ) and Oversight and Investigations Chair Diana DeGette (D-CO) stated: “In just a few short years, cryptocurrency has seen a meteoric rise in popularity. It’s time to understand and address the steep energy and environmental impacts it is having on our communities and our planet.”

By the close of the hearings, committee members received a two-hour lesson about a wide range of topics: blockchain (and its varying types of consensus mechanisms) and its energy impact to the climate; how crypto mining can affect utilities’ management of energy resources and ultimately the price consumers pay for their electricity; how utilities work with energy-intensive miners; and where to strike the balance between green energy goals and the economic development of cryptocurrency. A number of members of the Committee appeared open to preserving the potential innovations and economic growth from blockchain while still improving efficiencies in power usage and achieving growth in renewables.

This is Part I of a two-part post on the issues raised by the Congressional hearing on the energy usage of blockchains. In this part, we will discuss how different blockchain consensus mechanisms impact energy usage and some potential solutions discussed at the hearing. In Part II, we will delve into some ESG considerations now affecting businesses as related to cryptocurrency investments and blockchain usage.

On August 6, 2021, the Securities and Exchange Commission (SEC) announced that it had charged two men, Gregory Keough and Derek Acree, and their company, Blockchain Credit Partners, doing business as DeFi Money Market (collectively, the “Respondents”), for unregistered sales of more than $30 million of securities using smart contracts and so-called “decentralized finance” (DeFi) technology and for making false and misleading statements about their business to investors in violation of the federal securities laws. (In re Blockchain Credit Partners, No. 3-20453 (SEC Order Aug. 6, 2021)).

In recent days, many eyeballs were closely watching the drama behind the cryptocurrency taxation and transparency measures contained in the Senate’s infrastructure bill  and are still digesting SEC Chair Gary Gensler’s recent remarks before the Aspen Security Forum that offered some clues on where the agency will go with respect to cryptocurrency regulation and enforcement. Meanwhile, the SEC continued its enforcement efforts to shut down what it deems fraudulent and unregistered securities offerings involving digital assets. After ceasing operations in February 2021, Respondents consented to a cease-and-desist order that includes disgorgement totaling almost $13 million and civil penalties of $125,000 each of the individual Respondents.  The SEC’s order provides another example of how the now-familiar investment contract analysis applies to tokens, with some additional insights on the impact of voting rights under the Howey test and a further analysis of tokens as notes.

Once purely theoretical, “majority” or “51%” attacks on public blockchains have dealt participants a reality check: The fundamental assumption of Satoshi Nakamoto’s 2008 Bitcoin whitepaper (that computing power will remain sufficiently decentralized in blockchain networks that rely on a “proof-of-work” consensus mechanism) can in practice actually be exploited to enable double spending.

“The system is secure as long as honest nodes collectively control more CPU power than any cooperating group of attacker nodes…. If a majority of CPU power is controlled by honest nodes, the honest chain will grow the fastest and outpace any competing chains. To modify a past block, an attacker would have to redo the proof-of-work of the block and all blocks after it and then catch up with and surpass the work of the honest nodes.” – Satoshi Nakamoto, Bitcoin: A Peer-to-Peer Electronic Cash System

These incidents have provided opportunities for developers of both public and private blockchains, as well as operators of blockchain-based digital asset trading platforms, to learn from the first generation of blockchain deployments.