diff --git a/app/app.go b/app/app.go
index df4a3f6..4ea6060 100644
--- a/app/app.go
+++ b/app/app.go
@@ -479,6 +479,8 @@ func New(
 		panic(err)
 	}
 
+	app.applyUpgrades()
+
 	return app
 }
 
@@ -655,3 +657,7 @@ func initParamsKeeper(
 
 	return paramsKeeper
 }
+
+func (app *App) applyUpgrades() {
+	app.applyUpgrade_v0_1_2()
+}
diff --git a/app/upgrade_v0_1_2.go b/app/upgrade_v0_1_2.go
new file mode 100644
index 0000000..fb5a9f2
--- /dev/null
+++ b/app/upgrade_v0_1_2.go
@@ -0,0 +1,102 @@
+// Copyright 2024 Galactica Network
+//
+// Licensed under the Apache License, Version 2.0 (the "License");
+// you may not use this file except in compliance with the License.
+// You may obtain a copy of the License at
+//
+//      http://www.apache.org/licenses/LICENSE-2.0
+//
+// Unless required by applicable law or agreed to in writing, software
+// distributed under the License is distributed on an "AS IS" BASIS,
+// WITHOUT WARRANTIES OR CONDITIONS OF ANY KIND, either express or implied.
+// See the License for the specific language governing permissions and
+// limitations under the License.
+
+package app
+
+import (
+	"bytes"
+
+	sdk "github.com/cosmos/cosmos-sdk/types"
+	"github.com/cosmos/cosmos-sdk/types/module"
+	stakingtypes "github.com/cosmos/cosmos-sdk/x/staking/types"
+	upgradetypes "github.com/cosmos/cosmos-sdk/x/upgrade/types"
+
+	"github.com/Galactica-corp/galactica/app/upgrades/v0_1_2"
+)
+
+// applyUpgrade_v0_1_2 checks and applies the upgrade plan if necessary.
+func (app *App) applyUpgrade_v0_1_2() {
+	latestBlock := app.LastBlockHeight()
+	logger := app.Logger().With("upgrade", v0_1_2.UpgradeName)
+
+	ctx, err := app.CreateQueryContext(latestBlock, false)
+	if err != nil {
+		logger.Error("Failed to create query context with block", "error", err, "block", latestBlock)
+		return
+	}
+
+	plan, err := app.UpgradeKeeper.ReadUpgradeInfoFromDisk()
+	if err != nil || plan.Height < v0_1_2.UpgradeBlockHeight {
+		logger.Info("Applying upgrade plan", "info", plan.Info)
+		app.UpgradeKeeper.SetUpgradeHandler(v0_1_2.UpgradeName, app.upgradeHandler_v0_1_2())
+		app.UpgradeKeeper.ApplyUpgrade(ctx, v0_1_2.Plan)
+	}
+}
+
+// upgradeHandler_v0_1_2 returns a handler function for processing the upgrade.
+func (app *App) upgradeHandler_v0_1_2() func(
+	ctx sdk.Context,
+	_ upgradetypes.Plan,
+	fromVM module.VersionMap,
+) (module.VersionMap, error) {
+	return func(ctx sdk.Context, plan upgradetypes.Plan, fromVM module.VersionMap) (module.VersionMap, error) {
+		logger := ctx.Logger().With("upgrade", plan.Name)
+
+		if plan.Name != v0_1_2.UpgradeName {
+			logger.Error("Invalid upgrade plan", "expected", v0_1_2.UpgradeName, "got", plan.Name)
+			return app.ModuleManager.RunMigrations(ctx, app.Configurator(), fromVM)
+		}
+
+		validators := app.StakingKeeper.GetAllValidators(ctx)
+
+		for _, validator := range validators {
+			if err := app.updateValidatorPowerIndex(ctx, validator); err != nil {
+				logger.Error("Failed to update validator power index", "error", err, "validator", validator.OperatorAddress)
+				return nil, err
+			}
+			logger.Info("Validator power index updated", "validator", validator.OperatorAddress)
+		}
+
+		logger.Info("All validators updated successfully.")
+
+		if err := app.UpgradeKeeper.DumpUpgradeInfoToDisk(plan.Height, plan); err != nil {
+			logger.Error("Failed to dump upgrade info to disk", "error", err)
+			return nil, err
+		}
+
+		return app.ModuleManager.RunMigrations(ctx, app.Configurator(), fromVM)
+	}
+}
+
+// updateValidatorPowerIndex updates the power index for a single validator.
+func (app *App) updateValidatorPowerIndex(ctx sdk.Context, validator stakingtypes.Validator) error {
+	store := ctx.KVStore(app.GetKey(stakingtypes.StoreKey))
+	iterator := sdk.KVStorePrefixIterator(store, stakingtypes.ValidatorsByPowerIndexKey)
+	defer iterator.Close()
+
+	for ; iterator.Valid(); iterator.Next() {
+		valAddr := stakingtypes.ParseValidatorPowerRankKey(iterator.Key())
+		if bytes.Equal(valAddr, validator.GetOperator()) {
+			store.Delete(iterator.Key())
+			break // Assuming unique power index key per validator.
+		}
+	}
+
+	app.StakingKeeper.SetValidatorByPowerIndex(ctx, validator)
+	if _, err := app.StakingKeeper.ApplyAndReturnValidatorSetUpdates(ctx); err != nil {
+		return err
+	}
+
+	return nil
+}
diff --git a/app/upgrades/v0_1_2/README.md b/app/upgrades/v0_1_2/README.md
new file mode 100644
index 0000000..177393c
--- /dev/null
+++ b/app/upgrades/v0_1_2/README.md
@@ -0,0 +1,36 @@
+# Upgrade to v0.1.2
+
+## Guide for Upgrading from v0.1.1 to v0.1.2
+
+1. Halt the currently running `galacticad` process.
+2. **!!! Backup the data directory.** !!!
+3. Fetch the latest updates from the repository and switch to the `v0.1.2` tag.
+    ```bash
+    git fetch --all --tags
+    git checkout v0.1.2
+    ```
+4. Build the updated source code.
+    ```bash
+    make install
+    ```
+5. Execute the upgrade script located at ./scripts/upgrade_v0_1_2.sh
+    ```bash
+    ./scripts/upgrade_v0_1_2.sh
+    ```
+   Ensure the following environment variable is defined:
+    - `GALACTICA_HOME`: Specifies the home directory for the `galacticad` node.
+
+   The script executes the following operations:
+    - Updates the node storage to version v0.1.2.
+    - Roll back the state of the most recent block.
+    - Backup of the current priv_validator_state.json and replaces it with a new version with default settings.
+
+   Alternatively, these steps can be performed manually:
+   ```bash
+   galacticad --home $GALACTICA_HOME rollback --hard
+   echo '{"height":"0","round":0,"step":0}' > $GALACTICA_HOME/data/priv_validator_state.json
+    ```
+   Executing the rollback command will also automatically execute the storage upgrade.
+
+6. Restart the `galacticad` node.
+
diff --git a/app/upgrades/v0_1_2/upgrade.go b/app/upgrades/v0_1_2/upgrade.go
new file mode 100644
index 0000000..3afecbe
--- /dev/null
+++ b/app/upgrades/v0_1_2/upgrade.go
@@ -0,0 +1,32 @@
+// Copyright 2024 Galactica Network
+//
+// Licensed under the Apache License, Version 2.0 (the "License");
+// you may not use this file except in compliance with the License.
+// You may obtain a copy of the License at
+//
+//      http://www.apache.org/licenses/LICENSE-2.0
+//
+// Unless required by applicable law or agreed to in writing, software
+// distributed under the License is distributed on an "AS IS" BASIS,
+// WITHOUT WARRANTIES OR CONDITIONS OF ANY KIND, either express or implied.
+// See the License for the specific language governing permissions and
+// limitations under the License.
+
+package v0_1_2
+
+import (
+	upgradetypes "github.com/cosmos/cosmos-sdk/x/upgrade/types"
+)
+
+const (
+	UpgradeName        = "0.1.2"
+	UpgradeBlockHeight = 16951
+)
+
+// Plan defines the upgrade plan for addressing the staking PowerReduction issue.
+var Plan = upgradetypes.Plan{
+	Name:   UpgradeName,
+	Height: UpgradeBlockHeight,
+	Info: "Addresses a critical staking PowerReduction issue by mutating validators' " +
+		"power for accurate voting power recalibration and network integrity.",
+}
diff --git a/cmd/galacticad/cmd/config.go b/cmd/galacticad/cmd/config.go
index 6cca750..0eb94f5 100644
--- a/cmd/galacticad/cmd/config.go
+++ b/cmd/galacticad/cmd/config.go
@@ -15,6 +15,8 @@
 package cmd
 
 import (
+	"math/big"
+
 	"cosmossdk.io/errors"
 	sdk "github.com/cosmos/cosmos-sdk/types"
 
@@ -73,6 +75,10 @@ func initSDKConfig() {
 
 	RegisterDenoms()
 
+	sdk.DefaultPowerReduction = sdk.NewIntFromBigInt(
+		new(big.Int).Exp(big.NewInt(10), big.NewInt(BaseDenomUnit), nil),
+	)
+
 	config.Seal()
 }
 
diff --git a/scripts/upgrade_v0_1_2.sh b/scripts/upgrade_v0_1_2.sh
new file mode 100755
index 0000000..30747c4
--- /dev/null
+++ b/scripts/upgrade_v0_1_2.sh
@@ -0,0 +1,65 @@
+# Copyright 2024 Galactica Network
+#
+# Licensed under the Apache License, Version 2.0 (the "License");
+# you may not use this file except in compliance with the License.
+# You may obtain a copy of the License at
+#
+#      http://www.apache.org/licenses/LICENSE-2.0
+#
+# Unless required by applicable law or agreed to in writing, software
+# distributed under the License is distributed on an "AS IS" BASIS,
+# WITHOUT WARRANTIES OR CONDITIONS OF ANY KIND, either express or implied.
+# See the License for the specific language governing permissions and
+# limitations under the License.
+
+#!/bin/bash
+
+# This script is used to prepare the upgrade from v0.1.1 to v0.1.2
+
+GALACTICAD_VERSION=$(galacticad version)
+if [[ $GALACTICAD_VERSION != *"0.1.2"* ]]; then
+  echo "Galactica version must be 0.1.2"
+  exit 1
+fi
+
+# check env var GALACTICA_HOME and if not exists exit
+if [ -z "$GALACTICA_HOME" ]; then
+  echo "GALACTICA_HOME is not set, using default path"
+  GALACTICA_HOME="$HOME/.galactica"
+fi
+
+# ask user to confirm:
+echo "GALACTICA_HOME: $GALACTICA_HOME"
+echo "\nThis script will perform the following actions:\n\
+- Backup the existing priv_validator_state.json and replace it with a new one containing default values\n\
+- Upgrade the node storage to v0.1.2\n\
+- Rollback the latest block state\n"
+
+if [ "$1" != "-y" ]; then
+  read -p "Do you want to continue? (y/n): " -n 1 -r
+  echo
+  if [[ ! $REPLY =~ ^[Yy]$ ]]; then
+    echo "User cancelled the script"
+    exit 1
+  fi
+fi
+
+PRIV_VAL_STATE=$GALACTICA_HOME/data/priv_validator_state.json
+
+UPGRADE_INFO_FILE=$GALACTICA_HOME/data/upgrade-info.json
+if [ -f "$UPGRADE_INFO_FILE" ]; then
+  echo "upgrade v0.1.2 already applied"
+  exit 1
+fi
+
+if [ ! -f "$PRIV_VAL_STATE" ]; then
+  echo "priv_validator_state.json not found at $PRIV_VAL_STATE"
+  exit 1
+fi
+
+cp $PRIV_VAL_STATE $PRIV_VAL_STATE.bkp
+
+galacticad --home $GALACTICA_HOME rollback --hard
+
+echo '{"height":"0","round":0,"step":0}' > $PRIV_VAL_STATE
+