diff --git a/internal/consensus/replay.go b/internal/consensus/replay.go
index 5d097df21..10df0cd10 100644
--- a/internal/consensus/replay.go
+++ b/internal/consensus/replay.go
@@ -246,14 +246,14 @@ func (h *Handshaker) Handshake(ctx context.Context, appClient abciclient.Client)
 		return fmt.Errorf("error calling Info: %w", err)
 	}
 
-	blockHeight := res.LastBlockHeight
-	if blockHeight < 0 {
-		return fmt.Errorf("got a negative last block height (%d) from the app", blockHeight)
+	appBlockHeight := res.LastBlockHeight
+	if appBlockHeight < 0 {
+		return fmt.Errorf("got a negative last block height (%d) from the app", appBlockHeight)
 	}
 	appHash := res.LastBlockAppHash
 
 	h.logger.Info("ABCI Handshake App Info",
-		"height", blockHeight,
+		"height", appBlockHeight,
 		"hash", appHash,
 		"software-version", res.Version,
 		"protocol-version", res.AppVersion,
@@ -262,16 +262,17 @@ func (h *Handshaker) Handshake(ctx context.Context, appClient abciclient.Client)
 	// Only set the version if there is no existing state.
 	if h.initialState.LastBlockHeight == 0 {
 		h.initialState.Version.Consensus.App = res.AppVersion
+		h.initialState.ConsensusParams.Version.AppVersion = res.AppVersion
 	}
 
 	// Replay blocks up to the latest in the blockstore.
-	_, err = h.ReplayBlocks(ctx, h.initialState, appHash, blockHeight, appClient)
+	_, err = h.ReplayBlocks(ctx, h.initialState, appHash, appBlockHeight, appClient)
 	if err != nil {
 		return fmt.Errorf("error on replay: %w", err)
 	}
 
 	h.logger.Info("Completed ABCI Handshake - Tendermint and App are synced",
-		"appHeight", blockHeight, "appHash", appHash)
+		"appHeight", appBlockHeight, "appHash", appHash)
 
 	// TODO: (on restart) replay mempool
 
diff --git a/internal/consensus/replay_test.go b/internal/consensus/replay_test.go
index d24e55d67..6f45e34bf 100644
--- a/internal/consensus/replay_test.go
+++ b/internal/consensus/replay_test.go
@@ -1288,3 +1288,48 @@ func (ica *initChainApp) InitChain(req abci.RequestInitChain) abci.ResponseInitC
 		Validators: ica.vals,
 	}
 }
+
+func TestReplayUpdateAppVerion(t *testing.T) {
+	ctx, cancel := context.WithCancel(context.Background())
+	defer cancel()
+
+	logger := log.NewNopLogger()
+
+	app := kvstore.NewApplication()
+	client := abciclient.NewLocalClient(logger, app)
+
+	cfg, err := ResetConfig(t.TempDir(), "replay_test_")
+	require.NoError(t, err)
+	t.Cleanup(func() { _ = os.RemoveAll(cfg.RootDir) })
+
+	privVal, err := privval.LoadFilePV(cfg.PrivValidator.KeyFile(), cfg.PrivValidator.StateFile())
+	require.NoError(t, err)
+	pubKey, err := privVal.GetPubKey(ctx)
+	require.NoError(t, err)
+
+	stateDB, state, store := stateAndStore(t, cfg, pubKey, 0x0)
+	stateStore := sm.NewStore(stateDB)
+
+	// we modify the app version to the initial state for simulating the appversion update in the genesis file.
+	testGenesusAppVer := kvstore.ProtocolVersion + 1
+	state.Version.Consensus.App = testGenesusAppVer
+	state.ConsensusParams.Version.AppVersion = testGenesusAppVer
+	require.NoError(t, stateStore.Save(state))
+
+	// the genDoc has the default genesis app version which it's fine because it's be used in the app InitChain request.
+	genDoc, err := sm.MakeGenesisDocFromFile(cfg.GenesisFile())
+	require.NoError(t, err)
+
+	handshaker := NewHandshaker(logger, stateStore, state, store, nil, genDoc)
+	proxyApp := proxy.New(client, logger, proxy.NopMetrics())
+	require.NoError(t, proxyApp.Start(ctx), "Error starting proxy app connections")
+
+	require.NoError(t, handshaker.Handshake(ctx, proxyApp), "error on abci handshake")
+
+	// reload the state, check the app version was updated.
+	state, err = stateStore.Load()
+	require.NoError(t, err)
+
+	require.Equal(t, kvstore.ProtocolVersion, state.Version.Consensus.App)
+	require.Equal(t, kvstore.ProtocolVersion, state.ConsensusParams.Version.AppVersion)
+}