Ethereum, a leading blockchain platform for decentralized applications (dApps) and the giant behind the world’s second-largest cryptocurrency by market cap has always been a frontrunner in innovation from the get-go.
The Shanghai upgrade, also known as “Shapella”— a coinage of Shanghai and Capella, Ethereum’s execution and consensus layers, respectively—implemented on April 12, 2023, marked a major leap forward by finalizing Ethereum’s full transition to a more energy-efficient proof-of-stake (PoS) network. But this is also changing the staking and liquidity of ether (ETH) as we know it.
The Technical Side of the Shanghai Upgrade
The Shanghai upgrade is a “hard fork” that introduced several Ethereum Improvement Proposals (EIPs), with EIP-4895 being the most notable. This proposal introduces a new system-level operation to streamline the process for validators to withdraw their staked ether (ETH), allowing for more freedom and flexibility. Gone are the days of the manual process, as EIP-4895 automatically funnels withdrawals from the Beacon Chain to the Ethereum Virtual Machine (EVM) once they’re eligible.
Validators have staked about 16 million ETH to secure the network. Since September 2022, when Merge shifted Ethereum’s consensus mechanism from proof-of-work to proof-of-stake, validators have played a critical role. Under the new rule, by staking 32 ETH, validators can participate in block validation, with each staked ETH increasing the chance of earning block rewards. However, the Merge required validators to lock up their ETH and rewards until a future update.
EIP-4895 simplifies this process by automatically checking accounts for eligible excess balances every few days instead of requiring manual requests.
In a nutshell, validators, as key players in Ethereum’s PoS mechanism, stake ETH to secure the network and validate transactions. Each staked ETH acts like a golden ticket, which enhances the odds of being chosen to propose the next block and earn rewards. Before the Shanghai upgrade, staked ETH and rewards were locked. Still, the upgrade now allows validators to withdraw their assets, which has considerable implications for Ethereum’s liquidity and the staking dynamics.
Impact on Staking and Liquidity
The Shanghai upgrade fundamentally changed the game for stakers.
With staked ETH now unlocked, validators can freely withdraw their holdings or stakes and claim rewards freely. This newfound liquidity is a win-win for both investors seeking staking rewards and the Ethereum network itself, which benefits from increased security through staking.
Moreover, liquid staking providers, which offer staking services to users with smaller ETH holdings, may see increased usage due to the ability to unlock staked ETH. These platforms, which charge a fee on staking income, could become even more popular.
Market Position and Ripple Effects
The Shanghai upgrade caused quite a stir in the crypto market at the time. The release of unlocked ETH potentially tipped the scales for Ethereum’s position and price, as multiple reports have shown.
In all, during Ethereum’s transition to PoS, ETH’s price hovered around $1,800. Right after “Shapella,” ETH’s price rose slightly, trading 1.4% higher within 24 hours. It jumped more than 6% immediately after the upgrade, crossing $2,000 for the first time in nearly a year.
Crypto trading advisor Laurent Kssis of CEC Capital predicted short-term volatility as traders who bought ETH in anticipation of the upgrade sold their holdings to cash out. Kssis suggested that this selling could lead to a strong supply of ether flooding the market, potentially causing the price to drop. At the time of his prediction, ETH was trading near $1,875, and he speculated that it could drop below $1,700 for the first time in two weeks as investors take profits.
Despite short-term fluctuations, at the time, the long-term impact of the upgrade could be positive, particularly if institutional investors are attracted by the increased security and stability of the PoS system. This could boost institutional demand for Ethereum, potentially driving its price in the long run.
Moreover, the Shanghai upgrade wasn’t just about validator rewards. The upgrade also included proposals to address Ethereum’s major weaknesses: slow transaction speeds and high fees. These issues have been a thorn in the sides of DeFi and NFT applications. The surge in DeFi activity has significantly increased the total value locked (TVL) on the Ethereum chain, and the NFT boom from 2021 to early 2022 has further exacerbated these problems, leading to poor user experiences and high transaction costs.
Proposals EIP-3855 and EIP-3860, part of the upgrade, address these issues to make transactions faster and cheaper. This could reignite interest in DeFi and NFTs on the Ethereum network. While EIP-3855 should help address transaction speeds, and EIP-3860 hopes to reduce transaction costs, their broader effect on ETH transactions remains to be seen.
These improvements might encourage ecosystems affected by high gas fees and slow transactions, which had moved to other chains like Solana or Ethereum layer-2 solutions like Polygon, to consider a comeback.
The Shanghai upgrade is a watershed moment for the platform itself and the entire crypto landscape. By enabling validator withdrawals, the upgrade has not only boosted Ethereum’s liquidity but also has the potential to shape its market position. As Ethereum progresses on its innovative path, it will be interesting to see how these developments shape the future of decentralized finance and digital ownership and ultimately influence the future of the entire crypto landscape.
Author: Ayanfe Fakunle
The editorial team at #DisruptionBanking has taken all precautions to ensure that no persons or organisations have been adversely affected or offered any sort of financial advice in this article. This article is most definitely not financial advice.
