The Ethereum community is about to welcome another major upgrade to their home network, the Shanghai Upgrade. Shanghai is a hard fork that will allow all network validators to unstake their ETH from the network. Given that the world’s largest smart contract network has $26 billion staked, investors are now worried about an incoming supply shock.
Ethereum validators haven’t been able to withdraw their staked assets ever since the famous Merge took place. Everything’s about to change now that developers launched a test iteration of the Shanghai upgrade – which will publicly launch in March.
Join me in today’s article as I tell you all about the benefits, concerns, and potential risks of the Ethereum Shanghai Upgrade. And if you know nothing about either The Merge or Ethereum’s staking mechanism, I recommend checking out this article first.
Ethereum Shanghai – officially known as EIP-4895 – is a network upgrade that allows Ethereum validators to remove their staked assets from the network. The requirement for joining the network as a validator is to stake 32 ETH. And ever since The Merge took place, the network prevented validators from unstaking funds.
Part of the reason why unstaking was not a functionality is that the Ethereum Foundation wanted the network to remain stable following The Merge. The community, together with the foundation, finally agreed to making withdrawing assets possible after discussing the Ethereum Improvement Proposal (EIP) 4895.
The Shanghai network upgrade is expected to launch in March 2023. But before such a big change to the network occurs, developers have to implement Shanghai in a public test network. In fact, developers have already launched the update today (January 24th) to review and test the feature.
The Shanghai Upgrade will have a direct impact on all investors who stake ETH. However, it will also have an indirect impact on the network as a whole. Why? Because the upgrade will leave room for dynamic changes in Ethereum’s circulating supply. Moreover, those who staked so far will have the opportunity to withdraw and sell funds.
Data from Staking Rewards shows that nearly 14% of the entire Ethereum supply is staked. That’s a lot of liquidity that, when unlocked, can potentially wreck havoc on the market. However, the consensus amongst the community is that no aggressive selling will take place as investors have the incentive to keep holding ETH.
Ethereum switched to a new consensus model last year in an effort to improve the network. The Proof of Staking (PoS) mechanism makes blockchains more efficient and helps them consume less power. Rather than solve abstract problems, validators confirm transactions by staking assets and securing the network.
Validators have to stake assets because the network is no longer protected by miners and their tangible hardware equipment. Staking assets secures Ethereum by giving more power to the network itself – and its smart contracts. Doing so reduces the chances of a 51% attack in which a malicious entity can gain power over the network.
In return for staking assets, the network rewards stakers by providing them with an annual yield. The yield is mainly determined by the number of investors staking. Other factors such as network activity and network growth also influence staking yields. It’s worth noting that staking rewards are dynamic and come in the form of Ether (ETH).
Staking makes Ethereum more energy-efficient by removing miners from the equation. There is no longer the need for expensive and power-hungry mining equipment. Network participants reach consensus simply by staking. In other words, Ethereum’s energy consumption boils down to running a small machine capable of staking 32 ETH.
Staking notably impacts the market dynamics of its given network. A portion of the network’s tokens are always locked up. Such a situation leads to a smaller circulating supply. However, such a network also demands a large maximum token cap in order to cover staking rewards.
Those staking Ethereum have so far not had the opportunity to withdraw their assets. Everything changes in March once developers fully launch the upgrade and the floodgates open. Many within the community worry that the upgrade will have a negative impact on investors, as a fresh batch of unlocked tokens implies more selling pressure.
Glassnode statistics indicate that Ethereum has more than 16.1 million ETH locked up. The amount locked up is worth approximately $26 billion at the time of writing. It’s unlikely that stakers will massively flock to exchanges. But even if 10% of them did, the figure would still greatly impact the market.
There is much to speculate about the upgrade’s effect on markets. There is no concrete evidence as to whether a supply shock will even take place. All you can do is monitor the situation and trade or hold ETH accordingly. Despite the upgrade being common knowledge, there isn’t currently much selling pressure.
The positive aspect of the Shanghai upgrade is that it will make Ethereum more liquid. New investors will be able to join the network as validators and stake their assets – without having to use 3rd-party staking protocols. Something like that could even stir up rejuvenated interest for Ethereum and create demand.
The Shanghai upgrade represents one of the most anticipated features for Ethereum investors since The Merge. The upgrade is set to launch in March 2023 and will allow investors to unstake assets from the network. 14% of Ethereum’s supply is currently locked up on the network’s staking pools.
Some within the community speculate that the upgrade might potentially create a supply shock. Investors who no longer wish to stake will withdraw their assets and deploy them on exchanges – where they might be sold.
There is no way to tell whether investors are looking to offload their ETH. The asset has depreciated in value since the bull run’s end. Moreover, investors might still be interested in earning yield via Ethereum. Price action shows that there isn’t much selling pressure for ETH as the token’s price increased since the month’s start.
If you’re an Ethereum investor, I recommend monitoring the market in real-time once the Shanghai upgrade is ready to go. A shadow fork is currently live that allows developers to test the feature. However, the upgrade will fully launch in March this year.
Want to learn more about Ethereum? I suggest reading the following articles:
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