What is the Shanghai ETH update?

by Mar 9, 2023Blockchain Technology0 comments

The Shanghai ETH update Proof of Stake consensus mechanism has been eagerly anticipated by those who hold stakes in the cryptocurrency. Besides impacting staking, it also affects how much ETH is in demand on the market. Knowing what Shanghai will do and how it might impact your portfolio is essential, regardless of whether you are already staking ETH, considering it, or simply holding ETH.

The Shanghai ETH update is a hard fork and the protocol’s first significant update since “The Merge” in 2022. This network upgrade’s main goal, slated for March 2023, is to enable stakers and validators to remove staked ETH from the Beacon Chain.

This is explained in the “Ethereum Improvement Proposal” (EIP-4895), allowing validators to withdraw ETH staked as far back as December 2020, when the Beacon Chain was first introduced.

Several other EIPs, which aim to reduce gas costs for Ethereum developers, are included in the Shanghai fork along with EIP-4895.

What Does It Mean for Validators?

Validators can now finally access all of their staked ETH, the most notable outcome of the Shanghai hard fork for them. So, validators could line up to retrieve their staked tokens and remove them from the system. However, given Ethereum’s dominance in the DeFi space and the high staking yield, some analysts believe this outcome is unlikely. Furthermore, validators won’t have to worry about keeping a sizeable sum of money locked up for an extended period after the Shanghai ETH update because they will be free to withdraw staked assets. At its peak, 32 ETH was worth about $150,000.

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After the Shanghai fork, validators who want to unstake their ETH have a few options. One is establishing a “withdrawal credential” to unstake any rewards accumulated over the past few years. The second, more important option is to leave the Beacon Chain by unstaking all 32 ETH.


What Impact Will the Shanghai ETH update Have on Ethereum?

Your situation will determine the precise effects of the Shanghai ETH update. You can now withdraw your money if you staked Ethereum directly or through a staking product. Not everyone staked 32 ETH directly and many staked smaller sums on liquid staking platforms.

The potential impact on ETH’s price will be one of the biggest concerns for traders. Of course, there is yet to be a definitive solution to this. According to Staking Rewards, 13.81 percent of all ETH tokens are currently staked. Withdrawals are now permitted, increasing liquidity significantly and allowing holders of staked ETH to sell their staked holdings. The proportion of staked coins to the total supply will be an essential statistic for many traders and investors to keep track of.

As a result of its increased liquidity, staking on ETH might, however, be more appealing to users. Those who prefer not to use liquid staking protocols can now stake ETH directly with Ethereum. Due to the improved staking conditions, this might increase demand for ETH.

The price of users’ native tokens held on liquid staking platforms might also change. The justification is that Ethereum eliminates the special functionality that liquid ETH staking provides by allowing withdrawals.

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Allowing withdrawals from staking fosters a freer ETH market where ETH holders can respond to staking demand and supply to achieve market equilibrium. Because it lessens the influence of artificial price and circulation controls, this is a benefit.

What is the main change in the Shanghai ETH update?

The main change for the Shanghai fork is EIP-4895, but a number of other smaller EIPs are also included. For the benefit of Ethereum developers, these additional suggested improvements aim to lower gas fees during busy times. These include EIP-3651, which suggests reducing gas costs for Maximal Extractable Value payments when accessing the COINBASE address (COINBASE here refers to software rather than the same-named cryptocurrency exchange, which allows developers to receive new tokens), EIP-3855, which aims to reduce gas costs for developers generally, EIP-3860, which caps developer gas costs in certain situations, and EIP-6049, which addresses a related issue.

Compared to the Merge, Shanghai continues to be a modest upgrade. However, those staked ETH on the chain could be significantly impacted. Additionally, later in 2023, there is a good chance that additional modifications to the Ethereum protocol will be released, some of which will likely focus on enhancing the Ethereum Virtual Machine while others will attempt to splinter the Ethereum blockchain into multiple “shards” to improve scalability. This final suggestion for improvement, EIP-4844, was once considered for the Shanghai ETH update but was later postponed.

How Exactly Will the Withdrawal Work?


Once the Shanghai ETH update is operational, validators can withdraw roughly 16 million staked ETH. However, since there is only one queue for both full and partial withdrawals on the blockchain, validators must wait before accessing the ETH they want to unstake. There can be a maximum of 16 partial withdrawals in each slot (which happens every 12 seconds).

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Validators can unstake their ETH in two ways. First, they can create a “withdrawal credential” to unstake the staking rewards they’ve accumulated over the years. Second, validators may leave the Beacon Chain by unstaking all 32 ETH, the maximum permitted per validator.

Does the Price of ETH Affect the Shanghai ETH update?

As a new era of unlocked ETH begins, crypto traders are watching the market closely to see how it might react as both bullish and bearish voices weigh in on the Shanghai ETH update’s potential effects on the market. The upgrade, according to some traders, will encourage more staking. Others claim that Shanghai may cause a selling wave, with many investors taking profits once staked ETH is unlocked.

When Shanghai launches, about 1 million ETH in rewards will be available for withdrawal. While it is still unclear which way the pendulum will swing, traders will undoubtedly be keeping an eye on how much of the available ETH will be cashed out, as this could drive the price of ETH lower. On the other hand, it’s understandable to believe that launching Shanghai during a bear market might harm the staking ecosystem. Stakers may withdraw their ETH to keep their assets liquid if further market volatility occurs because they are uneasy about the macro outlook of cryptocurrencies in 2023. New stakers might deposit money slower than they would amid a bull market because they are wary of regulatory actions against staking providers.

However, the Shanghai ETH update(specifically, the capability to unstake and withdraw rewards) is positive for Ethereum in the long run. In Shanghai, three main ways will be to increase incentives for ETH liquidity providers.

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