Shanghai Upgrade

The Shanghai Upgrade will allow users to unstake and withdraw their ETH from the network.


What Is the Shanghai Upgrade? 

The next stage in Ethereum’s roadmap is the first of two major events this year, aside from sharding that will take place later in the year. The Ethereum Shanghai Upgrade is the biggest Ethereum upgrade since The Merge. It will finally allow ETH stakers to unstake and withdraw ETH rewards from the network. 
The Shanghai Upgrade is slated to take place in April 2023. The upgrade has five different aspects to it, but what is of the greatest importance is that users will be able to withdraw their staked ETH for the first time. Many of these users will be withdrawing their ETH after two years since the staking market began. 

The upgrade is raising many questions like what this means for investors moving forward and what will be the impact of this upgrade on the price of ETH.   

But before diving deeper into these questions, let’s touch on some basics! 

It all started with the concept of liquid staking – which has rapidly risen to become one of the most important sectors in crypto, standing in second place by total value locked (TVL) after decentralized exchanges.

What Is Liquid Staking and Why Is It Needed? 

For transactions on a blockchain to be processed, a consensus mechanism is required. The two most popular consensus mechanisms are Proof-of-Work (PoW) and Proof-of-Stake (PoS). Bitcoin uses the former, and Ethereum, Solana and BNB use the latter. Consensus mechanisms ensure network nodes (computers) agree on the blockchain state, valid transactions and block additions, without relying on a central authority. 

PoW used by Bitcoin requires miners to solve complex puzzles in order to validate transactions. PoS on the other hand requires validators to “stake” some of the blockchain’s native tokens to gain the right to validate transactions. Validators verify transactions, add blocks to the blockchain, and receive rewards as a result. 

A challenge, however, is that validators of the largest PoS blockchain, Ethereum, must stake a minimum of 32 ETH (worth around $52,000). This amount is not feasible for most users and makes staking on Ethereum inaccessible. Hence, platforms like Lido, Rocket Pool, and Tranchess emerged that offered users a service called “liquid staking” so that they can deposit a small amount of ETH in order to gain rewards even if they don’t hold 32 ETH. 

Since staking became possible in December 2020, staked ETH has remained locked for over two years. Staked Ether was locked to ensure that the network remains decentralized and secure, even as it transitioned to a new consensus mechanism in 2022 during the Merge. However, this stands in stark contrast to other pools where users can withdraw their staked assets according to their preference. This made Ethereum staking a less-than-ideal option for investors and contributed to the rise of liquid staking to enable liquidity in Ether tokens for their holders.  

Why Does the Shanghai Upgrade Matter to Investors?

Coming back to the main topic: the Shanghai Upgrade.

In anticipation of the Shanghai upgrade, the number of validators recently reached 500,000. The upgrade will reduce the risks associated with staking given that staked ETH will no longer be locked in the event of unexpected market circumstances. Investors require the option to withdraw funds to manage risk and respond to market changes. Prior to investing, it is crucial to comprehend the terms and conditions.

This upgrade may trigger an increase in participation rate that will have numerous benefits, including improved network security, better node validator uptime, superior block space efficiency, and greater decentralization. 

The unlocked Ether will spread across validators as investors contribute to the decentralization of the network. It will consequently spread risks across a greater number of validators. Up until very recently, there has been a large number of Ether deposited among a very small number of validators. This presents a concentration risk in the Ethereum network, and the Shanghai Upgrade will help address this risk.

Staking will also become much more accessible to individuals and institutions who previously could not risk depositing their ETH somewhere for two years without being able to withdraw it. 

Will the Shanghai Upgrade Impact the Price of ETH?

Like the Merge, the run-up to the upgrade could potentially see a slight shift in the price of ETH. Given that the upgrade will lower the risks and improve the security of the network, a positive trend is far more likely than a negative one (not financial advice). 

There have also been fears that the upgrade would cause a mass exodus of validators. However, measures are in place to prevent this as withdrawals will be capped at 43,000 ETH per day. However, the fear of increased supply could hurt market sentiment in the short term.

Conclusion

With the Shanghai Upgrade, staked ETH will no longer be locked, and users will have the flexibility to withdraw their funds, which is important for managing risk and responding to market changes. This will make staking more accessible to a wider range of users, including institutions and investors with large ETH holdings. It could lead to increased network security, better validator uptime, greater decentralization, and improved block space efficiency. 

Learn more about ETH Shanghai Upgrade!

 

Author: Danny Chong, Co-Founder of Tranchess

Danny Chong is the co-founder of Tranchess, a yield-enhancing asset tracker and multi-chain validator offering liquid staking for Ethereum and BNB Chain. Prior to joining the DeFi industry in 2020, Danny had over 17 years of experience in investment banking at Crédit Agricole CIB, Société Générale and BNP Paribas, where he held leading roles in trading, sales, and management for the APAC region.