What is Ethereum Shanghai upgrade ?
Ethereum is a blockchain network that has gained popularity for its smart contract capabilities and decentralized applications (dApps). On December 1, 2021, Ethereum underwent a significant upgrade known as the Shanghai Upgrade.
The Shanghai Upgrade brought several crucial changes to the Ethereum network, including the introduction of a new mining algorithm called Ethereum Improvement Proposal (EIP) 1559. This algorithm aims to enhance the network’s efficiency by reducing the gas fees required for transactions.
Apart from the new mining algorithm, the Shanghai Upgrade also included other essential modifications to the network. For instance, it introduced EIP-3198, which facilitates smart contract developers in working with the Ethereum Virtual Machine (EVM). The upgrade also introduced EIP-3529, which aims to improve the overall security and stability of the Ethereum network.
The Shanghai Upgrade marked an important milestone for the Ethereum network, with several key changes designed to enhance its efficiency, security, and overall performance. As Ethereum continues to evolve, we can expect to see many more upgrades and improvements in the future.
The most crucial aspect of this upgrade is EIP-4895, which will enable the withdrawal of staked ETH. With Ethereum 2.0 staking being active since December 2020, approximately 15.83 million Ether, equivalent to nearly $20 billion, has been locked in staking wallets. With the Shanghai upgrade, users will be able to stake their ETH and withdraw their rewards without experiencing lengthy delays.
Ethereum Shanghai Update is Scheduled on April 12, 2023
During the recent All Core Developers Execution Layer #157 call, Ethereum developers announced that the highly anticipated Shanghai hard fork, also referred to as “Shapella,” is targeted for release on April 12.
The Shanghai upgrade represents Ethereum’s complete transition to a proof-of-stake (PoS) network and includes a crucial feature allowing for the withdrawal of staked ETH.
Once this upgrade is implemented, investors will be able to withdraw their staked ETH, which is expected to unlock millions of funds currently held in staking wallets.
Will the ETH price go up after it moved to ETH 2.0?
Despite concerns, it is unlikely that the price of Ethereum will crash as a result of the upcoming unlocking of staked ETH. Here’s why:
The majority of ETH staking is done through exchanges or liquid staking platforms that issue tradeable staked ETH tokens. These tokens closely follow Ethereum’s price, and more than 40% of total ether deposits are staked through these protocols.
If investors intended to sell their staked ETH tokens in large quantities, the tokens would already be trading at a lower price than Ethereum. However, this has not occurred.
The unlocking of staked ETH is expected to increase trust in the Ethereum network, potentially attracting more significant investments.
Currently, Ethereum’s staking ratio is the lowest among major chains, at around 14%. The Shanghai upgrade is expected to boost the staking ratio, bringing it in line with other chains.
What is for investor from ETH shanghai Update?
The upcoming Ethereum Shanghai Upgrade may cause short-term volatility and FUD, but it is expected to be bullish for ETH in the long run, as a higher percentage of the coin will be staked. Currently, only 15% of the total Ethereum supply is staked in Ethereum 2.0, which is much lower than other Proof-of-Stake blockchains such as Cardano, Solana, BNB, Polygon, and Polkadot, which range between 40-70%.
This suggests that Ethereum holders have not yet considered the stability of Ethereum 2.0 staking, and a significant portion of ETH remains unstaked, awaiting more stable staking conditions. Ethereum’s transition to Proof-of-Stake has been ongoing since 2017, and staking was activated in 2020 through the Beacon chain. However, the main issue has always been the locked nature of staked ETH until Ethereum 2.0 is fully activated and implements unlocking.
The Ethereum Shanghai Upgrade, set for April 2023, aims to address this issue by allowing the free withdrawal of all staked Ethereum. Contrary to the belief that this may result in a bearish outcome, the upgrade is expected to increase demand as investors gain confidence in Ethereum’s staking capabilities. As the industry average for staked coins ranges between 40-70%, demand for Ethereum is expected to rise following the Shanghai Upgrade as it represents the final step in fully preparing Ethereum staking.
How is the Shanghai Upgrade Expected to Boost Liquid Staking Derivatives?
The Ethereum Shanghai Upgrade is expected to have a positive impact on the use of Liquid Staking Derivatives (LSDs). Lido Finance, which issues stETH, has been a prominent player in the liquid staking space.
There are two main reasons why LSD usage is likely to increase after the Shanghai upgrade:
- Increased staking levels: With the proportion of staked ETH set to rise from the current 14%, a significant portion of the newly staked ETH is expected to flow into liquid staking protocols. Currently, such protocols account for about 40% of all staked ETH, and projects like Lido, StakeWise, and Rocket Pool are likely to attract substantial amounts of new staked ETH.
- Expanded user base: Previously, the need to lock tokens with a staking platform for an extended period deterred many users from staking. However, the Shanghai upgrade will allow users to withdraw their staked ETH, making it easier to switch between providers. This increased trust and flexibility are expected to encourage more users to try liquid staking and facilitate the offering of DeFi platforms by companies.
It’s worth noting that while the Shanghai upgrade will introduce staking unlock features, it will not include any additional improvements related to cost or scalability.
Conclusion
The Ethereum Shanghai Upgrade has been officially scheduled for April 12th. Although there may be short-term volatility due to the withdrawal of previously staked ETH, this upgrade is ultimately expected to be bullish for ETH in the long run. This upgrade is the final step for a fully functional Proof-of-Stake Ethereum network that people can trust. Currently, the percentage of staked ETH is lower compared to other PoS networks, but the price of liquid staking ETH closely tracks the price of real ETH. Thus, this event is not expected to be bearish for Ethereum in the long term. Instead, it is anticipated that Ethereum staking amounts will increase, bringing it in line with other PoS networks and leading to increased demand. Additionally, LSD platform tokens are expected to have another hype wave following the Ethereum Shanghai upgrade, as they will likely experience higher amounts of user and staking activity, potentially leading to speculative price growth on their governance tokens.
More details link from Coindesk
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