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What is Ethereum’s Shanghai Upgrade?

Key Takeaways 

  • On April 13th, Ethereum completed its Shanghai upgrade, also known as the Shapella upgrade
  • It brings with it changes to the Proof of Stake consensus mechanism
  • Whether you’re currently staking, thinking about it, or just holding ETH, it’s important to grasp the full scope of the changes and how they might affect your investment portfolio.

On April 13th, Ethereum completed its Shanghai upgrade, also known as the Shapella upgrade. The eagerly anticipated Shanghai update brings with it changes to the Proof of Stake consensus mechanism. This update resolves a major issue faced by holders of Ethereum’s cryptocurrency, Ether. Previously, holders could not withdraw their coins after staking them for rewards on the network. However, the Shanghai upgrade allows them to unlock and withdraw their coins.

What is the Ethereum Shanghai Upgrade?

While its main impact will be on staking, the upgrade is also expected to significantly affect the market demand for ETH. As a result, whether you’re currently staking, thinking about it, or just holding ETH, it’s important to grasp the full scope of the changes and how they might affect your investment portfolio.

The Merge upgrade in 2021 transformed Ethereum’s operation from relying on miners to using validators. Validators are ether holders who lock up their coins to verify transactions and are rewarded with new coins. This change significantly reduced Ethereum’s energy consumption by over 99%. However, it created liquidity concerns as Ether holders were unable to unlock their coins after staking them.

The Shanghai upgrade resolves this issue and could encourage more investors, particularly institutions, to participate in staking. Nonetheless, staking comes with its risks. Validators could be punished and lose some of their staked coins if they validate incorrect transactions or go offline.

Moreover, unstaking Ether takes time. If an investor wishes to withdraw all their original coins and rewards, they need to join a queue. The time it takes to process withdrawal requests depends on how many users are withdrawing their Ether simultaneously. 

Since the upgrade, the ETH-USD trading pair on crypto exchange Coinbase recorded $28 million more sell orders than buy orders, crypto market research platform Kaiko reported on Monday.

This update may not have an immediate impact on ether price, but investors who are concerned about liquidity risks will likely participate in staking. In the long run, this could be bullish for ether. 

Some ether holders may also shift their staking methods. Previously, they may have staked their coins with liquid staking service providers to earn rewards while still being able to trade their ether. However, the Shanghai upgrade now enables them to directly stake on Ethereum and withdraw their crypto. 

How Does it Affect You?

The update’s primary purpose is to make Ethereum’s Proof of Stake (PoS) protocol more accessible to users, improve the network’s overall security, and increase transaction throughput. One of the most significant changes with this update is the ability to withdraw staked ETH.

The effects of the Shanghai update will depend on each user.  For those who have staked ETH directly with Ethereum or through a staking product, you can now withdraw your funds. However, it’s important to note that not everyone directly staked the minimum amount of 32 ETH. Many users staked smaller amounts on liquid staking platforms. With withdrawals now allowed, this unlocks a significant amount of liquidity, and staked ETH owners now have the power to withdraw and sell their staked holdings. This could increase selling pressure on ETH, resulting in potential price drops.

For traders and investors, the percentage of coins staked out of the total supply will be something to monitor. However, with the possibility of withdrawals, this percentage could fluctuate. Monitoring the percentage of staked coins in circulation is essential to predict any potential market effects.

On the other hand, staking on ETH may become more attractive to users due to its improved liquidity. Those who didn’t want to use liquid staking protocols will now have the chance to stake ETH directly with Ethereum, which could lead to increased demand for ETH. This may counterbalance the potential selling pressure on ETH.

For users holding native tokens of liquid staking platforms, there may also be an effect on their price. The reasoning is that Ethereum’s opening of withdrawals removes the unique functionality liquid ETH staking offers. As a result, these native tokens’ prices may decrease due to the reduced demand for their staking services.

Final Thoughts

Enabling withdrawals from staking promotes a freer ETH market. It allows ETH holders to react to staking demand and supply to achieve market equilibrium. This is a positive effect because it reduces artificial control effects on the price and circulation of ETH. However, it’s essential to be aware of the potential market effects of the Shanghai update and monitor them accordingly.

In conclusion, the Shanghai upgrade resolves a significant issue for ether holders and could encourage more investors to participate in staking.