Ethereum Shanghai Update: How can it impact you as an investor?

Muhammad Naeem

Blogger

The Ethereum Shanghai Update, which changes the network to Proof of Stake, is eagerly anticipated by Ethereum stakers. The update may also affect market demand for ETH and have implications for those already staking, considering it, or holding ETH. Understanding the changes and impact of Shanghai is important for anyone invested in ETH.

Ethereum Merge: A Recap

Before we get into Ethereum's Shanghai Upgrade, let rewind to September 15th, 2022, Ethereum, the world's largest smart contract-capable blockchain network, underwent one of the most significant transformations in crypto history.

The Ethereum network underwent a process known as the Merge, which converted this behemoth of a network - the world's second-largest by market cap - from a proof-of-work to a proof-of-stake consensus mechanism. This is the first step in a long process to move Ethereum into the future, where gas fees are cheap and transaction speeds are high, at least on pace with competitors, and where it can eventually maintain its position as the largest smart contract-capable blockchain platform available.

What Is the Ethereum Shanghai Upgrade?

Ethereum made the transition to a Proof of Stake consensus mechanism in September 2022, moving away from the previous Proof of Work and mining-based system. To participate in validating transactions on the network, users can now stake 32 ETH instead of using specialized mining equipment to solve computational puzzles.

The Ethereum mainnet has combined the PoS Beacon Chain with the Merge, but users have been unable to remove their staked funds until now. The Shanghai update (EIP-4895) adds withdrawal functionality and is scheduled to be implemented as a network hard fork on March 2023, following an agreement by Ethereum developers on January 5, 2023. A public test network with the Shanghai update will be available for testing towards the end of February 2023.

What Is the Importance of The Ethereum Shanghai Upgrade?

It is significant for various reasons, but it's important to keep in mind that these are predictions based on available information. • One of the key benefits of the Ethereum Shanghai Upgrade is that it could lower gas fees for layer-2 solutions built on Ethereum, like Polygon and Optimism. This would make transactions on the Ethereum blockchain even faster and more affordable.

• Before the Ethereum Merge, everyone interested in becoming a validator in the new PoS Ethereum Beacon chain had to stake a particular amount of ETH to a deposit smart contract, which was locked in even after the Merge. However, with the Shanghai Upgrade, the lock-in may be lifted and users who had staked their ETH tokens may be able to unstake them. Another significant update that can be expected from the Shanghai Upgrade. Ethereum, being the world's largest smart contract-capable blockchain network, must stay ahead of the curve in terms of development.

What Is Ethereum Staking?

Ethereum has switched to Proof of Stake, allowing users to stake their ETH as part of the network's consensus mechanism. This offers a less energy-intensive alternative to the Proof of Work mining system used by networks like Bitcoin. By temporarily locking 32 ETH, users can run validator nodes to secure the network and validate transactions.

Validators on the Ethereum network receive new blocks from other validators, and after checking the transactions and block signatures, they attest to their validity. With the Shanghai upgrade, stakers will be able to withdraw their locked ETH, a feature that was not available after the launch of the Beacon Chain in December 2020.

What Are Ethereum Improvement Proposals (EIPs)?

EIP (Ethereum Improvement Proposal) is a process for making changes or improvements to the Ethereum network. Anyone can propose an EIP by following the submission format and submitting it to the Ethereum community and developer board for review. EIPs must be technically approved to become part of an update, and they follow a specific numbering system. The Shanghai upgrade is referred to as EIP 4895.

Ethereum will continue to be the most popular PoS network.

Ethereum, the leading proof-of-stake network, is the second-largest cryptocurrency by market capitalization. Currently, it holds 65% of the total value invested in DeFi protocols, amounting to around $48.7 billion.

Despite market fluctuations, the amount of ETH deposited has steadily increased over time and reached over 500,000 validators in January 2023.

How Will Ethereum's Shanghai Update impact investors?

The impact of the Shanghai update varies depending on individuals' circumstances. Those who have staked ETH directly on Ethereum or through a staking platform will now be able to access their funds. It's important to note that not everyone staked the same amount; some staked smaller sums on more accessible staking platforms.

For traders, a major concern is a potential impact on ETH's price. At the moment, it is uncertain what the outcome will be. Currently, 13.81% of all ETH tokens are staked, according to Staking Rewards.

The ability to withdraw releases a substantial amount of liquidity, and staked ETH owners can now sell their holdings. Many traders and investors will be closely monitoring the percentage of staked coins compared to the total supply.

On the other hand, staking ETH may become more appealing to users due to increased liquidity. This will give those who previously avoided using liquid staking protocols the opportunity to directly stake ETH with Ethereum. These improved staking conditions could result in higher demand for ETH.

The price of tokens of liquid staking platforms may also be impacted. The reason is that the ability to withdraw ETH from Ethereum eliminates the exclusive benefits offered by liquid ETH staking.

Allowing staking withdrawals results in a more open ETH market, where ETH holders can respond to staking demand and supply to reach a market balance. This is viewed as a positive impact as it reduces an artificially imposed influence on ETH's price and circulation .

In 2022, there was a 178% increase in developer activity for Ethereum's programming libraries, reaching 1.5 million downloads. Despite a down market, developers have intensified their development of practical solutions and have continued to rapidly build smart contracts on Ethereum, reaching 4.6 million deployments in the fourth quarter of 2022.

The successful transition of Ethereum from proof-of-work to proof-of-stake is a remarkable accomplishment that should not be underestimated. As this transition has proven to be a resounding success, future upgrades will be rolled out more quickly due to the unparalleled creativity, values, and long-term vision of the Ethereum community. Ethereum has established itself as the foundation of cryptocurrency and proof-of-stake, and it has a bright future ahead.

It would be wise for investors and stakers to keep their ETH staked as doing so helps secure and decentralize the network. Staking ETH also provides a source of passive income in the form of staking rewards, making it a more attractive option to remain staked.

Ethereum Shanghai Update: release date

The official release date for the Ethereum Shanghai upgrade has not been confirmed yet. According to various sources, it could occur at any time in the latter half of 2023, with some predicting a possible September 2023 release. However, this is subject to change as more information becomes available.

Conclusion

The Shanghai update is an important development for Ethereum stakers and those considering staking. It's one of the highly anticipated features, along with Ethereum's Merge, that users have been eagerly waiting for. The update enables a fully-functional Proof of Stake mechanism, but its impact on the market is uncertain. It's advisable for anyone with exposure to ETH to understand the update and what it offers.