What is the Ethereum Shanghai Upgrade?
- Learn about the Ethereum Shanghai Upgrade and how it will unlock staked Ethereum tokens, improve the Ethereum blockchain's throughput, and make Ethereum staking a more viable investment opportunity
- Discover how Wirex customers can benefit from this upgrade with our Wirex Multiply product
Last night, a big change came to the Ethereum blockchain, named the ’Ethereum Shanghai upgrade’, so we thought we’d give you a quick overview of what it is and why it’s important!
What is the Ethereum Shanghai Upgrade?
Blockchain technology will continue to evolve to ensure that the digital economy continues to rival that of the traditional economy. The latest change on the Ethereum blockchain, the Shanghai upgrade, is a hard fork which includes five Ethereum Improvement Proposals (most prominently EIP-4895, EIP-3855 & EIP-3860). The Shanghai upgrade promises to take a large step towards realising the post-merge proof-of-stake (POS) Ethereum vision, aiming for faster transaction speeds and lower costs.
What is Shapella?
Shapella is the term which encapsulates the Ethereum Shanghai Upgrade and the Capella Upgrade. The two events are working side-by-side as Shanghai is an upgrade specific to the Ethereum execution client, whilst Capella is an upgrade specific to the Ethereum consensus client, with the main outcome being the unlocking of staked Ethereum tokens.
What will happen to staked ETH?
During the Ethereum Merge (Ethereum’s migration from Proof of Work to POS on the Beacon Chain) in Sept 2022, Ethereum token holders were provided with the ability to stake their Ethereum tokens to provide the ‘economic incentive’ which secures the Ethereum POS blockchain. Ethereum holders had the option to stake Ethereum in two primary ways. Firstly, if they owned 32 ETH and had technical knowledge, they could spin up their own personal validator. Alternatively, if they held less than 32 ETH, they could act as a validator via staking as service providers, which could be in the form of large, centralised players like Coinbase or decentralised protocols such as Lido. All ETH that had been staked on the Beacon Chain and had been locked to provide Ethereum Developers time to build the infrastructure to allow withdrawal.
EIP 4896 (1 of the 5 Ethereum Improvement Proposals of the Shanghai upgrade) will allow staked Ethereum to be unlocked from the Beacon Chain (these tokens will now be accessible to the stakers). These participants will also gain access to the rewards that have been accrued over this time for acting as validators for the POS Ethereum Chain. The Shanghai update will also mean that stakers no longer have to lock tokens for an extended period such as before, potentially making Ethereum staking a more viable investment opportunity for large capital allocators.
I have my ETH staked, what can I do with it now?
Only 7200 Ethereum withdrawal requests will be able to be processed daily (16 requests per slot, 12 secs per slot). This will mean there could be a significant ‘cooldown’ period between requesting a withdrawal and receiving your ETH Tokens. Additionally, users can choose to partially withdraw, something which would allow stakers access to the gains which have been accrued whilst acting as validators.
ETH stakers should strongly consider that if large withdrawals occur, Ethereum staking yields will increase as the system is self-regulating and will adjust for the number of active validators. This means that the post-upgrade staking yield could be significantly more attractive.
Why is it an important event in the crypto industry?
The Shanghai upgrade will strengthen the Ethereum blockchain’s position as an elite blockchain and further push Ethereum towards the original vision of its founder Vitalik Buterin.
Firstly, as ETH stakers will now be able to exit staking at any time, staking ETH will be a more economically viable task for sophisticated asset allocators, since liquidity is a major barrier for sophisticated market participants.
Additionally, Shanghai will begin the push to increase the throughput of the Ethereum blockchain, increasing the capacity of the chain and reducing the spikes in gas prices which become commonplace during the 2021 Bull market. The lack of throughput was identified as an issue as early as 2017 when early Ethereum adopters caused congestion when trading the original CryptoKittie NFTs.
What are the economic & market implications of the upgrade?
It is important to point out that the unlock of staked ETH will not happen all at once and the likely impact of this event will play out over a prolonged period of time. This will likely result in an increase in selling pressure on Ethereum in the short term as some validators will withdraw and sell.
Currently, 18.1 million ETH is being staked and of this, 44% is staked via staking service providers such as Lido, who can access the underlying capital value of the Ethereum they have staked through Lido’s liquid staking tokens that are issued (e.g., Lido issue Steth). These liquid staking tokens reflect a user’s staked ETH in a protocol/centralised staking provider and as such trade closely to the price of Ethereum, hence these stakers will have significantly less incentive to sell post-shanghai.
On top of this, the current economic environment means that true, organic yield is difficult to find, which ETH staking provides. Additionally, liquid staking protocols such as Lido have already outlined, they will not be able to process withdrawal on day one of the upgrade and this signals that selling pressure (if any) will be spread over a longer time period.
How can Wirex customers benefit from it?
Using our newest product, Wirex Multiply, customers can gain multiplied exposure to any price action and volatility caused by the upgrade. For users that invest and predict the price movement correctly, whether this be up or down, they can generate profits of up to 400% APR interest.