April 12 marks the end of one of the longest waits in blockchain history. From then on, Ethereum investors can finally withdraw a stash of $31 billion of ETH that started piling up in late 2020. That's because of the latest Ethereum upgrade, dubbed Shanghai, unlocking close to 18 million. of the so-called "Staked ETH" of the blockchain - about 15% of everything in circulation.
The giant token unlock marks the completion of the most important Ethereum upgrade to date:the fusion. Most significantly, Merge cut ties with crypto miner repositories by combining the old blockchain with a new network that runs on an environmentally friendly transaction validation mechanism called proof-of-stake.
The new proof-of-stake method awards newly minted ETH as a reward to those who โstakeโ (lock) their crypto into Ethereum smart contracts. The more ETH a blockchain validator stakes, the more likely it is that the Ethereum network will choose that validator to process a transaction, increasing the chance of the validator getting newly issued ETH.
To encourage validators to support proof-of-stake, Ethereum has since late 2020 offered interest rates of up to 5% to anyone who parks large amounts of ETH in its smart contracts. The ploy worked, and the Ethereum developers implemented the merger smoothly last September, but there was a catch for investors: Those who staked ETH couldn't withdraw the fund until the developers gave permission.
32 euro
Shanghai is that permit. The update gives around half a million validators, each of whom had to provide at least 32 ETH (now around $57,000), the right to withdraw their funds. So far, takers have earned around one million ETH in rewards, roughly 0.9% of Ethereum's total market capitalization.
The total number of individual participants is much higher than that half million figure; many of them pooled ETH from regular investors who couldn't afford to meet that 32 ETH requirement, staking the funds on their behalf in exchange for a nearly 5% APR reduction. Right now, Lido, the largest decentralized financial protocol that allows ETH delegation, owns around 31% of all ETH staked, according to crypto-analytics site DeFiLlama.
What else does Shanghai do?
Shanghai adds a number of other updates, known as Ethereum Improvement Proposals (EIPs). The most important, EIP-3651, EIP-3860and EIP-3855restrict transaction costs for technical applications, which could help reduce fees on the otherwise expensive Ethereum blockchain.
And Shanghai only refers to the updates of the execution Ethereum layer, the part that handles the smart contract and the protocol rules. Another set of updates, called Capella, will be applied to Ethereum's consensus layer, the part of the network that ensures Ethereum validators follow the rules set by the execution layer.
Confusingly, the developers call the updates Shapella, a portmanteau of Shanghai and Capella, despite the proximity to the update. The Ethereum merger also changed its name near the completion of Ethereum 2.0 to the all-encompassing "Ethereum upgrades."
Shanghai is scheduled for the end of April 12, the date the network is is expected to process the "slot" 6,209,536. Ethereum applications shouldn't feel much of a rush; Although previous Ethereum upgrades have been plagued by delays, often of several years, a series of successful testnets provide ample reason to believe that Shanghai is firmly locked down.
Will prices fall?
Expect to witness a flood of ETH in the market. After all, this is the first time that investors have been able to cash out staked ETH for actual ETH. Before Shanghai, investors could only withdraw tokens that represented staked ETH on platforms like Lido, the equivalent of derivative claims on ETH. They could also access fees earned during block proposals, such as tips paid to validators during each transaction, but not newly issued ETH.
Jim McDonald, CTO of London-based staking firm Attestant, expects the Ethereum price to drop sharply right after Shanghai as 50-70% of those who withdraw early withdraw: ETH price It has more than quadrupled since December, and there are gains to be had. He said he expects selling pressure to be made worse by a dearth of new ETH entering the market, a consequence of a previous update that burned ETH after every trade.
But McDonald's also predicts that the ETH price will recover quickly as stakeholders re-enter the fray, perhaps after reshuffling providers or reassessing their positions. He believes that new takers will also join, namely institutions that had previously feared that staking derivatives services like Lido or RocketPool would burn to ashes, or that Shanghai would be delayed in perpetuity, locking up their funds forever.
"You're trading your ether for magic beans," McDonald said of Lido. โNow, these are pretty well-proven magic beans, but trying to sell them to your CFO can be tricky. But after Shanghai, he added, institutions can "stay in control" while gambling. "You're not arguing with the tax collector that you sold your ether and traded it for magic beans."
TO panel Major liquid staking derivatives protocols also expect the upgrade to appeal to institutions, as they can add and withdraw funds at will, making Ethereum staking much more like an interest-bearing savings account than to the purchase of shares in a private company before -IPO. Konstantin Lomashuk, a trader and Lido contributor who appeared on the panel, said Fortune that Shanghai will not affect the price of ETH while the broader banking crisis has its weight on the crypto market.
How will the withdrawals work?
Two types of investors are likely to withdraw: validators and their 32+ ETH, and regular investors who delegated funds to these validators. However, there are reasons to believe that its effect on the market could be muted; Shapella sets some Limitations on how much ETH validators can withdraw at one time, and it would take around 18 months for validators to withdraw everything.
Only 1,350 full validators can withdraw all of their assets each day (the initial investment of 32 ETH, plus any accrued rewards), or 43,200 ETH out of a total jackpot of 17.6 million. It would be much quicker to remove the cream on top of 32 ETH; around 110,000 validators can withdraw their rewards every day. Attestant's McDonald expects around 1.1 million ETH (about $2 billion) to hit the market in the first week after Shanghai.
Lomashuk said Fortune that staking will nearly double to 30 million ETH within a year, and that no more than 20% of stakers will withdraw their funds forever. Validators may not want to withdraw your ETH if the variable rate of return, currently at 4.6%, still outpaces returns elsewhere. That will grow the Ethereum network, he said, with increased transactions burning more ETH and thus driving up the price "significantly."
Whats Next?
More updates are on the way. One of the next major updates, Cancun, will introduce "proto-danksharding", a method of speeding up the blockchain as it accommodates more users by running the network on several smaller chains at once.
Michael Anderson, co-founder of DeFi-focused venture capital fund Framework Ventures, said Fortune that proto-darksharding could be even more significant than Shanghai. โA successful implementation could significantly reduce transaction costs in L2,โ he said, referring to layer 2 protocols, โimproving the average user experience and creating a huge competitive risk for many of the 'Ethereum killers' that dominated the industry. conversation in the last market cycleโ.
But those upgrades will have to compete with Arbitrum and Optimism, as well as rival blockchains, which have eaten into Ethereum's market share in recent years. And while Shanghai is great for Ethereum, the US Securities and Exchange Commission. Crackdown on Cryptocurrency Underway it could call into question what early investors can do with their unstaked ETH.
