With the Ethereum Shanghai upgrade slated to happen sometime in Q1 2023, here's what you need to know leading up to the hard fork.
China has been in the news a lot recently, but a relevant piece of news has not gone unnoticed:
The Ethereum Shanghai Upgrade
That's right. Time to unstake those juicy 32 ETH
you put down as a deposit to validate the network.
This article will cover all you need to know about the Ethereum Shanghai Upgrade
: how it works, what it changes, what it means for your stack, and much more. Hop in!
The Ethereum Shanghai Upgrade is the biggest Ethereum upgrade since The Merge
. You will finally be able to unstake ETH and withdraw ETH rewards from the Beacon Chain
Refresher: The Merge was the first part of Ethereum's switch
. The old Ethereum chain merged with a proof-of-stake chain to become the Beacon Chain. However, stakers
are unable to unstake and withdraw until the Shanghai Upgrade.
The upgrade is a hard fork
. It implements EIP-4895, which hardcodes the new unstaking policy into Ethereum. Validators have been able to stake ETH since December 2020 when the Beacon Chain was released (but not yet merged with the old PoW chain). As of Feb 7, 2023, withdrawals on the Zhejiang testnet are enabled. In March 2023, 16.5m ETH will become available for withdrawals on the mainnet.
First and foremost, it makes Ethereum a true proof-of-stake chain. So far, ETH stakers who wanted the option to liquidate their staked ETH had to rely on liquid staking
derivatives. Stakers and validators will now be able to unstake ETH themselves. As Beincrypto explained, an exit transaction will take 27 hours, unless the validator has been slashed. However, it could go faster since the withdrawals are dynamic and depend on the exit queue.
Second, Ethereum as a blockchain decreases its tech risk with this upgrade. More stakers are expected to flock to Ethereum since they will be able to stake natively with the L1, without added smart contract risk or staking restrictions. This analysis
explains how enabled withdrawals may boost the staking ratio to 80%. Therefore, we can expect the following staking ratio to increase significantly for Ethereum:
The upgrade enables withdrawals, but only six validators per epoch can make a full withdrawal. An epoch is 6.4 minutes for Ethereum, meaning 1,350 validators can withdraw per day. That equates to 43,200 ETH per day, which is 0.8% of the daily trading volume
, at the time of writing. If hypothetically all validators wanted to withdraw, it would take them over 382 days, with roughly 16,510,000 ETH staked
in the Beacon Chain contract.
The upgrade also enables partial withdrawals, i.e., withdrawals of the rewards earned on the 32 ETH collateral. That is about 2 ETH per validator
, which yields 1 million ETH that can be withdrawn partially because there are 500,000+ validators
. This equates to 10% of the daily trading volume of ETH.
Roughly 68% of ETH staked is underwater. However, we cannot say with certainty which stakers prefer to take profit or lock in a loss. Even if all ETH are unstaked and liquidated, the volume is only a fraction of Ethereum’s daily trading volume. Blockchain educator korpi wrote a detailed thread on Twitter, outlining possible selling volumes for ETH. He concludes that the overall market sentiment will determine the extent of a possible dump:
Validators will be able to unlock their staked ETH. That means each validator can withdraw their 32 ETH collateral plus staking rewards collected. Withdrawals will be either partial or full. Validators can create a “withdrawal credential” to withdraw their staking rewards, triggering a partial withdrawal. Alternatively, they can unstake all of their collateral and exit the Beacon Chain.
CoinMarketCap Academy covered liquid staking providers in our Ultimate Guide to Ethereum Liquid Staking in 2023
. ETH liquid staking providers are used to stake and unstake Ethereum before the Shanghai Upgrade. Stakers receive a derivative token, such as stETH
and more in the LSD category
So, do we still need liquid staking providers after the upgrade?
They fulfill three functions:
- You can stake less than the 32 ETH necessary for running your own Ethereum validator.
- You can use the staked ETH as collateral in DeFi.
- You don't have to run your own node.
In fact, analysts expect staking providers
to become more popular after the upgrade! The Shanghai fork removes one risk vector for Ethereum, meaning more stakers (big and small) can feel secure about securing the network (pun intended).
The Shanghai Upgrade (EIP-4895) is targeted for March. The first shadow fork (something like a test run) is already finalizing:
The Merge followed a similar timeline, with a successful shadow fork preceding an eventually successful hard fork. Ethereum developers haven't specified a precise date yet, but the hard fork is on track for March, as planned in the roadmap.
Zhejiang Testnet — First of Three Dress Rehearsals
At epoch 1350 at 15:00 UTC on Feb 7, 2023, the Shanghai upgrade was triggered on the Zhejiang testnet. Partial and full withdrawals are included in the execution payload. The testnet fork serves as the first of three “dress rehearsals” to simulate the Shanghai upgrade. Two more are to follow on the Sepolia and Goerli testnets.
Developers are optimistic about everything going according to plan. One dev told CoinDesk
that the Zhejiang testnet shadow fork was executed successfully. However, there is still no news regarding an exact date for the mainnet fork, although it is expected to be sometime in March.
The Shanghai Upgrade also includes a few minor improvements:
- EIP-3855: the "Push0" code lowers gas costs for developers.
- EIP-3860: caps the gas costs for developers when they interact with ‘initcode’ (a code used by developers for smart contracts).
- EIP-6049: notifies developers of “SELFDESTRUCT,” a code to reduce gas fees, being phased out.
Ethereum has a detailed roadmap that we covered in our post about the next steps for Ethereum after the merge
. The next big hard fork in the roadmap is sharding, a way to increase the throughput of Ethereum directly without relying on layer-two solutions.
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