Ethereum's Shanghai Upgrade — Everything You Need To Know
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Ethereum's Shanghai Upgrade — Everything You Need To Know

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1 year ago

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.

Ethereum's Shanghai Upgrade — Everything You Need To Know

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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!

What Is the Ethereum Shanghai Upgrade?

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 from proof-of-work to proof-of-stake. 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.

How Does the Ethereum Shanghai Upgrade Work?

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.

What Does the Shanghai Upgrade Mean for Ethereum?

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:

How Exactly Do the ETH Withdrawals Work?

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.

Source: Etherscan

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.

What Does the Shanghai Upgrade Mean for the Price of ETH?

Source: dune.com/hildobby/eth2-staking

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:

View post on Twitter

What Does the Shanghai Upgrade Mean for Validators?

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.

What Does the Shanghai Upgrade Mean for Liquid Staking Providers?

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 for Lido, rETH for Rocketpool and more in the LSD category.

So, do we still need liquid staking providers after the upgrade?

Yes!

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).

When Is the Shanghai Fork Happening?

The Shanghai Upgrade (EIP-4895) is targeted for March. The first shadow fork (something like a test run) is already finalizing:

View post on Twitter

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.

What Are Ethereum Developers Saying?

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.
View post on Twitter

What Else Does the Shanghai Upgrade Improve?

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.

What Comes Next After the Shanghai Upgrade?

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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