What Is Ethereum’s Shanghai Upgrade?

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The Ethereum network is preparing for its next major update, known as the Shanghai Upgrade.

The upgrade's biggest change will be to give validators the ability to withdraw staked coins. This could prompt a mass liquidation event or alternatively lead to a surge in new users -- only time will tell.

The update is expected to occur on April 12. It's the first major upgrade since the merge in September 2022, which changed the Ethereum network to a proof-of-stake system.

The Shanghai Upgrade is a planned hard fork of the Ethereum protocol.

Forks are changes in a blockchain's protocol. In the case of Shanghai, the fork will be a "hard fork." In hard forks, the non-upgraded version is usually no longer compatible with the upgraded version.

With the Shanghai Upgrade, the non-upgraded nodes will no longer participate in the staking and validation process, says Pooja Ranjan, founder of EtherWorld.co and herder-in-chief of the Ethereum Cat Herders.

The Shanghai Upgrade will also be accompanied by the Capella Upgrade, which will apply changes to the Consensus Layer, leading to the joint moniker "Shapella."

"The Shanghai Upgrade is a relatively small upgrade, especially when compared to the merge this past fall," says Ben Weiss, CEO of CoinFlip.

"However, there are a handful of additional improvements in this release that will make it easier and cheaper for developers to deploy and run smart contracts which will help drive utilization in the network up over time."

One of the primary incentives behind the Shanghai Upgrade is to improve liquidity for stakers and validators who wish to withdraw their funds.

"Ethereum staking refers to the process of transaction validation on the Ethereum blockchain network," says Christopher Mitchell, founder and Principal of Keala Advisors, a registered investment advisory firm specializing in investments within the digital assets and emerging technology spaces.

"An investor can stake some or all of their ETH holdings on the network to earn interest on their staked amount." In this way, staking is similar to a traditional investor choosing to hold bonds.

To become a validator, users are required to stake 32 ETH to activate the validator software. Currently, validators can't transfer or withdraw these staked funds, however.

"Since the launch of the Beacon chain in Dec 2020, Ethereum staking is unidirectional," Ranjan says. "Users may stake ETH to become a validator, perform duties and earn rewards in their wallet." But they can't withdraw their staked ETH.

After the Shanghai and Capella Upgrades, users will be able to withdraw staked ETH.

"It will activate ether (ETH) withdrawals, allowing current validators in the network to unstake the ETH they've locked in the Beacon Chain, Ethereum's new consensus layer," says Samir Kerbage, chief investment officer at Hashdex, a leading global crypto-focused asset manager.

"This will be possible via either a partial withdrawal, which releases the issuance rewards a validator has collected over time, or a full withdrawal, that unlocks both their principal deposit and the aforementioned issuance rewards."

This new implementation means more liquidity for stakers as well as the broader market. "Enabling more access and liquidity puts more control in the hands of investors," Weiss says.

The Shanghai Upgrade will also deploy three other Ethereum Improvement Proposals (EIPs) on the execution layer:

Other than a bit of price volatility during and immediately following the upgrade, the Shanghai Upgrade shouldn't affect ETH holders who haven't yet staked coins as validators on the Beacon Chain.

ETH users, however, may notice lower fees, making it cheaper to transact on the network, Kerbage says. "This implies that using decentralized applications and transferring digital assets built atop the network may become more accessible to a larger portion of interested users."

How the Shanghai Upgrade will affect the price of ETH is a point of some debate.

One side of the debate worries that unlocking the more than 17 million staked ETH, worth more than $30 billion at the time of this writing, would lead to a deluge of ETH into the crypto market.

"That is a concern because if that were to occur, an increased supply of this cryptocurrency without a corresponding increase in demand could result in an immediate price decrease," Mitchell says.

"However, those who subscribe to that theory must also consider that two years ago the price of ETH was almost three times its current price, and it is currently trading at close to half the price it was trading at as little as a year ago," he adds.

"Many investors who had their ETH staked could be trading at a loss if they immediately withdraw, and therefore, investors may not be so quick to do so."

There's also the fact that even if all the stakers wanted to withdraw immediately, they couldn't due to the exit queue, which limits the number of ETH that can be unstaked in any single day.

Likewise, Kerbage says the "constant entry of new validators" will counterbalance this potential outflow, and possibly even outweigh it.

By removing both the staking requirement of 32 ETH and giving validators greater liquidity, the upgrade "will lower the barrier of entry for both individual and institutional investors interested in staking their ETH directly to the network," Mitchell says.

"That should attract more individual and institutional investors looking to use staking of ETH as an investment vehicle, which would be good for the long term price of ETH."

The long-term future of ETH remains bright, according to experts. Kerbage expects that once the volatility dies down in the weeks following the upgrade, investors are more likely to see price appreciation in ETH in the mid- to long-term.

Mitchell sees the upgrade as a positive for investors from a long-term fundamental perspective. He says the upgrade is another step towards increasing the efficiency of transactions on the Ethereum blockchain and reducing transaction fees.

"Increased efficiency and a reduction in fees should lead to further growth in the development of applications on the platform," he says. "Increased utilization of the network is good for long term growth and price gain of its native currency."