What is the Ethereum Shanghai Upgrade?

The second-largest cryptocurrency in the world by market value, Ethereum, is expecting another update to happen in April 2023. It’s called the Shanghai Upgrade. The Ethereum network’s transaction fee market has long been a concern, and this upgrade seeks to remedy it.

At first, it was thought that the upgrade to Shanghai would happen in late March 2023. Now, it’s likely that it will happen in the first two weeks of April. The delay was announced at an Ethereum developer meeting on March 2, 2023. In this article, we’ll look more closely at the Ethereum Shanghai Update, including its benefits and possible impacts on the cryptocurrency market.

What is the Ethereum Shanghai Update?

With the Shanghai Upgrade, users of Ethereum will be given the option to withdraw both the ETH they have already staked on the network, and any staking incentives they have accrued that will be deployed as a hard fork. These will fundamentally alter the Ethereum network.

How to Understand Ethereum Staking Withdrawals

Staking Ethereum is a method of supporting the network and earning incentives by locking up a specific quantity of ETH. When you stake your ETH, you become a validator, which means you are accountable for transaction verification and network security. Validators are compensated with new ETH tokens for their efforts.

You cannot withdraw your ETH immediately after staking it. During the lockup period, your ETH is locked and cannot be used for any other purpose. This lockup period is necessary to protect network security and prevent fraud.

When to Cash Out Your Ethereum Staking Rewards?

You can withdraw your staking earnings once the lockup period is over. The Ethereum staking lockup duration is 524,288 blocks, or approximately 6.4 days. After this time, you will be able to withdraw your rewards.

It should be noted that you cannot withdraw your staked ETH until the Ethereum 2.0 network is fully operational. Because the Ethereum 2.0 network is still in its early stages, not all of its functionalities are yet available. You can withdraw your staked ETH once the network is fully operational.

How to Cash Out Your Ethereum Staking Rewards?

It is simple to withdraw your Ethereum staking rewards. Here are the steps you must take:

1. Connect to your staking wallet: You must link to the staking wallet where your ETH has been staked.
2. Check your rewards balance: After connecting to your staking wallet, you can view your rewards balance.
3. Withdraw your rewards: Follow the instructions provided by your staking wallet to withdraw your rewards. The procedure may differ depending on the wallet you choose.

Those that construct blocks and check that the network’s blocks and transactions are accurate are known as validators, also referred to as nodes. They put up a stake of 32 ETH, which may be sliced (taken away) if they don’t act in the network’s best interests, to make sure they are operating honestly. This stake is placed on the Beacon chain, an Ethereum Proof of Stake chain, where it is locked. They may be compensated with stake incentives for providing this service.

Ethereum’s Proof of Stake Chain is known as The Beacon Chain

Ethereum was primarily a proof-of-work (PoW) blockchain, similar to its forerunner, Bitcoin, for most of its existence. However, Proof of Stake (PoS) was introduced to the network in December 2020 with the creation of Ethereum’s Beacon chain.

When it was first made available, the Beacon chain coexisted with the main PoW chain rather than replacing it. 32 ETH can be staked to participate in the Beacon chain validation process and strengthen the PoS alternative to Ethereum’s security. This made it possible for developers to test a PoS consensus system’s functionality before fusing the Beacon chain with Ethereum’s main net. With this modification, Ethereum’s PoW network officially became a PoS network in September 2022, during an event known as “The Merge.”

While allowing users to gain ETH rewards for staking on the Beacon chain, validators (or stakers who might not own their node) were unable to withdraw their ETH deposits or claim their prizes. Despite this, by March 2023, there were more than 17.5 million ETH locked in the Beacon chain contract equivalent to almost $27B.

You can find the contract here: https://etherscan.io/address/0x00000000219ab540356cbb839cbe05303d7705fa

Source: cryptoquant.com

The Withdrawal Process in Details

Shanghai will enable two types of withdrawals: partial withdrawals and full withdrawals.

A validator will be permitted to get any ETH, generally, the staking rewards, that are more than the 32 ETH staking requirement during a partial withdrawal. As long as the validator has their withdrawal credentials set to an Ethereum address, they are automated.

In a full withdrawal or unstaking, a validator may remove both the staking rewards and their full 32 ETH stake from the Beacon chain. Unlike partial withdrawals, the process is not automatic, and there is a limit to the number of validators that can perform a full withdrawal per epoch (defined as 32 blocks). In fact, validators who want to fully withdraw their stake must wait in an “exit queue” before completing this function. In other words, all staked ETH cannot be withdrawn simultaneously, which would otherwise disrupt the performance of the blockchain.

Understanding the Transaction Fee Market in Ethereum

The Ethereum Shanghai upgrade is expected to dramatically cut Ethereum network gas expenses. The upgrade will equalize block size and improve network call-data efficiency. As a result, transaction costs will be reduced, making it more economical for users to transact on the network.

The lower gas fees will benefit specialized networks built on a layer-2 like Polygon, making horizontal scaling more efficient. This will distribute demand and lower gas prices for customers throughout the ecosystem. This is a significant win for the Ethereum network because it will help it to scale more effectively while also lowering transaction fees for users.

Fee Reductions and WARM Coinbase (EIP-3651) and other EIPs

The Ethereum Shanghai upgrade will also include a WARM coinbase, which will modestly reduce fees paid by major builders such as Flashbots and BloXroute. This is another significant victory for the network since it will assist in incentivizing developers to design new apps for the network. Lower costs allow builders to devote more resources to building new applications, allowing the network to grow and remain competitive.

Additionally, the upgrade will add a basic cost that will be algorithmically chosen according to network demand, guaranteeing that users pay a reasonable fee for their transactions.

A few more EIP will be added with the Shanghai Update:

• EIP-3855: PUSH0 instruction
• EIP-3860: Limit and meter initcode
• EIP-4895: Beacon Chain push withdrawals as operations
• EIP-6049: Deprecate SELFDESTRUCT

We won’t analyze those in this article because of their very technical and difficult explanation. They may require a very high level of knowledge for a good understanding. If you want to learn more visit: https://eips.ethereum.org/

Benefits of the Ethereum Shanghai Upgrade

The Ethereum Shanghai Upgrade is expected to bring several benefits to the Ethereum network, including:

• More Stable and Predictable Transaction Fees: The introduction of the base fee is expected to make the transaction fee market more stable and predictable. Users will no longer have to bid against each other to get their transactions included in the next block, which can lead to unpredictable and high transaction fees.
• Lower Transaction Fees: The base fee method is anticipated to reduce the typical transaction charge in the Ethereum network. Users will pay a reasonable charge depending on the network’s demand, and the burning process will reduce the total quantity of Ethereum tokens, perhaps causing the price of the token to drop.
• Deflationary Pressure on the Ethereum Token: The burning procedure is expected to put deflationary pressure on the Ethereum token’s value, which might eventually lead to an increase in its price. This may be helpful for investors and customers who hold onto their Ethereum tokens over the long run.
• Increased Adoption of Ethereum: The Ethereum Shanghai Update is anticipated to improve the Ethereum network’s effectiveness, affordability, and usability, which might enhance its acceptance as a platform for smart contracts and decentralized applications (dApps). As a result, there may be more programmers creating applications for the Ethereum network, creating a more dynamic and engaged ecosystem.
• Positive Feedback Loop: The Ethereum Shanghai Update is anticipated to provide a positive feedback loop that can boost interest in Ethereum coins even more. More users will be encouraged to utilize the Ethereum network as transaction costs drop, which might raise the demand for Ethereum tokens. The supply of the token may further drop if more users choose to hold onto their tokens rather than sell them in reaction to the rise in demand. This may trigger a positive feedback loop that gradually drives up the price of Ethereum.

What Does the Ethereum Shanghai Update Mean for the Future of Blockchain Technology?

Staking ETH enables users to participate in the security of a network while earning rewards for doing so. Before the Shanghai Upgrade, however, the stakes were locked as the rewards remained on the consensus layer. Shanghai enables the flow of assets from the consensus layer to the execution layer and thus allows stakers and validators to unlock their staked ETH and collect their rewards. This might lead to a better user experience overall and increased adoption of blockchain technology.

Additionally, the Ethereum Shanghai Update could have implications for the broader cryptocurrency market. If the burning mechanism leads to an increase in the value of Ethereum tokens, this could create a positive feedback loop, leading to greater demand for other cryptocurrencies as well.

How Will the Ethereum Shanghai Update Affect the Cryptocurrency Market?

One of the major worries about the upgrade is that it will result in the release of all the locked-up ether since the staking smart contract debuted in December 2020. When the beacon chain debuted, 17.5 million ether, which is worth over 25 billion dollars, had been deposited into it. At that time, eth was trading at 600, indicating that many early stakers may want to take profits.

There is a good possibility that many of the investors are having financial problems, and as you are aware, forced sellers are the worst kind of sellers. As a result, many investors may be forced to sell their equity positions as soon as possible to pay their obligations.

Will this selling pressure crash the price of ETH?

That’s not necessarily true, and not everyone will be able to withdraw their initial stake in Ethereum immediately. It’s important to take into consideration that people who didn’t stake during this period may consider staking now, considering that after the Shanghai upgrade, it is possible to withdraw without waiting for a long period of time, as you were an early staker.

A recent article from Cryptoquant.com analyzed how the Shanghai update could impact the price of ETH as follows: \

“We argue that there would be low selling pressure for ETH from staking withdrawals after the Shanghai upgrade. This conclusion derives from a profit & loss analysis of the ETH staked.

• We argue this mostly because: a) the majority of the ETH staked (60% or 10.3 million) is currently in loss (comparing the current ETH price to the price at the moment each ETH was staked) and b) the average depositor of the largest staking pools is also at a loss currently. Typically, selling pressure emerges when market participants are sitting on extreme profits, which is not the case right now for the ETH that has been staked.
• Moreover, most of the ETH staked that is in profit was staked less than a year ago and most of it is only up between 20-30%, a return that in the past has not been consistent with large profit-taking events (selling).”

Conclusion

The Shanghai fork is an upgrade that will allow ETH stakers to withdraw their staked ETH without restriction. Users expect this to happen in April 2023. All along, there have been expectations by the crypto community that the upgrade could lead to high selling pressure for ETH, the native token of the Ethereum blockchain.

The Shanghai Capella (also known as Shapella) upgrade to Goerli will be the final opportunity for Ethereum clients and staking providers to ensure that the Shanghai hard fork runs well when it releases on the mainnet.

Ethereum core developer and project coordinator Tim Beiko said, “For mainnet, we usually want to give people at least 2 weeks after the announcement,” and then “so imagine Goerli happens on the 14th, everything goes well, on the 16th, we agree to move forward with mainnet.”