What will the Shanghai upgrade bring

Foreword

After 8 years since genesis, Ethereum finally ushered in a major upgrade. On September 15, 2022, Ethereum officially migrated from Proof of Work (PoW) to Proof of Stake (PoS), which means that the Beacon Chain is merged with Mainnet. This is a milestone that bears high expectations from the public and is highly valued by the Ethereum community. It is regarded as the most important event in the history of the crypto space. The Merge will significantly reduce the energy consumption of PoW and improve the consensus of the community, marking a great stride toward a green energy future.

The Merge is now completed successfully. Following that, Ethereum developers will work towards the next major step, the Shanghai upgrade, which would be the first and most expected upgrade after The Merge.

However, since Ethereum developers have not yet reached a consensus on the details of the Shanghai upgrade, it has been suspended (for about two or three weeks). During this period, core developers will continue to discuss what features will be included.

But given that ETH staked on the Ethereum blockchain has reached tens of billions of dollars, the suspension will not last long. It is the paramount concern of the general public about when they can withdraw their assets. The core development team is still discussing whether to unlock the staked ETH and enable the withdrawal service after the Shanghai upgrade. What is certain now is that users will gradually lose their confidence in Ethereum due to the delayed unlocking time, which does no good to its sound development. It is all up to the Ethereum development team about what features are to be included in this Shanghai upgrade.

What is The Merge?

Before introducing the Shanghai update, we’ll first have a brief review of PoS, providing a clearer understanding of the significance of the Shanghai upgrade in the entire roadmap.

PoW lags behind PoS that Beacon Chain already uses

Ethereum had been using the PoW mechanism to verify the correctness of transactions and smart contracts since its inception. However, with an increasing number of users and applications on Ethereum, the PoW mechanism that could only process 15 transactions per second (TPS) can no longer meet the demand.

To address the problem, the development team proposed an alternative solution. As a result, the Beacon Chain that uses the PoS mechanism came into existence on December 1, 2020. The Beacon Chain is a blockchain that runs in parallel with the Ethereum PoW chain to ensure continuous, uninterrupted operation. It was created to execute the transition from PoW to PoS and to maximize the difficulty bomb so that all hardware and computing power will be unfeasible.

The graph below shows a list of the cryptocurrencies that were mined by hash rate in May 2022.

GPU Mineable Coins 05/2022, By Bitproit

The difficulty bomb makes it impossible to mine on Ethereum using PoW

Before Ethereum transitioned from PoW to PoS, it created the difficulty bomb to deter miners who wish to continue PoW mining once the network migrated to PoS. The difficulty bomb works by exponentially increasing the difficulty of PoW mining over time and eventually making it impossible to produce blocks on Ethereum.

The difficulty bomb is created by reprogramming the blockchain to increase the difficulty of computing power. Under this mechanism, when a predefined block number is reached, for every 100,000 blocks generated, the time to generate a block will get exponentially increased. As a result, the difficulty to produce blocks will increase infinitely and eventually make it impossible to produce one. PoW miners used computing power to compete with each other for rewards, while PoS miners get rewards by staking assets.

2016-2022 ETH Hash Rate and Mining Difficulty Statistics, By Glassnode

PoS supersedes PoW

PoS was first put forward in the BitcoinTalk forum in 2011. In the original Ethereum whitepaper, Buterin stated that Ethereum will eventually adopt PoS in the future. Compared to PoW, PoS is less energy-intensive, eco-friendly, deflationary, and decentralized. All of these advantages make it inevitable for Ethereum to implement this major upgrade.

Burning Ethereum, By Ethereum

Simply put, the PoS consensus mechanism will make the entire network secure, friendly, and sustainable. After The Merge, Ethereum will transition to the PoS mechanism, where users need to stake ETH in the protocol as collateral. If a node committed fraudulent behaviors and intended to attack the network, the staked ETH on the chain will be destroyed directly, which makes the 51% attacks exponentially more costly for attackers compared to PoW. Consequently, the security of the protocol is improved.

Having switched to PoS, staking ETH becomes the means for validators to jointly maintain network security. Expensive hardware is not needed any longer; energy consumption will be greatly reduced, and sustainable development will be placed an equal emphasis. All of these improvements are preparing the ground for future scaling solutions.

The Present of the Shanghai Upgrade

PoS staking unlocked

Developers get a short break in the few weeks after The Merge. After that, they will work on figuring out what features should be included in the Shanghai upgrade. As of mid-September, Ethereum had accumulated digital assets worth tens of billions of dollars, the number of network validators had reached 430,000, and the total number of staked ETH had reached 14.45 million.

However, at present, the staked ETH remains locked on the Ethereum network. When it can be withdrawn is the most wanted concern of stakers. If the withdrawal service is not enabled or the predetermined unlocking time is postponed, again and again, users may lose the motivation to become a validator and new users will be discouraged from staking. This may have an adverse impact on the future development of Ethereum and network security.

Considering this, Ethereum core developer Marius Van Der Wijden announced that the staked ETH withdrawal should be addressed in the Shanghai upgrade.

Shanghai upgrade: What’s next?

Micah Zoltu, another developer, said that the biggest problem with the upgrade is that the community has not reached a consensus yet. Everyone has a different list and feels that their proposals are the most urgent. Besides enabling the function of withdrawing staked ETH in this Shanghai upgrade, some additional updates are expected to be included:

1. Ethereum Virtual Machine (EVM) update: EVM is the underlying mechanism of Ethereum that developers rely on. It defines the rules managing how blocks interact on the network. According to Marius Van Der Wijden, the update before The Merge will make the test 10 times more complex than post-Merge, making it rather hard for the whole upgrade. It is expected that after The Merge, the EVM, which hasn’t had any updates in the past two years, will be updated.

2. Proto-danksharding update: Proto-danksharding, also known as EIP-4844, is connected with the Rollups scaling solution. It is a proposal to implement the logic, transaction formats, and verification rules that make up a full Danksharding specification. Proto-danksharding introduces a new feature - a transaction type called blob-carrying transaction, in which blob is short for Binary Large Object. It is unique as it carries an extra piece of data called a blob. The data on Rollups can be verified by sampling the small block data and gas fees on the Rollup chain can be reduced, making it easier for Rollups to scale massively while reducing transaction costs significantly.The update also improves the speed and ease of verifying large amounts of data for Ethereum Layer 2 networks such as Optimism and Arbitrum.

Asset dropping, staked assets withdrawn only after the Shanghai upgrade

The next major event for Ethereum after The Merge is the Shanghai upgrade, after which the staked ETH will be unlocked successively, according to the official announcement by Ethereum. The Shanghai upgrade is expected to take place 6~12 months after The Merge.

However, it still remains unclear when the Shanghai upgrade will happen and how long it will last. Influenced by the overall economic downturn this year, coupled with the depressed financial markets due to the Federal Reserve’s shrinking balance sheet and interest rate hikes, the traditional stock market and cryptocurrency space encountered a significant dip. Even though the merged Ethereum is a positive signal for the market, the ETH price is still falling, making the assets of stakers devalued. And stakers can do nothing about this but wait until the Shanghai upgrade to withdraw. Staked ETH is locked and may continue to depreciate. This situation will change only after the Shanghai upgrade.

By TradingView

Conclusion

Unlocking staked ETH is the top priority

The next major event for Ethereum following The Merge is the Shanghai upgrade. However, many issues still remain uncertain as team members hold different views regarding critical issues, including the specific time to carry out the Shanghai upgrade and the features to be included. Investors and stakeholders all hope that the Ethereum team can enable the service of unlocking the staked ETH during the Shanghai upgrade as scheduled, so as to alleviate public panic caused by the recent ETH price drop.

A complicated testing process

Technically, the more features to be included in the Shanghai upgrade, the more complicated the upgrade will be and, what’s worse, the delay in the upgrade schedule.

Ethereum core developer Marius Van Der Wijden said that many people only look at the surface and think that not all features in the Shanghai upgrade need to be implemented and tested. But the question is that each additional upgrade change needs to be tested individually. It is also necessary to test how each change will interact with the other. In other words, if the number of features to be included in the Shanghai upgrade increases, the testing workload will increase exponentially.

Subject to the official announcement of Ethereum

At present, the Ethereum development team suspends the Shanghai upgrade that was scheduled to be implemented within 6~12 months. The Ethereum team needs to first reach a consensus on what features to be included and estimate the according time required. It would be better to provide a definite answer after a consensus is reached within the community. Though it is impossible to estimate how long it will take to complete the Shanghai upgrade currently, it is expected to take place in 2023. Just stay tuned.