Ethereum Shanghai Upgrade, scheduled for the second half of 2023, is the next major upgrade to the Ethereum network after the much-talked-about Merge in September last year.
The Ethereum Shanghai Upgrade will incorporate eight Ethereum Improvement Proposals (EIPs), that were discussed at a recent meeting of Ethereum developers. Among the most noteworthy improvements proposed are EIP 4844 (proto-danksharding), which will considerably increase network scalability, and a group of 5 EIPs that will modernise the Ethereum Virtual Machine (EVM).
- The Shanghai upgrade mainly proposes implementing EIP-4895, which will let validators withdraw ETH that has been staked since December 2020.
- As much as 14% of all ETH are currently staked, accounting for a total value of $26 billion for 16 million tokens.
- The Shanghai fork also has several other EIPs (Ethereum Improvement Proposals), primarily designed to reduce gas costs for Ethereum developers.
The Ethereum Shanghai Upgrade; Explained
Said, the Ethereum Shanghai Upgrade is expected to bring a number of essential improvements and fundamental modifications to Ethereum's EVM features. The Ethereum Foundation published a pre-Shanghai testnet set for official release on October 14, 2022. The Ethereum Improvement Proposals (EIPs), commonly known as "Shandong," will be tested and polished on this testnet before being released as part of the official Shanghai Update.
This is why the Shanghai Upgrade is Crucial:
It is significant for a number of reasons, which we’re going to list down below. It must be understood, nevertheless, that these are calculated assumptions based on the information at hand. We'll keep this section updated as we learn more about the change.
- Gas Fees: One of the main effects that the Ethereum Shanghai Upgrade is anticipated to have is a reduction in gas costs for layer-2 solutions that run on top of Ethereum, such as Polygon, Optimism, and similar ones. Using Ethereum is now quicker and less expensive thanks to these L2 solutions, and this improvement might even lower the cost of doing business on the Ethereum blockchain.
- Withdrawal of staked ETH tokens: Prior to the Ethereum Merge, everyone interested in being a validator in the new PoS Ethereum Beacon chain had to stake a particular amount of ETH to a deposit smart contract, and that stake was locked in with the contract, even after the Merge took place. However, with the Shanghai Upgrade, we might witness the lifting of the lock-in and allow people who have staked their ETH tokens to unstake them.
- Updates to smart contract infrastructure: The Shanghai Upgrade is expected to bring about another significant development in this area. As the largest blockchain network capable of smart contracts, Ethereum must continue to advance in development.
How will the Ethereum Shanghai Upgrade Affect Investors?
The Ethereum Shanghai Upgrade, as mentioned above, is the upcoming modification or advancement on the Ethereum blockchain network that is most anticipated. There are a few reasons why this is so eagerly awaited, especially in light of the Ethereum Merge that occurred on September 15, 2022, last year. However, there is one that will undoubtedly grab attention in the industry.
In other words, the Ethereum Shanghai upgrade, notably the EIP-4895, will allow ETH stakers to remove their staked funds as validators. This is crucial because, at the time of the launch of the proof-of-stake Beacon chain in December 2020, Ethereum network users who wished to participate in Ethereum 2.0 as validators had to stake a minimum of 32 ETH tokens, which were essentially going to be locked up for an infinite duration. These validators weren't able to withdraw their money at any time after you staked the 32 ETH tokens.
What impact will this action have on you, one could ask? That really relies on your circumstances or, more precisely, the type of player you are on the Ethereum network. You can now withdraw your staked ETH tokens and sell them if you want to if you are only a validator on the Ethereum PoS chain.
The Impact of the Shanghai Upgrade on ETH price
Continuing from the last concept, the situation is slightly different if you are a trader or investor in the ETH token. Although it is impossible to say for sure, the implementation of EIP-4895 may have certain effects on the token's price. This is because 14.09% of all eligible ETH tokens have been staked, according to data from Staking Rewards. Therefore, when staking withdrawals become available, a huge quantity of liquidity may flood into the open market, which might cause ETH prices to decline. However, that assumes that the entire 14.09% of ETH tokens will be sold off right away, which seems exceedingly implausible in hindsight. Therefore, it would be wise for traders and investors to closely check the proportion of ETH coins staked.
However, things might also go the other way, with ETH possibly becoming more appealing to users due to its increased liquidity. Those who choose not to use liquid staking protocols would now be able to stake ETH with Ethereum directly.
One major takeaway from this, though, is that while locking up coins helps to make the process safer, it might also be seen as an artificial means of control, and removing that cap might help restore more equilibrium and balance to the market.