At 22:27 UTC, the blockchain upgrade, also referred to as "Shapella," was activated, enabling the network to handle withdrawal requests.
Ethereum's highly anticipated Shanghai hard fork, known as "Shapella," has been successfully completed, ushering in a new era of staking withdrawals for users who have staked their ether (ETH) to validate transactions on the blockchain.
The Shanghai upgrade was activated at 22:27 UTC and finalized approximately 15 minutes later at 22:42 UTC. According to beaconcha.in, around 285 withdrawals worth approximately $10 million had been processed in epoch 194,408, just 30 minutes after the upgrade went live.
The hard fork, which is essentially an upgrade that creates a new blockchain, has been hailed as a significant milestone by members of the Ethereum community, as it marks the completion of the network's multi-year transition to a full proof-of-stake system.
In a proof-of-stake setup, users stake their cryptocurrency as a form of security to help validate new data blocks. Although the blockchain moved away from its original proof-of-work consensus mechanism – the same one used by Bitcoin – last year, until now, users have been unable to withdraw their staked ether or redeem earned rewards, a crucial feature of the new paradigm.
At the time of the Shanghai hard fork activation, the price of ETH remained largely stable, while approximately 4,000 people tuned in to the Shapella Mainnet Watch Party hosted by Ethereum Cat Herders.
During the livestream, Ethereum co-founder Vitalik Buterin noted that the most challenging aspects of the Ethereum protocol's transition to proof-of-stake had been completed, adding that the next major challenge will be to improve scaling to make transactions faster and cheaper.
Buterin emphasized the importance of fixing scaling issues before the next bull run, saying that failure to do so could lead to users paying $500 per transaction. He also underscored the significance of Verkle Trees, a data structure designed to enhance Ethereum's scalability, stating that the absence of Verkle Trees before the next bull run would be a relatively minor problem compared to high transaction fees.
Market analysts in the digital-asset space have been speculating for several months about the potential impact of the Shanghai hard fork on the cryptocurrency market. Some have wondered whether the successful completion of the upgrade would trigger a significant price rally, while others have expressed concerns that stakers may withdraw their ETH and flood the market with sell orders, leading to a sharp price crash.
Understanding the Role of Validators and Staking in Blockchain Technology
The Ethereum blockchain underwent a significant change during the "Merge" hard fork, which replaced the proof-of-work (PoW) consensus mechanism with proof-of-stake (PoS) and introduced a new class of "validators" responsible for maintaining the network's operation. By shifting to PoS, Ethereum's energy consumption decreased by 99%, and developers believed that the network would become more secure and decentralized.
According to Ben Edgington, product lead for Teku, a ConsenSys Ethereum client, the goal has always been to create an Ethereum network that comprises many solo node operators rather than a few large data pieces. Edgington added that PoS enables this design, which is a significant improvement over PoW.
However, Vitalik Buterin wrote in a November 2020 blog post that PoS may lead to "higher wealth concentration over the long term." This is because validators only need ether to stake and can acquire more ether through staking, whereas PoW requires outside resources to earn ether. As a result, Buterin suggested that PoS "coin distributions risk becoming more and more concentrated" over time.
To participate in block validation and protect the Ethereum network, validators must stake a minimum of 32 ETH, which is sent to a smart contract where the funds are locked. The greater the amount of ETH a validator stakes, the more likely they are to be assigned the task of proposing a block of data transactions to be verified on the blockchain. If a validator proposes a block that is approved by other validators, they receive an additional reward.
When the PoS chain was first launched, 32 ETH was valued at around $15,000. Since then, ETH has increased significantly in value and now stands at around $58,000, prompting speculation that some investors may sell their ETH to lock in profits.
Not all investors have the resources to stake a full 32 ETH. Liquid staking providers emerged as an alternative, allowing users to contribute any amount of ETH they want to participate in the staking process, with third-party providers staking the ETH and running the validator on behalf of the collective clients. The largest liquid staking provider is Lido, which controls around 23% of all ETH staked, while some of the world's largest crypto exchanges, including Coinbase, Kraken, and Binance, control another 22% of staked ETH.
Unstaking Enabled After Successful Shanghai Hard Fork Upgrade on Ethereum Blockchain
There are two main types of unstaking for validators: partial withdrawals and full withdrawals. A partial withdrawal allows stakers to take out their earned rewards while leaving the original staked ether in place. To perform a partial withdrawal, solo stakers running their own validators must migrate their credentials to a 0x01 withdrawal credential. After the Shanghai hard fork upgrade was triggered, partial withdrawals became accessible, but the queue for withdrawals could take hours as Ethereum can only process 16 partial withdrawal requests in a single slot.
According to Barnabas Busa, a DevOps Engineer at the Ethereum Foundation, during the first few epochs, there most likely won't be any partial withdrawals because the first few hundred validators are all 0x00, meaning that they joined the network when the Beacon Chain went live and thus have the old withdrawal credential set. Full withdrawals, on the other hand, allow validators to fully unstake their 32 ETH and any rewards they have accumulated and stop participating in the block validation process.
Full withdrawals require validators to send a message to the blockchain to get added to the queue, as they do not happen automatically. Staking services have their own timelines for the release of staked ETH withdrawals. Coinbase has said that they will start processing withdrawal requests for their stakers about 24 hours after the Shanghai hard fork is complete, while Lido has stated that stakers won't be able to retrieve their withdrawals until the protocol goes through another upgrade in May.
Is there a selling pressure currently present?
Since the launch of the Beacon Chain in December 2020, over 18 million ETH has been staked, which accounts for roughly 15% of the total ETH supply. With the recent launch of the Shanghai upgrade, approximately 1.1 million ETH in accrued rewards is now eligible for immediate withdrawal.
Concerns have been raised by market analysts that the unlocking of staked ETH on the Beacon Chain could trigger stakers to rapidly sell their tokens, leading to potential market volatility.
Celsius Network, a financially troubled crypto lender, may need to sell its staked ETH balance of 158,176 ETH to recover some funds for its creditors. Kraken, a US-based crypto exchange, has agreed to shut down its staking operations to settle SEC charges, which may require the unstaking of all 1.2 million ETH in their possession.
However, some market analysts predict that the selling pressure for ETH will likely be spread over several days due to the withdrawal queue, which will give buyers an opportunity to observe and analyze the selling pressure.
In addition to the staked ETH withdrawals, the Shanghai upgrade introduces four Ethereum Improvement Proposals (EIPs) that aim to enhance gas fees for developers.
One of the EIPs, EIP-3651, provides access to the "COINBASE" address at a lower gas cost, which could potentially improve Maximal Extractable Value (MEV) payments for users.
Another EIP, EIP-3855, introduces "Push0" code to reduce gas costs for developers.
EIP-3860 caps gas costs for developers using "initcode," a code utilized for smart contracts.
Lastly, EIP-6049 notifies developers of the depreciation of the "SELFDESTRUCT" code, which helps reduce gas fees.
