Summary
Ethereum Shanghai Upgrade (EIP-4895) will allow ETH stakers to remove their staked funds as validators. Following Ethereum's implementation of proof of stake, users can stake 32 ETH to become network validators, but these funds will be locked indefinitely.
This upgrade may affect the proportion of staked ETH in its total supply, which in turn may affect the market supply and demand of ETH.
Introduction
The Shanghai upgrade is a change to Ethereum’s proof-of-stake consensus mechanism that has been long awaited by Ethereum stakers. In addition to the potential impact on staking, the upgrade may also have some impact on the market demand for ETH. Therefore, whether you have already staked ETH, are considering staking ETH, or just hold ETH, it is necessary to understand exactly what the Shanghai upgrade is and how it will affect your portfolio.
What is Ethereum Shanghai Upgrade?
In September 2022, Ethereum successfully completed the transition to the Proof of Stake (PoS) consensus mechanism. Prior to this, Ethereum used Proof of Work (PoW) and mining mechanisms to process and verify transactions. Users who want to participate in network verification now only need to stake 32 Ethereum (ETH) to do so, without the need to use specialized mining equipment to solve computational problems.
Since the merge combines the Ethereum mainnet with the PoS beacon chain, users are unable to remove their staked funds. The Shanghai upgrade (EIP-4895) aims to solve this problem and add a new withdrawal function. On January 5, 2023, Ethereum developers agreed to launch this upgrade in March 2023 as a network hard fork. Users will be able to test this update through the public test network implemented in Shanghai at the end of February 2023.
What is Ethereum Staking?
As Ethereum moves to PoS, users can stake their ETH as part of the network's consensus mechanism. PoS provides an alternative to the energy-intensive PoW mining system, which is still used by networks such as Bitcoin. Users can temporarily lock up to 32 ETH to run a creator validator node, helping to secure the Ethereum network and verify transactions.
Each validator receives new blocks created by other validators on the Ethereum network. After checking the transaction and block signatures, the validator proves the validity of the block. With the implementation of the Ethereum Shanghai upgrade, stakers will be able to withdraw their locked ETH. Previously, this feature was not available after the launch of the token chain in December 2020.
What is an Ethereum Improvement Proposal (EIP)?
EIPs are improvements or changes to the Ethereum network and how it operates. Anyone can create an EIP in a submission format and submit it to the community and developer committee for review. Technical changes to an EIP must be approved before they can be updated. In addition, EIPs follow a specific numbering system, and the Shanghai upgrade is also known as EIP 4895.
How does the Ethereum Shanghai upgrade affect me?
The exact impact of the Ethereum Shanghai upgrade will depend on your situation. If you have staked ETH directly using Ethereum or through a staking product, you will be able to withdraw funds after the upgrade is completed. Please note that not everyone stakes 32 ETH directly, and many users stake smaller amounts on liquid staking platforms.
A big question for traders is the impact this upgrade could have on the price of ETH. Of course, this may or may not happen. As of this writing, 13.81% of the total ETH supply is staked, calculated based on staking rewards. Once this upgrade is complete, users will be able to withdraw, which will unlock a lot of liquidity, and owners of staked ETH will have the right to withdraw and sell their staked assets. For many traders and investors, the percentage of staked ETH in the total supply will need to be monitored.
On the other hand, since the liquidity of staking ETH has been improved, it may be more attractive to users. Users who were originally reluctant to use the liquidity staking protocol will now have the opportunity to directly stake ETH using Ethereum. The improvement of staking conditions may trigger an increase in the demand for ETH.
For users who hold the native tokens of the liquidity staking platform, the price of their tokens may also be affected. The reason is that the opening of the Ethereum withdrawal function cancels the unique functionality provided by ETH liquidity staking.
In general, allowing the withdrawal of staked ETH increases the freedom of the ETH market, and ETH holders may respond to the demand and supply of stakes to achieve market balance. This move reduces the artificial control effect on ETH prices and circulation, and should be regarded as a positive impact.
Conclusion
The Shanghai upgrade provides a key feature for Ethereum stakers or users considering staking ETH. Along with the Ethereum merge, this upgrade is one of the most anticipated features for users who have been patiently waiting for a fully functional proof-of-stake mechanism. While its potential impact on the market is uncertain, it is necessary for anyone involved in ETH to understand this upgrade and the features it will provide.
Further reading
What is Ethereum Arrow Glacier Upgrade?
A comprehensive introduction to Ethereum merge upgrades
What is the Ethereum London Hard Fork?