Summary
The Shanghai Ethereum update (EIP-4895) will allow ETH stakers to withdraw their incoming staking funds as validators. After the implementation of Proof of Stake, users can stake 32 ETH to become a network validator, but the funds are locked indefinitely.
This update is likely to affect the percentage of ETH that goes into staking out of the total supply. In turn, this will affect demand and supply.
Introduction
For Ethereum stakers, the Shanghai update represents a long-awaited change to Ethereum's Proof of Stake consensus mechanism. In addition to its impact on staking, this update is also likely to have some impact on market demand for ETH. So, if you have already staked ETH, are considering it, or are simply holding ETH, you should understand the Shanghai update and its impact on your portfolio.
What Is the Shanghai Ethereum Upgrade?
In September 2022, Ethereum completed its switch to a Proof of Stake (PoS) consensus mechanism. Previously, Ethereum used Proof of Work (PoW) and mining mechanisms to process and validate transactions. Users who wish to participate in validation on the network can now stake 32 ether (ETH) instead of solving a computational puzzle using dedicated mining equipment.
Since the Merge, which combined the Ethereum mainnet with the PoS Beacon Chain, users have not been able to withdraw their staking funds. The Shanghai update (EIP-4895) resolves this issue and adds withdrawal functionality. On January 5, 2023, Ethereum developers agreed to implement this upgrade as a network hard fork in March 2023. Users will be able to test this update with the implemented public test network with Shanghai in late February 2023.
What is Ethereum staking?
With Ethereum's switch to PoS, users can stake ETH as part of the network's consensus mechanism. PoS offers an alternative to high energy consuming PoW mining systems such as the Bitcoin network. Users can temporarily lock 32 ETH to run creator validator nodes that help secure the network and validate transactions.
Each validator receives new blocks created by other validators on the Ethereum network. Once the transactions and block signatures are checked, the validator proves the block's validity. With the Shanghai upgrade, stakers will now be able to withdraw their locked ETH. Previously, this feature was not available after the launch of Beacon Chain in December 2020.
What is the Ethereum Enhancement Proposal (EIP)?
EIPs are improvements or changes to the Ethereum network and how it works. Anyone can create an EIP by following the submission format, then send it to the developer community and board for review. EIP technical changes must be approved to be part of an update. EIPs also follow a specific numbering system. The Shanghai upgrade is called EIP 4895.
How Will Ethereum's Shanghai Update Impact Me?
The exact impact of the Shanghai update will depend on your situation. If you have staked ETH directly with Ethereum or via a staking product, then you will now be able to withdraw your funds. Note that not everyone stakes 32 ETH directly. Most users stake smaller amounts on liquid staking platforms.
For traders, one of the biggest questions is the possible impact on the price of ETH. Of course, there is no definitive answer to this. At the time of writing this article, 13.81% of all ETH tokens are in staking based on Reward Staking. Allowing withdrawals opens up a huge amount of liquidity. ETH owners who staked now also have the ability to withdraw and sell their staked holdings. For most traders and investors, the percentage of coins staking out of the total supply will be what they monitor.
On the other hand, staking against ETH may be more attractive to users due to its increased liquidity. Users who do not wish to use liquid staking protocols will now have the opportunity to stake ETH directly with Ethereum. This may result in demand for ETH due to increased staking conditions.
For users who own liquid staking platform native tokens, there may also be an impact on the price. The reason is that opening Ethereum withdrawals removes the unique functionality offered by liquid ETH staking.
Overall, enabling withdrawals from staking will encourage a freer ETH market. ETH holders can react to staking demand and supply to achieve market balance. This should be considered a positive impact, as it reduces the impact of artificial controls on the price and circulation of ETH.
Closing
The Shanghai update enables features that are important for Ethereum stakers or users considering staking. Along with Merge Ethereum, this feature is one of the most anticipated for users who have been patiently waiting for the fully functional Proof of Stake mechanism. While its potential impact on the market is uncertain, anyone dealing with ETH would do well to understand this update along with its offering.
Further Reading
What Is Arrow Glacier Ethereum Upgrade?
The Ethereum Merge Upgrade: Everything You Need to Know
What is Ethereum's London Hard Fork?
