Upgrade Shapella

Ethereum's Shanghai hard fork, also known as “Shapella”, has been completed, allowing withdrawals for users who have staked their ether (ETH) to secure and validate transactions on the blockchain.

The Shanghai upgrade was activated at 5:27 a.m. and completed at about 5:42 a.m. Vietnam time. Half an hour after the upgrade was activated, about 285 withdrawals in epoch 194,408 were processed, with a value of about 5,413 ETH (worth $10 million), according to beaconcha.in.

The hard fork has been described by members of the Ethereum community as a historic milestone, completing a years-long transition to a fully proof-of-stake network. In a proof-of-stake system, users “stake” cryptocurrency as a form of assurance to help secure and validate new blocks of data.

Last year, the Ethereum blockchain left behind the original proof-of-work consensus mechanism but until now users were unable to withdraw staked ether or redeem accumulated rewards, a key feature of the new model. The price of ETH remained largely unchanged at the time the hard fork was activated

Vitalik Buterin says that scaling – making transactions faster and cheaper – will be the next problem Ethereum needs to solve after Shapella.

Validators and staking issues

When Ethereum went through “The Merge,” the hard fork removed the old consensus mechanism from proof of work (PoW) to proof of stake (PoS). The project introduced a new type of “validator”. Although the PoS consensus mechanism has reduced Ethereum's energy consumption by 99%, developers also believe that under PoS, the network will be more secure and will allow for more decentralization.

To participate in the block validation process and secure the Ethereum network, validators must “stake” at least 32 ETH by sending them to a smart contract where the funds are locked. When a validator proposes a block and is approved by other validators, he or she receives additional rewards.

When the PoS chain was first launched, 32 ETH cost around $15,000. Since then, ETH has increased in price, currently around $58,000. It is therefore possible that some investors may choose to sell their ETH – to lock in profits.

Not everyone has enough ETH to be able to stake 32 ETH. So, liquid staking providers have become an alternative, where users who want to participate in the staking process can stake any amount of ETH they want and third-party providers will stake that ETH and run the validator on behalf of the customer collective.

Lido, the largest liquid staking service provider, controls about 23% of all ETH staked. Coinbase, Kraken and Binance, some of the world's largest cryptocurrency exchanges, control 22% of staked ETH.

Can be unstaked

There are many ways for validators to unstake, besides the two main options of partial withdrawal and full withdrawal.

  • Partial withdrawal: withdrawing the rewards they earned from staking but leaving behind the original amount of ether staked. Single individuals running private authenticators must convert their credentials to withdrawal credentials 0x01. Without it, partial withdrawals cannot take place automatically. However, Ethereum can only process 16 partial withdrawal requests in a single slot (occurring every 12 seconds). Depending on the number of requests that will occur, the withdrawal queue can take hours.

  • Full withdrawal: validators fully withdraw their 32 ETH and any rewards they have accumulated. By leaving the chain, the validator stops participating in the block validation process and stops contributing to the security of the network. Full withdrawals do not happen automatically, so those who want to exit must send a message to the blockchain to be added to the queue.

Staking services are having their own schedules to open staked ETH withdrawal services. Coinbase previously said it would begin processing withdrawal requests approximately 24 hours after Shapella is complete. Lido said stakers will not be able to withdraw until the protocol undergoes its next upgrade in May.

ETH selling pressure

Since Beacon Chain launched in December 2020, more than 18 million ETH have been staked (about 15% of total ETH supply). Now that Shapella is live, approximately 1.1 million ETH accumulated from rewards are eligible for immediate withdrawal. Market analysts have been concerned that unlocking the ETH deposited into the Beacon Chain could cause investors to rush to liquidate their tokens.

There could be additional selling pressure from companies facing financial pressures. Bankrupt crypto lender Celsius Network may sell 158,176 ETH staked to partially recoup creditors. Kraken, a US-based cryptocurrency exchange, recently agreed to stop staking operations to settle SEC fines, thus potentially having to cancel all 1.2 million ETH.

Some market analysts believe that ETH selling pressure may be spread out over several days due to queue participation.

Suggestions for improvement

While withdrawing staked ETH is the main focus of Shapella, there are also four small mechanisms for Ethereum (called Ethereum Improvement Proposals or EIPs) that will improve gas fees for developers.

  • EIP-3651: access to “COINBASE” address, a software used by validators (no connection to popular exchanges), with lower gas fees. Changing this code to blockchain could improve Maximum Extractable Value (MEV) payments to users.

  • EIP-3855: enable “Push0”, a code that will reduce gas fees for developers.

  • EIP-3860: limits gas costs for developers if they use ‘initcode’ (code used by developers for smart contracts).

  • EIP-6049: will notify developers about depreciating a code called “SELFDESTRUCT”, which also reduces gas fees.