Everything You Need to Know About Ethereum's Upcoming Shanghai Upgrade

One of the first anticipated Ethereum’s 2023 upgrades, Shanghai, is coming this March. It will enable network validators to release ETH that has been staked on the protocol's smart contract. This is the first time this functionality will be available since ETH staking began in 2020. Let's take a closer look.

What is the Shanghai upgrade

The Shanghai upgrade is a hard fork of the Ethereum network that could potentially impact the market value of the ETH cryptocurrency. This is because it allows validators to withdraw ETH from the Beacon Chain, which was previously impossible. With this update, the network becomes fully functional in terms of PoS consensus. Validators will not only be able to stake, but also withdraw the asset into a liquid state if necessary.

The Shanghai upgrade includes several Ethereum Improvement Proposals (EIPs):

• EIP-3651 reduces the cost of block creation.
• EIP-3855 improves transaction speed by introducing a new instruction for EVMs that optimizes the size and code of smart contracts.
• EIP-3860 optimizes transaction fees.
• EIP-4895 introduces a mechanism for withdrawing ETH coins from staking, which many validators have been eagerly awaiting.

The Shanghai upgrade represents a crucial step in improving Ethereum's network scalability. Further major upgrades are planned for 2023, including the introduction of sharding, which will segment the Ethereum network to significantly increase its scalability potential.

The date of the Shanghai upgrade

As for the release of the upgrade, there is no exact date yet, but the Sepolia testnet recently processed staked ETH withdrawals successfully. Another test is planned on the Goerli testnet before Shanghai is rolled out to the live network.

It appears that if everything goes smoothly, the Shanghai upgrade may not launch until the second half of March. In December 2022, developers tentatively set March as the launch date, but a more precise date will be determined after all testing of the upgrade is complete.

The selling pressure dilemma

As for the withdrawal of ETH from staking, validators will be able to withdraw all ETH received as rewards in the first few days, which is estimated to be close to 1 million ETH. However, given the current value of ETH and the fact that its price was as high as $4,000, there are concerns about a massive one-time drain of the entire volume. Investors understand that it may not be profitable to sell at the current price, especially after a long bearish trend, and they may wait for the price to increase further before selling. Therefore, there is much to look out for and expect in the future.

The withdrawal of ETH will not happen all at once but will occur gradually over time. The protocol will set limits on the amount of ETH that can be withdrawn over a certain period, with a daily limit of around 43,200 ETH after the Shanghai upgrade is implemented. Given the amount of ETH on exchanges, these volumes are unlikely to have a significant impact on the market price of the asset.

As of the beginning of March 2023, there are approximately 17,065,699 ETH in the staking, which represents about 14% of the total supply (122,373,866).

What's interesting is that the supply of staked ETH has increased by 1 million since the beginning of the year. During the first two months of the year, the average value of coins fluctuated around $1600 per coin, equivalent to $1.6 billion. Furthermore, there is a trend towards an increase in ETH staking.

According to CryptoQuant data the number of ETH is 18,277,733 on the end of January 2023. Even if hypothetically, 50% of coins were taken out of staking and sent to exchanges, the total supply on exchanges would still be about 27 million coins, which is just about the number of ETH on exchanges in March of 2022.

We all know the theory that increased supply would lead to a decline in asset value. However, in the crypto industry, outcomes can be unexpected. Big players could potentially buy back the entire supply, perhaps at current prices or by letting the price drop a bit. The overall market trend during the fork will be important.

Conclusion

The Shanghai upgrade will have a significant impact on Ethereum validators or those considering staking. This upgrade implements a full PoS consensus of the Ethereum project, allowing users to withdraw both staked ETH and the rewards they have earned.

I think that the expectation and how it is presented in information sources will have a bigger effect on the price, along with the presence or absence of FUD speculation on this topic. The exact impact of the Shanghai upgrade on the ETH price remains unclear, but it is assumed that it will depend on general market trends at the time of the fork implementation. In a bullish scenario, the market will absorb all the supply that will be withdrawn and sent to the exchanges without any notice. If the market returns to bearish sentiment, the new supply may cause turbulence in the market and lead to a decrease in price, depending on how it is covered.