What Is the Ethereum Shanghai Upgrade? All You Need to Know

2023/04/05 07:27:39

The highly anticipated transition of the Ethereum network from proof of work (PoW) to proof of stake (PoS) has finally come to fruition with the completion of The Merge. Proponents have praised the implementation for its energy-efficient approach, which could stimulate positive deflation. However, skeptics have expressed concern that the novel system might compromise the decentralized nature of the cryptocurrency and render it vulnerable to fresh forms of attack.

The next update coming up soon is the Shanghai upgrade, and there’s much excitement and trepidation among crypto investors - especially ETH stakers, as its date nears. The Shanghai update (EIP-4895) will let ETH validators unlock their staked ETH from the network. To put this in numbers to give you a clearer picture of just how significant this upgrade is, to date, there are more than 17 million ETH staked by over 550,000 validators.

When Is the Ethereum Shanghai Upgrade?

The Shanghai upgrade, scheduled for April 12, 2023, will make all the staked ETH and corresponding rewards accessible, significantly boosting ETH liquidity in the crypto market.

To refresh your memory, ETH staking began as far back as December 2020 when the Beacon Chain started supporting this feature. Several validators and liquid staking protocols have begun participating in staking ETH since then, locking up a minimum of 32 ETH on the network to become validators.

The Beacon Chain will undergo a simultaneous Capella upgrade along with the Shanghai upgrade. The Capella upgrade to the Beacon Chain will let validator nodes with staked ETH fully prepare for the Shanghai upgrade. They must update their withdrawal keys and broadcast this information following the Beacon Chain’s Capella upgrade.

Ethereum 2.0 Network Roadmap

The road to a complete Ethereum 2.0 consists of a number of milestones and phases, each bringing new functionality and features to the network.

The roadmap consists of three main phases, namely:

Phase 0: Beacon Chain (live)
Phase 1: The Merge (live)
Phase 2: Sharding (2023-2024)

The first phase of Ethereum’s upgrades was none other than Beacon Chain, which introduced PoS to the network. This upgrade first launched on Dec 1, 2020, and later formalized PoS transition on Sep 15, 2022 through The Merge. This feat is often compared to landing on the Moon in terms of difficulty.

The Merge made the Ethereum network much more energy efficient as it no longer required miners that consumed large amounts of electricity. This is also the time when users started staking their ETH coins. Last but not least, The Merge has set the stage for future upgrades to the scalability of Ethereum, such as sharding.

The third major upgrade phase is Sharding. Sharding introduces horizontal database scaling, which will divide the burden of handling huge amounts of data caused by layer 2 rollups. This upgrade will reduce the cost of storing data by reducing the hardware requirements, thus enabling anyone to become a validator. This would, in turn, mean more decentralization, and more security.

While the aforementioned phases are large upgrades that will drastically affect how Ethereum network works, each of them will have a series of smaller upgrades — one of them being the Shanghai upgrade, which will allow users to unstake their ETH tokens.

After The Merge: Ethereum Shanghai/Capella Upgrade

The Merge event in September 2022 saw the Ethereum mainnet migrate from the PoW consensus to PoS following the linking of the PoS Beacon Chain with the mainnet. This was one of the most awaited developments in the Ethereum ecosystem and helped significantly reduce the blockchain’s energy consumption levels - one of the biggest pain points that Ethereum had faced criticism for over the years.

The Merge was a foundation for upcoming network scalability improvements in the Ethereum ecosystem, including sharding, which can only be achieved under a PoS consensus model. Sharding entails splitting the blockchain into smaller independent shard chains to enhance transaction throughput and alleviate network congestion. Ethereum's roadmap for ongoing development aims to implement sharding in the future phases.

But before sharding, a critical development in the Ethereum 2.0 roadmap is the ETH Shanghai upgrade. This is yet another much-anticipated development and is being watched closely by supporters of the network and the overall industry.

All About the Ethereum Shanghai Upgrade

In April 2023, the Ethereum network is set to undergo the hard fork known as the Ethereum Shanghai upgrade, which will introduce some desired new features. This network upgrade will allow stakers and validators to withdraw assets from the Beacon Chain, one of the most significant implications is the ability to withdraw more than 17 million staked Ether, currently valued at over $28 billion.

The new protocol will follow Ethereum Improvement Proposal-4895 (EIP-4895), which enables validators to withdraw staked tokens. Since the Merge, validators have been critical to the blockchain platform by staking ETH and helping to secure the mechanism.

Validators that stake 32 ETH in the chain participate in validating blocks and increase their likelihood of receiving block rewards. The Merge required validators to lock up their ETH and any rewards they earned until a later chain update.

Following the Ethereum Shanghai/Capella update, validators can withdraw staked assets without worrying about locking up a significant sum of money indefinitely. However, some analysts view it as unlikely that validators will choose to withdraw their staked tokens, given Ethereum’s dominance in the DeFi space and strong staking yield.

Note: EIP stands for Ethereum Improvement Proposal, which represents a protocol that allows developers to (as the name implies) propose new features and solutions to the Ethereum network.

Shanghai/Capella Upgrade Benefits

There are three main reasons the Shanghai/Capella upgrade will benefit users, namely:

Reduced Gas Fees on Ethereum Layer2 Networks

The first way users can benefit from this upgrade is the reduction in gas fees for layer2 solutions. Projects run on top of Ethereum, and the reduction in gas fees is a welcome benefit. Layer2 solutions are already created for the purpose of reducing gas fees and increasing usability of the network — and this upgrade will further these ideas.

Stakers Can Release Locked ETH

Before this upgrade, users that wanted to stake their ETH and validate transactions had to pledge a given sum of ETH into a deposit-smart contract. These ETH would remain locked in even after the Merge. The Shanghai upgrade looks to allow stakers to release their locked ETH coins, allowing everyone to access their pledged funds.

Validators wishing to unstake ETH after the Shanghai upgrade fork can create a “withdrawal credential” to unstake any rewards earned in the last few years or exit the Beacon Chain altogether by unstaking all 32 ETH valued at around $150,000 at its peak.

The upcoming Ethereum Shanghai upgrade can potentially affect those who have staked Ether on the Ethereum network. The proposed hard fork, slated for April 2023, will enable validators who stake ETH to withdraw their tokens, which could have significant implications given the current value of all staked Ether, which exceeds $28 billion.

Paves the Way for New Advancements to Ethereum Network

Ethereum is the first smart contract-supporting network, as well as the largest one. This means that it paves the road ahead not only for itself, but for other blockchains as well. The Shanghai upgrade looks to further this goal by allowing further advancements on the network.

How Will the Shanghai Upgrade Impact ETH Price?

The upcoming Ethereum Shanghai/Capella upgrade is expected to significantly impact the market more than the previous technological overhaul known as the Merge, which was a pure technological shift with no direct economic impact.

OrBit Markets warns that Ethereum's Shanghai upgrade will change ETH’s supply and demand in the short and long term and could significantly impact ETH prices. The supply of ETH is expected to increase by $28 billion due to withdrawals and sales following the upgrade, potentially leading to considerable selling pressures on the ETH price.

While the entire staking balance of more than 17.7 million ETH cannot be withdrawn on the day of the upgrade, more than 1 million ETH in staking rewards, accumulated over two years, can be instantly taken out, creating additional liquidity in the market.

Total Amount and Percentage Staked by Cryptocurrency

The ETH Shanghai upgrade is crucial in establishing a completely decentralized, scalable, and secure Ethereum infrastructure.

As a result, Ether could turn volatile in the days leading up to the event, with the market endorsing fears of post-upgrade price turbulence.

However, despite a large dollar value standing behind staked ETH, the actual percentage of total supply staked is significantly lower compared to other networks that allow for staking.

How Does the Shanghai Upgrade Affect KuCoin Users?

KuCoin has been one of the first exchanges to introduce ETH 2.0 staking. As a result of that, many decided to use this KuCoin Earn feature and pledge their funds to validate Ethereum transactions and earn a profit from staking rewards.

With Shanghai Upgrade bringing unstaking to the market, KuCoin Earn will be launching ETH staking withdrawal function 7 days after the Ethereum Shanghai/Capella upgrades. Users will be free to redeem their ETH at the ETH 2.0 Staking page after the Shanghai upgrade.

Crypto enthusiasts can also trade the Shanghai-Upgrade tokens on the KuCoin Spot Market, and make the most of the volatility this development is driving in the crypto market.

What Comes After the Shanghai Update?

Although the Shanghai upgrade is relatively minor in terms of technical scope, more substantial improvements to the Ethereum ecosystem are expected in 2023. Among these is EIP-4844, which aims to split the Ethereum chain into multiple shards to boost scalability.

Initially considered for inclusion in the Shanghai update, this proposal was ultimately postponed to a later date. Additionally, other upgrades are anticipated to improve the Ethereum Virtual Machine and other aspects of the network. Future upgrades to the Ethereum network will also focus on bringing down the cost of transactions, offering better user experience, and improving the network’s security. These developments could further herald Ethereum as a scalable, sustainable, and highly capable ecosystem to drive mainstream adoption of Web3.