Ethereum keeps unfolding new updates to enhance its robustness as a blockchain network. In 2022, it was the landmark 'Merge' upgrade, and this year, the Shanghai upgrade of Ethereum made the headlines.
The Shanghai upgrade can reportedly bring significant swings in the demand and supply of ETH and its related coins. And this is why you must know about this upgrade to make the most of the upcoming market volatility.
What is the Shanghai Upgrade of Ethereum?
The Shanghai Upgrade is a network upgrade of Ethereum that mainly aims to allow the withdrawals of staked Ether (ETH) deposited in the Ethereum smart contract from 2020. Before the launch of the Merge upgrade, some holders of ETH, who were willing to become the validators on the Ethereum 2.0 network, staked some ETH in the network. They did so despite knowing the network would lock their staked ETH for years.
The upcoming Shanghai upgrade will finally allow these validators to withdraw their staked ETH partially and entirely.
The Ethereum Developers have set April 12, 10:27 PM UTC (April 13, April 13, 3:57 PM IST) as the date and time for this Shapella upgrade.
Why did Ethereum lock the ETH of Validators?
As we all know, Ethereum used to operate on an energy-intensive Proof of Work Consensus Mechanism. However, it shifted to the Proof of Stake (PoS) Consensus in September 2022. This transition was a significant change for the Ethereum ecosystem and hence took place in several steps to avoid lots of substantial modifications happening at the same time.
The first crucial step of this transition was establishing the Beacon chain in 2020. The Beacon chain was a separate PoS blockchain layer that ran parallel with the main PoW Ethereum Blockchain. Since the Beacon chain worked on a staking-based algorithm, it needed enough ETH and validators for testing the PoS mechanism before merging with the main Ethereum blockchain.
And for this purpose, the early network participants of Ethereum willingly deposited their ETH tokens in large numbers. When the Merge upgrade took place to combine the Beacon chain with the main Ethereum Blockchain, the Ethereum developers decided to keep only the necessary steps in the upgrade to avoid any network issues. Due to this reason, they only merged both the blockchains and left the unlocking of Staked ETH for the next improvement.
The upcoming Shanghai upgrade will do this by unlocking the staked ETH network participants deposited in the Beacon chain for withdrawals.
How will this upgrade take place?
There will be two simultaneous upgrades, named Shanghai Upgrade and Capella Upgrade. These two upgrades combined are called Shapella Upgrade.
The Shanghai Upgrade is the name given to the execution layer upgrade that will allow users to-
- Stake their ETH
- Un-stake their ETH to have control of their entire ETH balance
- Earn automatically distributed ETH rewards
- And re-stake and start earning more rewards
But this will only be possible once Capella Upgrade, the consensus layer upgrade, completes successfully.
What would be the withdrawal process for staked ETH?
The Withdrawal of staked ETH would be of two types-
- Partial Withdrawal- Refers to the withdrawal of extra ETH above 32 ETH
- Full Withdrawal- Refers to withdrawing the entire balance and exiting from the ETH staking.
Both the above types of withdrawals would need the participants to provide a withdrawal address to the Ethereum blockchain. Ethereum blockchain would NOT allow changes in the withdrawal address once submitted. The validators should be extremely careful in giving an accurate withdrawal address. The network will not charge any fee for withdrawing staking rewards and staked ETH.
If someone opts for Full withdrawals and exits from the system, they would broadcast a "voluntary exit" message and provide their validator key. Once they complete all these requirements, their exiting will begin. The time it would take to complete the exiting process will depend directly on the number of other validators exiting at the same time.
A limited number of validators would be able to get partial or full withdrawals in a day after the Shanghai upgrade. The network came to a rough number of maximum possible ETH withdrawals a day through the below calculation:
Max No. of withdrawals processable in a single block = 16
Max No. of ETH blocks produced per day = 7200 (approx.)
Thus, max no, of Withdrawals processable in a day = 7200 *16 = 1,15,200
(assuming that no block slot is missed)
It means the maximum number of staked ETH Withdrawals ( partial and full combined) possible to be processed in a day is 1,15,200.
The validators who submit withdrawal addresses and opt for partial withdrawal will start getting the staking rewards automatically every few days.
How will Shanghai Upgrade affect the market?
Currently, only a one-way route for ETH exists because they can only go into the Ethereum smart contract, but their holders can not withdraw them. However, after Shapella Upgrade, the users can withdraw their staked ETH and even re-stake them whenever they want.
It means that those ETH holders who stake their ETH through depositing their ETH to big validators will be able to choose different validators offering higher returns. It will encourage ETH staking pool providers like Lido and Rocket Pool to offer competitive staking returns.
Moreover, since it will be the first time staked Ether will become withdrawable, a huge amount of ETH might enter the market. It can change the supply-demand market dynamics of ETH for a short time which can bring wild price swings in ETH price and its fork coins.
There also exists a strong possibility that the Shanghai upgrade will prove the efficiency of Ethereum 2.0 by streamlining the staking process for Ethereum. Ether (ETH) might experience a positive price change in that case. If you are also in favor of this possibility and willing to take advantage of it, you can buy ETH in India through Flitpay.
FAQs about Ethereum Shanghai Upgrade
Question: Will the Ethereum blockchain give priority to Partial withdrawals over Full withdrawals?
Answer: No, the system will not prioritize any withdrawal request based on its withdrawal type or size.
Question: Will the Validators lose their rewards if they do not provide a withdrawal address?
Answer: No, the Validators will not lose their staking rewards if they do not provide any withdrawal address. The system will keep using their staked ETH for validating the transactions.
