"Shanghai Upgrade" enters countdown, analysis of potential ETH selling pressure.

23-04-08 10:49

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Source: Ebunker Chinese

According to a blog post by the team supported by the Ethereum Foundation protocol, the client team has agreed to activate the Shapella upgrade (also known as the "Shanghai upgrade," which is a combination of the names "Shanghai" and "Capella" referring to the execution layer client and consensus layer client hard fork, respectively) on the mainnet after a smooth transition on the Goerli testnet.

Shapella upgrade is expected to take place on April 12, 2023 at UTC 22:27:35. This upgrade will enable validators to withdraw ETH from the beacon chain and bring new functionality to the execution and consensus layers.

After the upgrade is completed, for validators running independently, they can choose to withdraw partial or full amounts. Partial withdrawal refers to extracting the profits generated by each validator staking 32 ETH, and this reward can be withdrawn immediately while the validator continues to add blocks to the beacon chain.

And the time required to extract these rewards will depend on the number of partial withdrawal requests submitted after the Shanghai upgrade. Each slot can accept 16 partial withdrawal requests (occurring every 12 seconds), and the queue may take several hours. At the same time, Ethereum has designed an "automatic scanning" function, where the network will periodically scan and automatically extract the profits of nodes with balances exceeding 32ETH to the user's specified address according to the scanning progress.

On the other hand, full withdrawal refers to extracting all balances, including 32 ETH, from the blockchain. This means that validators will stop participating in the block validation process. As validators need to send messages to the blockchain to add themselves to the withdrawal queue, this process may take a long time. Especially after the Shanghai upgrade, there may be a surge in withdrawal requests. Based on the current network size, Ethereum can process a maximum of 57,000 withdrawal requests per day, which is equivalent to the maximum number of nodes allowed to enter staking consensus per day.

If the pledger extracts ETH through a pledging service provider or decentralized pledging pool, the service provider or pledging protocol needs to further determine when to withdraw the pledge.

For example, Coinbase stated in March that it would process withdrawal requests within 24 hours after the Shapella upgrade. All requests to withdraw collateral are processed on-chain, and once the ETH pledged is released through the Ethereum protocol, Coinbase will immediately distribute the principal and rewards.

Lido indicates that users holding Steth will need to wait until the Lido protocol is upgraded in mid-May before they can withdraw their staked ETH, as the protocol needs to undergo appropriate security checks. Rocketpool, on the other hand, states that the protocol will need to wait until the April 18th "Atlas" upgrade before ETH staking can be withdrawn.

Upgrade Analysis of ETH Selling Pressure

Due to the fact that most users choose to participate in staking through LSD on decentralized or centralized trading platforms, the ETH of these stakers has always had liquidity, so there is not much motivation to sell. Decentralized LSD platforms such as Lido currently account for 33.2% of the total ETH staked. In addition, about 27.1% of people stake through centralized trading platforms such as Coinbase, Binance, and Kraken. Therefore, approximately 60.3% of ETH is staked through LSD.

The remaining 40% of the total staked ETH is directly deposited into the staking contract through self-set nodes or third-party service providers. This portion of ETH has been locked up until now and is likely to be sold after unlocking.

According to the analysis of data website Nansen, approximately 59% (3.62 million to 4 million ETH) of ETH that currently lacks liquidity is in a profitable state, and they may partially or fully withdraw after unlocking. Of course, some stakers may choose to continue staking. Nansen estimates that the selling pressure after the ETH upgrade will be between 1.2 million and 3 million ETH, but due to daily withdrawal limits, this process will be slow.

According to Nansen's report, there will be three stages of ETH selling pressure after the upgrade.

The first stage is within 27 hours after the upgrade, with selling pressure from partial withdrawals (i.e. accumulated interest over the years), which is about 84,000 to 125,000 ETH per day.

The potential selling pressure in the second stage is the highest, coming from partial withdrawals (interest) and full withdrawals (32ETH in total), with a daily amount of 136,000 ETH and 173,000 ETH respectively. This stage lasts from the third day to the fourth day after the upgrade.

The main selling pressure in the third stage comes from all withdrawals, which will last for 19 to 52 days, with a daily selling pressure of about 48,000-53,000 ETH.

Due to the current average daily inflow of 313,533 ETH on the 30-day trading platform, the potential inflow of the upgraded trading platform will be between 15% and 55% of this average, which may suppress the ETH price until the selling pressure subsides in 3 to 8 weeks.

Arcana Research estimates that approximately 1.3 million ETH will be sold within the first 10 days after the upgrade due to partial and full withdrawals. The selling pressure of ETH will peak in the first three days after the upgrade, with a daily selling pressure of approximately $527 million (calculated based on an ETH price of $1800), accounting for 6.4% of the current daily trading volume.

From another perspective, the Shapella upgrade will remove the uncertainty risk of ETH staking and pave the way for an increase in ETH staking rate, which will partially offset potential selling pressure. After the upgrade, the staking percentage of ETH may increase by 2-4 times. Currently, the staking rate of ETH is only about 15%, while the staking rate of other PoS cryptocurrencies is mostly between 50-70%, or even higher.

The low ETH staking rate is due to the uncertainty of the lock-up period, which brings unknown risks to many investors. However, the upgrade will enable flexible extraction of ETH staking, which will encourage more ETH holders to participate in staking.

Recent spot market demand

According to data from the Santiment analysis website, the supply of ETH on trading platforms has dropped to its lowest point since 2015, accounting for only 10.31% of the current circulation. In other words, more ETH is held by investors themselves, reflecting the confidence of this group in the long-term performance of ETH.

Recent data shows that the market demand for ETH is increasing, especially among retail investors. Currently, there are over 23.3 million addresses holding at least 0.01 ETH, reaching a new high in 8 months.

In addition to the demand from retail investors, the demand for ETH from whales and institutions is also increasing. The number of addresses holding more than 1000 ETH and 10000 ETH has recently increased.

Unmanaged Staking pool Ebunker co-founder Muye Sheng said that there are currently 560,000 nodes on the entire ETH network, and before the Shanghai upgrade, they are still mainly concentrated in the LSD and centralized trading platform solutions. However, after the Shanghai upgrade is completed, especially after the early withdrawal peak (about 1-2 months), Solo Staking and Unmanaged Staking can also quickly meet users' withdrawal needs. Therefore, for users, gradually transferring their private keys to their own custody is still the endgame of Staking.

Derivative Market Signals

Currently, there is less than a week left until the upgrade, and traders may try to preempt potential selling pressure by opening short positions in the futures market. However, so far, the futures market has not shown a significant increase in the volume of short positions or funding rates.

Usually, in a healthy market, the futures premium within two months should be between 5% and 10% to cover related costs and risks. When futures are traded at a discount relative to the traditional spot market, it indicates that traders lack confidence and is considered a bearish indicator.

The above chart shows the annualized premium of ETH futures in the past two months. On March 29th, as the indicator rose to 4%, traders using futures contract derivatives became slightly bullish. Although it remained below the neutral threshold of 5%, the futures premium reached its highest level in four weeks.

When market makers and arbitrageurs overcharge fees to gain upward or downward price protection, the 25% Delta skewness rate is a reference indicator. In bear markets, option investors bet more on price declines, causing the skewness indicator to rise to more than 8%. On the other hand, in bullish market trends, the skewness indicator usually runs at values below -8%.

Since March 22nd, ETH's 25% Delta skew indicator has remained neutral, indicating equal probabilities of price increases and decreases. However, given the recent increase in regulatory pressure on trading platforms and the bearish market environment, the ability of the derivatives market to maintain this state also reflects a certain degree of market confidence.