Summary

The Ethereum Shanghai upgrade (EIP-4895) will allow ETH stakers to remove their pledged funds as validators. Following the implementation of proof of stake in Ethereum, users can pledge 32 ETH to become a network validator, but these funds will be locked indefinitely.

This upgrade may affect the proportion of pledged ETH in its total supply, which may in turn affect the market supply and demand of ETH Condition.

Introduction

Shanghai upgrade is a proof-of-stake consensus mechanism for Ethereum A change that Ethereum stakers have been waiting for. In addition to the possible impact on staking, this upgrade may also have some impact on the market demand for ETH. So, whether you’ve already staked ETH, are considering staking ETH, or just hold ETH, it’s important to understand exactly what this Shanghai upgrade entails and how it will impact your portfolio.

What is the Ethereum Shanghai upgrade?

In September 2022, Ethereum successfully completed the conversion to the Proof of Stake (PoS) consensus mechanism. Prior to this, Ethereum used proof-of-work (PoW) and mining mechanisms to process and verify transactions. Users who wish to participate in network verification can now only pledge 32 Ether coins (ETH), eliminating the need to use specialized mining equipment to solve computational challenges.

Due to the Merge that combines the Ethereum mainnet with the PoS beacon chain, users cannot remove their pledged funds . The Shanghai upgrade (EIP-4895) aims to solve this problem and add a new withdrawal function. On January 5, 2023, Ethereum developers agreed to launch this upgrade in March 2023 and implement it as a network hard fork. Users will be able to test this update through the public test network implemented in Shanghai at the end of February 2023.

What is Ethereum staking?

As Ethereum moves to PoS, users can stake their ETH as part of the network’s consensus mechanism. PoS provides an alternative to the energy-intensive PoW mining system. Currently, networks such as Bitcoin still use the PoW consensus mechanism. Users can temporarily lock 32 ETH to run a creator validator node to help protect the security of the Ethereum network and verify transactions.

Each validator receives new blocks created by other validators on the Ethereum network. After checking the transactions and block signatures, the validator certifies the validity of the block. With the implementation of the Ethereum Shanghai upgrade, stakers will be able to withdraw their locked ETH. Previously, this feature was not available after the Beacon Chain was launched in December 2020.

What is the Ethereum Improvement Proposal (EIP)?

EIP is an improvement or change to the Ethereum network and how it operates. Anyone can create an EIP following the submission format and submit it to the community and developer committee for review. Technical changes to the EIP must be approved before they can be updated. In addition, EIP also follows a specific numbering system, and the Shanghai upgrade is also known as EIP 4895.

How will the Ethereum Shanghai upgrade affect me?

The exact impact of the Ethereum Shanghai upgrade will depend on your actual situation. If you have staked ETH directly using Ethereum or through a staking product, you will be able to withdraw funds after this upgrade is completed. Please note that not everyone directly stakes 32 ETH, many users stake smaller amounts on the liquidity staking platform.

A big issue for traders is the impact this upgrade may have on the price of ETH. Of course, this effect does not necessarily occur. As of this writing, staked ETH accounts for 13.81% of its total supply, based on staking rewards calculations. After this upgrade is completed, users will be able to withdraw cash, which will unlock a large amount of liquidity, and owners of staked ETH will have the right to withdraw and sell their pledged assets. For many traders and investors, the proportion of staked ETH as a percentage of the total supply will need to be monitored.

On the other hand, since the liquidity of staking ETH has been improved, it may be more attractive to users. Users who would otherwise be reluctant to use liquidity staking protocols will now have the opportunity to stake ETH directly using Ethereum. Improvements in staking conditions may trigger an increase in demand for ETH.

For users who hold the native tokens of the liquidity staking platform, their token prices may also be affected. The reason is that the opening of Ethereum withdrawal capabilities removes the unique functionality provided by ETH liquidity staking.

In general, allowing withdrawals and pledges of ETH has improved the freedom of the ETH market. ETH holders may have concerns about the demand for pledges and Supply responds to achieve market equilibrium. This move reduces the artificial control effect on the price and circulation of ETH and should be viewed as a positive impact.

Conclusion

The Shanghai upgrade provides a key feature for Ethereum stakers or users considering staking ETH. This upgrade, along with the Ethereum merger, is one of the most anticipated features for those who have been patiently waiting for a fully functional proof-of-stake mechanism. While its potential impact on the market is uncertain, it is necessary for any user involved in ETH to understand this upgrade and the features it will provide.

Extended reading

• What is Ethereum Arrow Glacier Upgrade?

• Comprehensive introduction to the Ethereum merger and upgrade

• What is the Ethereum London hard fork?