VOLATILITY IN SHANGAI- PARTIAL WITHDRAW

MetalSwap

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MetalSwap

4 min readApr 1, 2023

METALSWAP DEFI USE CASE

**Partial Withdrawals Post-Shanghai Update: Maximizing Validator Rewards and Hedging with MetalSwap**

— Originally written on MetalSwap’s Official Blog

The Shanghai and Capella update is bringing significant changes to the Ethereum ecosystem, including the introduction of partial withdrawals. This feature allows validators to periodically withdraw rewards earned from staking, providing them with more control over their assets. In this article, we will explore how partial withdrawals work, the potential impact on validator earnings, and how Hedging Swap services like MetalSwap can help manage the risks associated with market volatility.

PARTIAL WITHDRAWALS POST SHANGHAI

Understanding Partial Withdrawals

Partial withdrawals are a new feature in the Ethereum ecosystem, allowing validators to periodically “skim” their validator balances that exceed the 32 ETH threshold. This provides recurring access to the consensus layer (CL) staking rewards their validators have earned. Since the actual balance of an Ethereum validator is limited to 32 ETH, any excess balance is unproductive, making partial withdrawals an efficient way to maximize validator rewards.

Processing Time

Post Shanghai/Capella update, set for the date of the 12th of April, validators can expect their validator’s balance to be partially withdrawn every 2–5 days. The range accounts for the uncertainty surrounding how many validators with 0x00 credentials will update to 0x01 credentials immediately after the update. A 2-day processing time assumes none of the validators with 0x00 credentials will upgrade, while a 5-day processing time assumes all of them will upgrade immediately.

Use Case

Consider a validator who staked 32 ETH in the Beacon Chain in 2020. By the time the Shanghai and Capella update arrives, they have accrued about 2 ETH from staking their ETH. With the update, any ETH above 32 (not multiples of 32) will not produce rewards, so the validator would want to withdraw the excess ETH.

To do this, the validator must activate the Sweep key by changing their node key from BLS 0x00 to Execution Layer 0x01. The algorithm processes 16 blocks every 12 seconds. Assuming 547,381 active validators, the maximum processing time is 5 days, with an average of 3 days. The withdrawal sweep is automatic and takes about 28 hours, with no transaction costs.

Hedging with MetalSwap

Due to uncertainties regarding the market response to the increased withdrawal possibilities, the validator decides to hedge their position using MetalSwap. They choose coverage for 4 days, targeting a size of 2 ETH and covering 10%. If the price of ETH increases, the validator benefits from the asset’s appreciation at the expense of a 0.079 ETH premium and a 0.2 ETH cover, with the option to resettle. If the price of ETH decreases, MetalSwap covers the price gap at the expense of a 0.079 ETH Premium.

Conclusion

The introduction of partial withdrawals in the Ethereum ecosystem post-Shanghai Update offers validators more flexibility and control over their assets. However, the potential for market volatility necessitates a strategic approach to managing risk. Decentralized hedging swap instruments like MetalSwap provide an effective solution for navigating these uncertainties, allowing validators to protect their digital assets and make informed decisions in the face of market fluctuations.

By incorporating tools like MetalSwap’s Hedging Swaps into their decision-making processes, Ethereum validators can better adapt to the upcoming changes and navigate the challenges posed by increased market volatility.

MetalSwap’s Hedging Swap tool allows to hedge against the volatility these events bring.

This is a first article about Shanghai’s Update, setting the basis from where we’re going to deep-dive into our favourite topics! Stay tuned, Swappers!

Goodbye Volatility!

To the MetalSwap

… and beyond!

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✎ What is MetalSwap?

MetalSwap is a decentralized platform that allows hedging swaps on financial markets with the aim of providing a coverage to those who work with commodities and an investment opportunity for those who contribute to increase the shared liquidity of the project. Allowing the protection for an increasing number of operators.

With MetalSwap we enable hedge swap transactions through the use of Smart Contracts, AMM style.

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