Ethereum Shanghai — What You Need To Know!
The Shanghai Ethereum Upgrade also known as the Shapella Hard Fork is due for April 12th 2023 !
Out of all the Ethereum Improvement Proposal (EIP) that will be adopted it’s EIP-4895 that makes this upgrade a hard fork.
By revolutionizing the staking mechanism in the Ethereum network.
Here’s how!
EIP-4895 & Staking
Stakers who have been holding their ether since December 2020 for some, will now be able to withdraw both their staked amount and the accumulated rewards!
The transition of Ethereum’s consensus mechanism from Proof-of-Work to Proof-of-Stake began with the launch of the Beacon Chain, a PoS chain that coexisted with the PoW Ethereum from December 2020 until “The Merge” in September 2022.
With the introduction of the Beacon Chain, staking became possible on Ethereum, albeit in a one-way direction, where validators could only deposit ETH to the Beacon Chain but not withdraw it.
As a reminder, where once under PoW, block creators called miners had to solve cryptographic puzzles, now, under PoS, validators,-the new cool kids on the block-, are the users responsible for verifying transactions on the Ethereum blockchain.
To become a validator, you need to pledge or stake cryptocurrency as collateral, allowing you to earn the privilege of adding the next block of transactions to the ledger, precisely 32 ETH.
The Ethereum Foundation defines staking as “the act of depositing 32 ETH to activate validator software”. Essentially, as long as you stake your 32 ETH and keep a single node connected to the Ethereum network at all times, you can become a validator.
Your services as a validator are rewarded with interest on the staked assets.
As validators have lower capital and maintenance costs than miners, the shift to PoS meant that thousands of addresses are now associated with validation, in contrast to the pre-Merge scenario where only a few dozen mining addresses were linked to rewards. At press time, there are 547,467 validators operating on the Ethereum Blockchain and 17,518,946 ETH staked.
With the implementation of EIP-4895, which is the flagship improvement featured in the Shanghai Upgrade, validators will finally be able to withdraw their staked ETH and the associated rewards earned from staking.
In their analysis on the Ethereum Shanghai Upgrade, Binance Research reports:
“ It could be argued that many groups of individuals had been waiting for Shanghai to stake their ETH, as withdrawals will remove the liquidity risk and uncertainty of an previously undefined lock-up period. […] A wave of new participants who had previously been watching from the sidelines can potentially add a level of buying pressure to ETH, especially if institutional capital can be enticed.”
In addition, there is an expectation that staking will continue to expand.
This is due to the fact that the ETH staking ratio is notably lower than that of other layer 1 cryptocurrencies.
Markus Thielen, head of research and strategy at digital-assets platform Matrixport, told CoinDesk:
“Only 14% of ETH is currently being staked vs. 58%, the average for layer 1 coins, [..]. Its likely interest in staking will continue to swell.”
An opinion entirely shared by Venture Capital firm Paradigm, a holder of Lido’s LDO governance.
In their report about staking derivatives, Paradigm researcher affirms that:
“Staking derivatives open the potential to state the vast majority of Ether in circulation. […] Without staking derivatives, we might expect 15–30% of ETH to be staked, […]. However, with staking derivatives, this number could be as high as 80–100%, because there is no additional cost to staking compared to non-staking.”
And the latest only seem to prove this statement!
The upcoming EthereumShanghai Upgrade has generated a surge of investor interest in Liquidity Staking Derivatives (LSDs).
So much so that liquid staking saw a 60% surge in total value locked, and became the “best-performing crypto sector this year” !
As depicted in this graphic from Dune, The Merge and then the announcement of the Ethereum Shangai upgrade has generated great enthusiasm for LSDs.
As a testament to the remarkable growth of LSDs, the beginning of March has marked a turning point where liquid staking has overtaken DeFi lending to become the second-largest crypto sector.
Why the rush to LSDs?
LSD advocates believe that LSDs provide a means of safeguarding Ethereum by enabling users to stake their Ether and earn rewards without having to miss out on more profitable ventures.
The LSD system is pretty straightforward and simple:
- You stake a certain amount of a cryptocurrency, in exchange a platform will issue liquid-staking derivatives, or tokens that represent users’ staked currency. You’re given the same amount in another token based on the type of cryptocurrency you have staked. Example: If you stake 5 ETH on Lido, you get in return 5 stETH.
- Now, you are free to do whatever you wish with these new tokens. What most will do is find a DeFi protocol that has a high-APY reward for staking their new tokens. Today, staking your stETH can yield returns of up to 90% in certain DeFi protocols.
In this system, on top of the approximately 5% Ethereum staking rewards you get, you gain an additional X% APY. Despite some inherent risks associated with LSDs, it’s understandable why validators and their almost inert 32 ETH are drawn towards the tempting call of the LSDs siren.
And if they all fall for the siren call, forewarn some, that will make Ethereum wobble, and maybe, ultimately crumble.
As a matter of fact, some argues that this widespread-and-rising-at-full-speed LSDs adoption, in combination with the Ethereum Shanghai upgrade’s ability to finally “withdraw at will” staked Ethereum, has the potential to entirely transform the Ethereum landscape!
We did a full decrypt of this crucial subject here:
While many rejoice at this new Ethereum Hard Fork full of $ETH promises, and other forewarn of Ethereum’s gloomy future, the regulators, who are hard at work at turning Ethereum into a security, could found in the Shanghai upgrade, a lauded weapon!
Few days ago, SEC Chair Gary Gensler openly suggested that tokens using staking protocols could be considered securities under U.S. law:
“The investing public is investing anticipating a return, anticipating something on these tokens, whether they’re proof-of-stake tokens, where they’re also looking to get returns on those proof-of-stake tokens and getting 2%, 4%, 18% returns, […].
Whatever they’re promoting and putting into a protocol, and locking up their tokens in a protocol, a protocol that’s often a small group of entrepreneurs and developers are developing, I would just suggest that each of these token operators … seek to come into compliance, and the same with the intermediaries.”
As regulators seem dead set into making Ethereum an example and condemning it to security status, it appears like the Shapella Hard Fork could turn into the final nail in the security coffin!
Our full report on Ethereum’s fate as a Security:
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