Ethereum’s Shanghai Upgrade: Bullish or Bearish?
On April 13, Ethereum successfully implemented the Shanghai Upgrade, also known as Shapella, allowing validators to withdraw their staked Ethereum for the first time in three years. Leading up to the activation of withdrawals, there was lots of speculation about whether or not there would be a mass exodus of stakers and if it would cause a decline in the price of ETH. Let’s look at what happened post-Shanghai, the other improvements in the upgrade, and what withdrawals could mean for the future of Ethereum staking.
Ethereum staking was first released in late 2020 with the launch of the Beacon Chain and was the start of the Merge process that would continue until late 2022. Anyone who wanted to stake on the network was required to run a validator and stake in increments of 32 ETH, a prohibitive amount for many. Additionally, due to security and technical concerns, withdrawals were not enabled and were promised to come at a later date which could be years away. Nonetheless, Ethereum believers and enthusiasts demonstrated their support and long-term belief in Ethereum’s viability by staking 900,000 ETH before the release of the Beacon Chain on December 1, 2020 — over 300,000 more than required. Since then, stakers have been passively collecting transaction fees and block rewards with an average APY of around 4–7%, and the amount of staked ETH has climbed to over 18 million, worth more than $30 billion at recent prices.
Ever since, the lack of withdrawal capability has been a point of contention. While some considered it a technician necessity, others considered it a massive downside that was not worth the staking rewards. The vagueness surrounding the withdrawal date also made some skeptical that it would ever be implemented. With all of this concern, there was some speculation that early stakers would sell their staked ETH as soon as possible, both to cover some of their operational costs from the past few years as well as take profits. It was also expected that liquid staking derivatives, which is a way to stake any amount of ETH and get a tokenized version of the staked ETH in return. This gives stakers much more flexibility, greater liquidity, and a token that can be used in DeFi protocols. Some of the biggest LSDs include Lido, Rocketpool, and Coinbase’s cbETH.
Now that we are two weeks out from Shanghai’s implementation, we can analyze Ethereum’s price and staking action and determine overall Ethereum sentiment. Surprisingly, the price of ETH jumped, fell back, then remained relatively stable, meaning that there either was not a lot of sell pressure or the selling pressure equaled the buying pressure. Another possibility is that since unstaking is not instant, there was never an opportunity for a large price dump. The upgrade prompted around 1 million ETH, 5% of the total stake, to be withdrawn. From on-chain data, we can see that since Shanghai, more stakers have entered than exited, an incredibly bullish signal for Ethereum, its decentralization, and the amount of buy pressure. With more ETH staked, there is less available on the market, and consequently less selling pressure with an equal amount of demand to help increase the price.
With Shanghai’s successful implementation, Ethereum is now a full proof-of-stake blockchain with all required implemented features. The developers plan to focus on scalability through sharding, starting with proto-danksharding as outlined in EIP-4844. Ethereum has never been in a stronger position from a technical perspective and is well on its way to becoming the base layer for Web 3.0.
By Lincoln Murr