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On April 12, 2023, the Ethereum chain rolled out the Shanghai upgrade. The update implemented a series of proposals, namely EIP 3651, also known as ‘Warm Coinbase,’ that decreased the gas fees for transactions that go through the Coinbase address, EIP 6049, proposing an improvement of security and reliability to the smart contract and the much-anticipated EIP 4895 that enabled staking withdrawals on Ethereum. In the piece below, we will explore how the upgrade may affect the price of Ethereum and LSD (liquid staking derivatives) projects and tokens in the long run. Exploring the background To better understand the upgrade, we begin by closely examining the problem it aims to solve. In December 2020, Ethereum went through an upgrade from the PoW (proof-of-work) system to PoS (proof-of-stake) consensus mechanism in an event better known as ‘The Merge.’ Ethereum has achieved relative scalability with its consensus mechanism, as it no longer employs time consuming problem-solving consensus mechanisms such as Bitcoin’s proof-of-work. Still, the chain had a downside takers couldn’t withdraw their staked Ethereum tokens until a designated deposit period was over. To solve this issue, some projects have created protocols allowing users to stake Ethereum and benefit from liquidity. These protocols utilize a type of token pegged with Ethereum, called liquid staking derivatives. Shanghai update impact on the Ethereum price The impact of the Shanghai upgrade on the price of Ethereum remains uncertain, and two possible scenarios may occur. For those bearish on Ethereum, there are concerns about the pressure from the US government towards US-based protocols and cryptocurrency exchanges that offer Ethereum SaaS (staking-as-a-service). Most recently, Kraken’s announcement on the unstaking of all their Ethereum after being sued by the SEC has set a negative precedent for cryptocurrency exchanges and protocols providing SaaS in the United States. Additionally, some investors are looking to withdraw their Ethereum and exchange it with fiat currencies to offset the costs and losses from 2022. Inversely, for those bullish on Ethereum, the Shanghai upgrade is expected to potentially bring significant improvements to the Ethereum network, including faster transaction processing times and reduced fees. These improvements may attract more users to the network, increasing the demand for Ethereum and driving up its price. Furthermore, 10% of the entire staking pool can be withdrawn every month, and the time-consuming two-step process in unstaking Ethereum may discourage investors from withdrawing their assets. It is essential to consider both the potential positives and negatives when evaluating the impact of the Shanghai upgrade on the price of Ethereum. While there may be some short-term selling pressure from investors looking to withdraw their staked Ethereum, the long-term improvements to the Ethereum network could drive demand and increase the price of Ethereum. Impact on LSD tokens Another impact of the upgrade is on LSD protocols. LSD protocols could maintain their peg better after the Ethereum upgrade, leading to lower costs. These protocols can give a higher APY (annual percentage yield) after the upgrade as derivative tokens become stable therefore, the rate governance tokens of the protocols have been growing in price. LDO increased by over 100%, PENDLE grew by over 900%, RPL rose by 120% and the trend continues to increase. One potential outcome investors have been anticipating is the chance to transfer their recently unstaked Ethereum to LSDs to take advantage of greater profits and the capabilities of decentralized finance. LSD protocols hold 42% of the total staking volume of the Ethereum network. This means the upgrade will highly impact the price of the protocol’s governance tokens, derivative tokens and APY. Each LSD protocol has designed different ways for its users to liquidate their position and will try to redeem all their investors sufficiently. Investors would also need to learn the liquidating process for protocols they want to invest in, as it will affect the security of these protocols. Each protocol will have its own liquidating process and affect security therefore, I highly recommend doing your own research before investing in any LSD protocols. Ethereum generating value for the industry Ethereum as a protocol has helped generate a whole lot of other value through different means across many industries. While the current Shanghai upgrade will help enhance the overall functionalities of Ethereum and associated protocols, other EVM (Ethereum virtual machine)-compatible blockchain networks will also benefit from the network event. Though there are still a lot of milestones for Ethereum to cover in order to become a fully functional PoS protocol, the ability to withdraw the staked tokens will bring in institutional money, especially in jurisdictions where regulatory demands are not so strict. In the meantime, investors and observers will place a keen eye on how Ether as a token as well as its LSD counterparts take advantage of these major protocol updates across the board.Arifin Santoso is a research analyst of the Singapore-based tier-one cryptocurrency exchange platform Bitrue.
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