The Ethereum network is gearing up for a major upgrade known as the Ethereum Shanghai upgrade. The upgrade is expected to bring significant changes to the world’s second-largest crypto by market capitalization. This highly anticipated upgrade is part of Ethereum’s ongoing transition from a proof-of-work (PoW) consensus mechanism to a proof-of-stake (PoS) mechanism aimed at improving the network’s scalability, security, and sustainability.
The Ethereum Shanghai upgrade is set to introduce several key improvements and features, including the implementation of the Ethereum Improvement Proposals (EIPs) that address issues such as gas fees, network congestion, and miner rewards. As the Ethereum community eagerly awaits the launch of the Shanghai upgrade, here’s what you need to know about this important milestone in the evolution of Ethereum.
Ethereum Network gears for a major upgrade
The Shanghai upgrade to the Ethereum blockchain is about to go live, releasing more than 18 million ether valued at approximately $34 billion. Since November 2022, when the FTX crypto exchange failed, the value of ether (ETH-USD) has been on the rise and with a struggle to hold ground.
As reported by CoinMarketCap, the price of ETH is $1,865 today. In the last 24 hours, the price has dropped by 2.81 percent. Bitcoin (BTC-USD) surpassed the $30,000 threshold and increased to $30,129.
Ethereum’s Shanghai upgrade is scheduled to launch on April 12; this will complete Ethereum’s transition to a ‘proof of stake’ blockchain, making it over 99% less energy intensive than the ‘proof of work’ blockchain that powers the Bitcoin network.
The new upgrade will make more than 18 million ether, worth approximately $34 billion, withdrawable. This has led to fears of a sudden market supply dump, resulting in a short-term price hemorrhage.
According to some experts, the price of ETH is expected to drop significantly immediately after Shanghai. Since December, the price of ETH has more than quadrupled, prompting between 50 and 70 percent of early withdrawers to cash out.
However, some analysts predict that the short-term price impact may be more muted, as withdrawal queue restrictions and ether holders may prevent a sharp price decline.
ETH stakers have a situation at hand
Ethereum ‘stakers’, or those who have their ether locked in the blockchain’s validation process, will have to wait days to months to access their ether. This is determined by whether they staked themselves or through pools and service providers.
According to Glassnode, less than 1% of ETH staked is expected to sell following the Shanghai upgrade. Only 253 validators have signed up to fully exit their staked Ether position, according to the analytics firm.
Glassnode is confident that the hard fork will not have a “dramatic” impact on Ether’s price action. The 253 exiting depositors own a total of 1,229 validators, and another 214 slashed validators will be forced out once Shanghai is activated on Ethereum.
Even in the extreme case where the maximum amount of rewards and stake are withdrawn and sold, the sell-side volume still falls within the range of the average weekly exchange inflow volume.
Glassnode
According to data provided by Glassnode, only 22% of the 253 exiting depositors are currently profitable. Glassnode anticipates that a substantial amount of Ether will be withdrawn from the crypto exchange Kraken following the SEC’s challenge to the legality of Kraken’s staking services. (SEC).
As part of its bankruptcy proceedings, it also anticipated that crypto lending platform Celsius may withdraw a sizeable sum to sell its staked Ether. Nevertheless, it is unlikely that Kraken and Celsius will make these withdrawals once Shanghai is activated, the report states.
How will the upgrade affect ETH’s price?
As more individuals who were previously uncomfortable locking up their ETH participate in staking, experts anticipate that the price will experience upward pressure. As the ETH staking ratio increases, more ETH will be withdrawn from the market, driving up the price.
According to other analysts, Shanghai could make Ethereum more appealing to long-term investors and increase competition in cryptocurrency custody, as major banks demonstrate a growing interest in the sector.
Other analysts note that the Ethereum Shanghai upgrade is a significant de-risking event that could entice more institutional players to participate in staking or provide related services to clients.
Potential risks of the Shanghai upgrade
Valerie Tetu, Lido Finance’s head of go-to-market strategy, emphasized the importance of strict security due diligence and testing to mitigate potential smart contract risks during and after the Shanghai upgrade.
She stated that the Shanghai upgrade enabled staking withdrawals, which she described as a significant milestone in the development of the Ethereum blockchain. Withdrawals will allow stakeholders to participate in network security with greater confidence, while also increasing the capital efficiency of the tokens they choose to allocate.
While the upgrade is well-positioned to drive more staking activity and participation, potential smart contract risks need to be considered and mitigated. All ecosystem stakeholders have the responsibility to commit to strict security due diligence standards and testing.
Valerie Tetu
