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What is the Shanghai Upgrade?

What is the Shanghai Upgrade?

An easy-to-understand guide on the upcoming Shanghai Upgrade for Ethereum and what the implications are for the anticipated hard fork.

TLDR: The Shanghai Upgrade is a hard fork to the Ethereum network set to occur in March 2023. Its main focus is the implementation of Ethereum Improvement Proposal-4895 (EIP-4895), which will allow validators to withdraw 16 million staked ETH that they have accrued since the transition to a proof-of-stake system.

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What is the Shanghai Hard Fork?

The Shanghai upgrade for Ethereum, estimated to occur in March 2023, will enable validators to withdraw their locked Ether (ETH) and any earned rewards from the Consensus Layer after they stop running their validators and exit the network. The upgrade is expected to have implications for the Ethereum market as it will be unlocking 42.3% of the total ETH staked.

Once withdrawals are enabled, staking ETH would become a more attractive alternative to lending out ETH and earning interest on borrow/lend platforms. This could result in a decrease in lending interest rates and an increase in staking demand, which would remove supply of ETH from the market. Besides EIP-4895, the upgrade has several other Ethereum Improvement Proposals aimed at reducing gas fees for developers building on the Ethereum blockchain.

Shanghai Upgrade Unlocking ETH
Illiquid Staking vs Liquid Staking Supply.

Price Implications for Ethereum's Shanghai Upgrade

Regarding the short-term market impact, there are differing opinions on how enabling withdrawals could affect the market. On one hand, it could potentially increase the supply of ETH due to the unlocking of staked ETH. This would result in sell pressure that cannot be absorbed or off-set by the fee-burn in a post EIP-1559 world.

On the other hand, being able to withdraw quickly would encourage people to stake more, reducing supply. It is unlikely that enabling withdrawals would cause a big short-term market impact due to unlocked liquidity, and other drivers may increase the staking demand and remove supply from the market after the Shanghai fork. It may take a long time for a large number of validators to exit, lowering the short-term impact on the market.

Current ETH burn rate according to ultrasound.money.

Whats the Next Upgrade for Ethereum?

After the Shanghai hard fork, the next upgrade for Ethereum is expected to take place in the third quarter of 2023. Some of the changes that are being considered for this upgrade include "proto-danksharding," which involves splitting the blockchain into multiple chains to improve scalability, and changes to the EVM Object Format (EOF), which includes small upgrades to enhance the Ethereum Virtual Machine.

These upgrades are intended to make the Ethereum blockchain more scalable and efficient, and could have a significant impact on the Ethereum ecosystem.

Bottom Line

The Shanghai upgrade is an important event for the Ethereum network and will have implications for the market. While the short-term impact may not be significant, long-term effects could be more pronounced due to staking demand increasing, reducing supply of ETH from circulation. The next upgrade in 2023 is expected to bring further scalability and efficiency improvements, and could have a meaningful impact on the Ethereum ecosystem.

It will be important to stay up-to-date as these events unfold and understand how they may affect the market. As with any major network event, it is recommended to do your own research before taking any action in order to make an informed decision.

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