Ethereum Shanghai Upgrade Unlocks $34B in Ether, What Does It Mean for Crypto Prices?
Developers at Ethereum, the world’s second-largest blockchain with a capitalization of $231 billion, will upgrade its software network on Wednesday with reported new features and improvements to efficiency, cost and security.
The main feature of the so-called Shanghai Upgrade – which is due to take place at 22:27 UTC on Wednesday, according to the Ethereum Foundation – is EIP-4895. This allows users to withdraw their stake Ether, or tokens staked to support the operation of a blockchain in return for a passive income, usually in the form of more tokens.
With around 18 million Ether ($34.5 billion) – or about 15% of the total supply – staked on the network, according to Etherscan, concerns emerged that holders could rush to sell Ether to lock in profits, which would lead to lower prices. Ether is up around 60% so far this year and recently traded at more than $1,900.
But on-chain data provider CryptoQuant doesn’t expect a flood of Ether sales, according to a report it released in February.
“We argue that there will be low selling pressure for Ether from staking withdrawals after the Shanghai upgrade,” CryptoQuant said, adding that the majority of the staked Ether was still at a loss compared to Ether prices when it was staked. Ether hit all-time highs of more than $4,600 in November 2021.
“Typically, selling pressure occurs when market participants are sitting on extreme profits, which is not the case right now for Ether that has been staked,” CryptoQuant said.
CryptoQuant also pointed out that the currently locked Ether cannot be withdrawn at the same time, estimating that it could take up to a year to withdraw the total value staked on the network,
Other benefits
Zhuling Chen, CEO of crypto staking services provider RockX, said some short-term market volatility is to be expected after the upgrade, but he preferred to focus on the “substantial” long-term benefits of the Ethereum blockchain.
“Ethereum’s capacity to handle more transactions per second increases, transaction costs decrease, and the security and efficiency of smart contracts improve,” Chen said in a statement. The staking landscape will be transformed and Ethereum will become the benchmark return for crypto, Chen added.
That’s a view shared by Alex Esin, CEO of P2P.org, which offers institutional staking and blockchain development services. Expect a significant increase in investment activity in the year following the Shanghai upgrade, Esin said in a statement.
“We don’t expect a massive outage when this functionality goes live,” Esin said.
Guilhem Chaumont, CEO of crypto-financial service Flowdesk, points out that the system for withdrawing staked Ether could itself prevent the sale of the token.
“It is important to realize that the withdrawal queue only allows a limited set of requests per day (115,200), so while there may be sustained downward pressure on the price, unstaking is unlikely to lead to a sharp, sudden drop,” he said in an emailed comment.
Chaumont said it is more likely that a significant portion of Ether will remain staked “with stake rewards exceeding current interest rates.”
Overreact?
Ken Timsit, head of Cronos Labs, the accelerator of the Cronos chain that connects the Ethereum and Cosmos blockchains, warned that Ether players will monitor withdrawals after the Shanghai upgrade starts and could potentially overreact if there is significant demand for withdrawals.
“However, once short-term volatility has smoothed out, the outcome is likely to be neutral given that this upgrade has been priced into Ether value for some time,” Timsit said in an emailed comment.
Danny Chong, co-founder of Tranchess, a decentralized app that offers Ethereum services, said the Shanghai upgrade will reduce the risk associated with floating stakes and “should see increased institutional participation.”
Liquid staking, also known as soft staking, allows investors to access their locked funds for other crypto-based activities while still earning rewards. Users with deposits locked on liquid staking platforms receive a tokenized version of their crypto assets, which can then be stored or traded elsewhere.
The total value of cryptoassets locked in liquid staking services was $17.3 billion on Tuesday, up from $14 billion on March 1, making liquid staking the second largest service in decentralized finance, after decentralized exchanges, according to data provider DefiLlama.
“Earning returns from liquid investment shares similarities with certain traditional financial instruments such as bonds or stocks that offer interest payments,” said Chong. “Therefore it is likely to attract TradFi [traditional finance] participants who are familiar with such instruments.”
Chen of RockX shared similar views: “We will see more innovations coming from direct and liquid staking solutions, and liquid staking will start to play a much bigger role in the cryptocurrency space.”
Some cryptocurrency exchanges have also discovered opportunities to expand their betting products. For example, Singapore-based crypto exchange Bybit last month launched a new staking pool in time for the Shanghai upgrade.
“The highly liquid and trade-integrated ETH staking options we will roll out around the time of Ethereum’s Shanghai upgrade will open up many new opportunities for our users,” Bybit CEO Ben Zhou said in a March statement.
See related article: What impact will Ethereum’s Shanghai upgrade have on the ETH and crypto markets?
