What crypto investors need to know about Ethereum’s ‘Shanghai’ upgrade
by Arthur · April 9, 2023
Ether rallied last week as investors looked forward to the Ethereum network’s next major technology upgrade. The second largest crypto asset by market capitalization has not had the kind of rally that led to the transition from a proof-of-work to a proof-of-stake protocol in September. This week it added more than 4%, outperforming bitcoin, which gained less than 1%, and the major stock indexes. It rose 12% in March, although that was lifted by the various forces that pushed bitcoin up 22%. Last year it increased in the weeks before the upgrade. ETH had a 70% increase in July alone. It dropped around 20% shortly after the upgrade was completed. The upcoming change, known both as the “Shanghai” upgrade and, more recently, the “Shapella” upgrade, is scheduled to take place on April 12 and will allow investors to withdraw ether stakes from the network for the first time ever. It is intended to strengthen Ethereum’s proof-of-stake consensus mechanism, which it migrated to in September’s “Merge” event, which would ultimately provide more liquidity to ether investors and stakers. “The upgrades represent a significant step for the Ethereum network, and while it’s hard to say what ETH flows might look like post-upgrade, more liquidity will exist all things being equal,” said KeyBanc analyst Alex Markgraff. “Greater liquidity can be a catalyst for a change in institutional participation, while also presenting commercial opportunities for bet providers.” It is also intended to extend the migration that took place in September, meaning it should make the network faster, more scalable and more energy efficient than if it were a proof-of-work protocol. “This upgrade is a significant milestone in Ethereum’s transition to proof-of-stake,” said Andrew Ballinger, head of staking solutions at Canadian investment fund manager 3iQ. “The liquidity that comes with it will allow greater participation in staking and, as a result, improved network security.” ETH.CM= 1M mountain Ether (ETH) Here’s what investors need to know about the next Ethereum update: Withdrawing your “locked” ETH While the merger turned Ethereum into a proof-of-stake network and gave investors a bigger opportunity to monetize passive returns on their ETH holdings through staking – which includes locking tokens on the network for a period of time – Shapella will enable investors to “delay” or withdraw ETH. “Up until this point, assets that had been staked were locked up indefinitely, and those who wanted to participate in the network and generate returns on their ETH holdings often had to get comfortable with an indefinite timeline for liquidity,” Ballinger explained. There are several reasons why someone might want to withdraw their money at a given time. Investors who may wish to engage with other parts of the network, such as purchasing NFTs or participating in a decentralized finance protocol, may be unable to have their funds locked up. Someone was staking ETH before the emergence of floating staking protocols, Ballinger pointed out. Owen Lau, an analyst at Oppenheimer, noted that short-term traders may simply want to unwind their ETH to sell it – especially at a time like now, when crypto prices including ether have risen. However, he added that they are more likely to get an even bigger return by keeping the funds locked up. (When you stake crypto, you contribute to the proof-of-stake system that keeps decentralized networks like Ethereum running and secure; you become a “validator” on the blockchain, meaning you verify and process the transactions as they come through , if chosen by the algorithm. The locking of your funds acts as a kind of security that can be destroyed if you as a validator act dishonestly or insincerely. For more, check out our stake basis here .) “Providing liquidity for the stake ETH will allow a significant group of institutions and merchants, who have been sitting on the sidelines, the opportunity to finally participate in the network,” Ballinger said. “And greater participation in ETH staking strengthens the security of the Ethereum network as a whole.” Potential ETH Selling Pressure Many market participants have speculated that there will be a wave of negative selling pressure in the market as previously locked funds on Ethereum are released. However, data from CryptoQuant suggests that any selling pressure will be low. Typically, selling pressure occurs when market participants are sitting on extreme profits. At the moment, however, the majority of ETH stakes (54%, or 9.7 million ETH) are currently at a loss, the firm said. Average depositors of the largest betting pools are also currently making losses, according to the data. Ballinger pointed out that unlocking will not happen on day 1 of the update either. It can take as long as 30-60 days for participants to exit, due to the two-day “freeze” period (the time a blockchain delegator waits before they can move or sell tokens) and a variable exit queue that changes based on the number of participants in line, he said. “Given there is a limited number of participants who can exit in a day, this selling pressure will not be as immediate or violent as announced by some commentators,” he said. “We may still see some selling pressure on the price of ETH, but that will come over a period of weeks – a much healthier solution for the Ethereum network.”
