Why crypto is watching Ethereum’s ‘Shanghai’ upgrade
Since it was introduced by crypto entrepreneur Vitalik Buterin in 2014, it has become a popular platform for developing apps used for everything from commerce to gaming.
Transactions on Ethereum and many other crypto platforms known as blockchains are publicly visible and are built on open source software, allowing developers to jump in and try to make improvements.
Ether’s value fell during the “crypto winter” of 2022, when investors pulled back from many digital assets. But the appeal of Ethereum’s underlying technology has endured.
2. What is the Shanghai Upgrade?
Until September 2022, Ethereum relied on a costly, energy-intensive process known as proof-of-work to order transactions. That changed when a technical overhaul known as “Merge” used an alternative approach – proof-of-stake.
People who put up, or stake, Ether can become “validators” of transactions on the Ethereum blockchain and receive an income in return – much like deposits in a bank. Since 2020, users have been able to stake their Ether but could not withdraw it. Shanghai will allow them to withdraw these coins. About 16 percent of the total Ether supply, worth around $US37 billion ($55 billion), was stuck in the protocol for stakes from early April.
3. Why is this a sensitive moment?
It is not clear how many users will want to withdraw once their Ether is unlocked. The token’s value has fluctuated wildly in the years since staking was first activated – rising as its popularity grew among institutional and private investors, before falling in 2022.
At least initially, demand for withdrawals is expected to outweigh new stake deposits on Ethereum. In the longer term, the ability to withdraw staked tokens will likely make Ether staking more attractive as it will reduce the risk for those involved.
Investors also expect volatility in so-called liquid-staking tokens, which represent the stake Ether and can be used in decentralized finance apps that allow people to lend, borrow and trade coins. The prices of some of these tokens have risen in recent months and risk falling in line with Ether around the time of the Shanghai upgrade.
4. Will people be able to withdraw staked Ether right away?
They have to stand in queues, which can be longer or shorter depending on where their stake is held. The process is likely to be more complicated for holders of floating tokens like Lido.
The service, which holds about a third of the stake in Ether, expects to enable withdrawals in May. It can take months for Ether holders to withdraw their coins as Ethereum has put limits in place to ensure that too many people do not withdraw at once, making it vulnerable to an attack.
5. Could there be technical problems?
There is a chance of error when Shanghai goes live. During a recent test of the code, transaction confirmations took much longer than expected, as many computers handling the process had not had a software upgrade.
Still, Ethereum developers have a track record of seamless software changes. There is also a risk that some nodes in the wider Ethereum blockchain that hold Ether in place may have lost the keys that provide access to the coins, leaving users locked out.
6. Other concerns?
Since the merger, Ether has drawn scrutiny from regulators, including the US Securities and Exchange Commission, which has indicated that certain services that offer returns from betting on cryptocurrencies constitute illegal securities offerings. The Shanghai upgrade, by allowing unlocked Ether, could lead to increased scrutiny.
Bloomberg
