Shanghai Upgrade is Another Step Closer After the Testnet Execution

After more than 2 years of waiting, the option of ETH unstaking is finally around the corner. The Shanghai upgrade, which will bring the unstaking feature is scheduled to go live sometime during late March or early April. It has spared quite an interest within the crypto community of what will happen to the ETH price and stability of the Ethereum network after the upgrade. To that and more you will find answers in today’s post.

Shanghai Upgrade Recap

Currently scheduled for late March, or early April 2023, the Shanghai upgrade is one of the most anticipated events in the crypto world at this time. The upgrade implementing proposal EIP-4895 will allow validators to unstake their ETH for the first time since December 2020. To receive staking rewards (yield) validators originally had to lock their ETH into the staking smart contract for an indefinite amount of time. However, after the Shanghai upgrade is implemented, validators and other stakers will be able to withdraw ETH from the staking contract at any time they want.

Progress summary so far

Staked ETH locked for an indefinite amount of time posed quite a challenge for ETH liquidity in the market. Liquid staking solutions (Lido, Rocketpool) with staked 1:1 derivatives have emerged to fulfill this demand for transferability and better capital efficiency. 

Over the course of the past few months, the liquid staking market has grown rapidly. However, the option of direct unstaking was still lacking, so users started exiting staked positions through swaps in liquidity pools containing ETH and a staked derivative, such as stETH.

Meanwhile, the Shanghai upgrade was being prepared for deployment on the mainnet. At this time, the upgrade is up and running on the Sepolia and Goerli testnets and is expected to arrive at the mainnet in the following weeks. Goerli, the largest public testnet serves as a last stop and check-up point before the upgrade goes live on the Ethereum mainnet. So far the upgrade is operating on both testnets.

Issues with Deployment

Several testnet validators failed to upgrade their client software before the Goerli fork, leading to a less-than-smooth deposit processing experience.

Ethereum core developer Tim Beiko attributed this to testnet validators having "less incentive" to upgrade since Goerli ETH is considered worthless. Despite these issues, the Shapella hard fork eventually took effect on the Goerli testnet after 15 epochs, as network participation reached the required two-thirds threshold. 

Near Future Estimations for Ethereum

Price after Shanghai

Once unstaking is enabled, a withdrawal cap of 43,200 ETH per day will be processed through a queue. An analyst, Lucas Outumuro, stated that "it would take over a year for the 15.91 million ETH staked to be withdrawn, preventing mass withdrawals and mitigating selling pressure."

The withdrawal cap will prevent mass withdrawals and mitigate selling pressure, but some amount of capital outflow and selling pressure is still to be expected. Some validators will surely want to access their rewards, but there's no way to tell how many will unstake immediately after the upgrade. However, the withdrawal possibility could increase the stability of the network and remove a degree of uncertainty for many people.

It is important to note that in the absence of an official withdrawal option, some alternative ways emerged. Those, who participated in liquid staking and wanted to exit, could easily do so by swapping staked derivatives (for example stETH) for the actual ETH in liquidity pools on DEXs. A prominent pool with deep liquidity is the stETH/ETH on Curve.

This alternative option for exiting liquid-staked positions can further mitigate the initial selling pressure on ETH after the Shanghai upgrade is live. Because a big part of holders wanting to exit have done so continuously during the last year.

Staking yield

Being the main incentive mechanism, staking yield serves as a crucial part of the ecosystem. It motivates validators to confirm transactions and obey the rules of the network. How will the yield react to the much-discussed staking withdrawal option?

There are basically three scenarios of what could happen:

• Validators will start to gradually exit their staked positions. This could slow the ETH emission rate, causing the yield to be distributed between the remaining smaller pool of validators - resulting in a higher APR
• The option of withdrawal will spark higher confidence in the network, resulting in an increased number of validators. In this case, issued ETH are divided among more validators, causing lower APR
• The amount validator amount balances out, staying essentially the same. This option would not have much effect on the APR

Many analysts, like Adam Struck and Lachlan Feeney, agree that over time an equilibrium of validators (and APR) establishes, resulting in a more sustainable ecosystem. 

Closing Words

In conclusion, the Shanghai upgrade is expected to bring significant changes to the Ethereum network, including the long-awaited unstaking feature. This upgrade has generated a lot of interest within the crypto community, and the estimates for the ETH price and staking yield are closely watched. While it remains to be seen how the upgrade will ultimately impact the network and ecosystem, the withdrawal cap and potential increase in validators are expected to help mitigate any negative effects.