Will Ethereum Price Drop After the Shanghai Upgrade?

Another big upgrade of Ethereum is scheduled for March 2023 - the Shanghai upgrade will bring the long-awaited possibility of unstaking ETH. Until now, validators had to lock their ETH into the staking smart contract with limited certainty as to what will happen to the coins.

After the Shanghai upgrade is implemented, users will be able to withdraw ETH from the staking contract for the first time since December 2020.

Validators and unstaking

After the Merge, validators took over the role of miners. That is confirming transactions and securing the Ethereum network. The key difference is a lower investment (32 ETH) as opposed to buying expensive mining equipment and electricity.

Being a validator can be as easy as activating the staking contract and running a code on your device. Both decentralization and electricity consumption has improved with the Proof of Stake model.

Unstaking means redeeming staked coins from the contract and no longer participating in the network. Users can try out the upgrade on test net being available during February. The full version of the upgrade on the mainnet will take the form of a hard fork.

At the time of writing, there are over 500 000 active validators. Once unstaking is enabled, there will be a withdrawal cap of 43 200 ETH per day processed through a queue.

An analyst, Lucas Outumuro said in a newsletter: “Based on this, it would take over a year for the 15.91 million ETH staked to be withdrawn, preventing mass withdrawals and mitigating selling pressure,”.

Post Shanghai

There are multiple opinions as to what could happen with the Ethereum network after the withdrawals are enabled.

Certain capital outflow and selling pressure are expected, as some validators will want to access their rewards. However, due to the withdrawal cap of 43 000 ETH per day, this outflow should not be that abrupt. At this time, there is no way to tell how many validators will unstake immediately after the upgrade.

We are seeing a significant rise in staking activity as the upgrade approaches, which hits a more bullish sentiment. Believe in the network remains strong, as an increasing number of users are willing to stake their coins to participate in the validation.

With that said, the withdrawal possibility could raise confidence even more and remove a degree of uncertainty for many people.

What of liquid staking?

Liquid staking enables users to stake with less than 32 ETH by utilizing the so-called Liquid staking derivatives (LSDs). More on that in our Liquid staking post. It is expected for liquid staking solutions to continue accruing new users, especially after the upgrade due to the reduced risk of holding a derivative. 

LSDs will become redeemable 1:1 to actual ETH directly in the platforms and thus enabling tighter arbitrage ranges as opposed to what we see now.

Devs concerned

A minority of Ethereum core devs have recently raised concerns about the technical state of the Network and its readiness for the Shanghai upgrade. Particularly strong voice, Micah Zoltu commented that the upgrade is being rolled out too soon just to meet public expectations.

He said that by sticking to the scheduled upgrade term in March, developers could be creating unnecessary technical debt. This debt would be caused by not implementing a new encoding system for Ethereum. 

By switching the encoding system now, developers could save themselves a lot of labor work later on. This tweak should take an extra two to four weeks to implement, but at this point, it looks like the upgrade will be here on time.