Ethereum’s eagerly awaited Shanghai upgrade is set to go live soon, marking the blockchain’s years-long transition to proof of stake. This article explains what you can expect from the upgrade and its impact on the Ethereum network and its users.
What is the Shanghai Upgrade, and Why Is It Significant?
The Shanghai upgrade will allow the withdrawal of staked ETH from the Ethereum blockchain network. Since December 2020, users have deposited over $32.95 billion worth of ETH with the network, marking Ethereum’s transition to a proof-of-stake model. The merge event in September 2022 upgraded Ethereum’s mainnet to a proof-of-stake consensus mechanism, reducing the network’s carbon footprint by 99%, according to figures from the Ethereum Foundation.
The Shanghai upgrade will make the funds deposited by stakers and rewards generated by those funds accessible. This marks a significant moment in Ethereum’s history, completing its transformation to a proof-of-stake network.
What Does the Shanghai Upgrade Mean for You?
Most Ethereum stakers who deposited their ETH with the network through intermediaries like Lido and Coinbase will not need to do anything once Shanghai goes live. Intermediaries such as Lido will introduce the capability to withdraw staked ETH about a month after the upgrade, while Coinbase has not offered a firm timetable, saying the process could take up to several months for some customers.
For independent validators who staked directly with Ethereum, matters will be slightly more hands-on. Validators must first provide a withdrawal address for staked funds to be sent to. They can then opt for either a partial or full withdrawal. Partial and full withdrawals will be processed in the order they are received by the network.
Benefits of the Shanghai Upgrade for Ethereum
The Shanghai upgrade of Ethereum will allow users to withdraw staked Ether, increasing market liquidity and making it easier for users to access their funds. The upgrade will benefit Ethereum liquid staking platforms, which emerged to alleviate the blockchain’s prohibitive lock-up and staking requirements, by increasing competition between these platforms and likely benefitting their users through lower fees and additional perks in exchange for their loyalty. Liquid staking providers like Lido, Rocket Pool, Ankr, Coinbase, and Frax Finance are anticipated to enjoy an increase in usage post-Shanghai. Furthermore, the increased competition between these platforms will likely benefit their users through lower fees and additional perks in exchange for their loyalty. The Shanghai upgrade will increase Ethereum’s staking ratio, bringing it closer to its competitors and helping to secure the protocol’s dominance as a layer-1.
What Will the Shanghai Upgrade Mean for the Ethereum Ecosystem?
The Shanghai upgrade will be a notable event for individual stakers and a symbolic culmination of Ethereum’s transformation to a functional proof-of-stake network. However, it will not meaningfully change how users interact with Ethereum or the underlying economics of the network itself.
Most people have been able to sell staked ETH for quite some time because ETH has been staked through platforms with liquid staking derivatives (LSDs), like Lido or Rocket Pool. This has resulted in a sizable portion of the capital supposedly held captive in Ethereum’s staking deposit contract traveling freely around the crypto ecosystem for years. The upgrade is another step in the progression forward, and Ethereum looks poised to chug along post-Shanghai without much noticeable difference.
The Future of Ethereum
The Shanghai Upgrade is a much-needed solution that will spark a new wave of innovation and attract more participants to the Ethereum blockchain. The upgrade aimed to enhance its security, efficiency, and sustainability. However, it’s just one step in a larger evolution that will make Ethereum more functional. It introduced multiple modifications, such as EIP-1559, which aimed to make transaction fees more predictable and decrease network congestion, EIP-3554, which delayed the difficulty bomb, and EIP-3529, which reduced the gas cost of specific transactions. The next upgrade, Sharding, will improve Ethereum’s scalability and capacity by separating the chain into smaller chains.