Shapella Upgrade: Will ETH Go Up or Down?
17th April 2023 — In another edition of Bitrue’s Twitter Spaces “Ask Me Anything” session, we discussed one of the most talked about upgrades in the space — Ethereum’s Shapella Upgrade — with Mark Lee, CMO of SynFutures and Dora Tang, CEO of Exchangily. The Shapella Upgrade is essentially a series of upgrades — known as Ethereum Improvement Proposals (or EIPs for short) — designed to improve the security and scalability of Ethereum as a whole. Amongst the EIPs laid out for the Shapella Upgrade, one of the most important EIPs for this round of upgrades is EIP-4895 — which will allow previous validators of the Beacon Chain to unstake their 32 ETH.
Without further ado, take a look at the main Q & A’s from the session below if you missed out:
Q1. For those unfamiliar, what is Ethereum’s Shapella Upgrade? Could both of you share more about what the Shapella Upgrade means to both of you?
Mark: The Shapella Upgrade, which is also known as the Shanghai Upgrade, is a significant one because it marks the completion of the transition from POW to POS for Ethereum. So this is the completion of going from Ethereum 1.0 to 2.0. And as you mentioned, one of the most significant portion is a series of proposals, but the most significant proportion is going to be EIP-4895, which is pretty much, I think, the major topic for the crypto industry. And what EIP-4895 does is allows stakers to withdraw their stake either partially or fully finally. Depending on what group you’re in. This is a major upgrade for the network itself.
The upgrade is expected to bring significant improvements to the network, including faster transaction processing times, reduced fees, potentially increasing demand, and driving up the price of Ethereum. So I think that’s kind of all in summary. What it means to me personally is, well, not only personally, but for retail crypto holders in general, is it de-risks Ethereum staking. Because now people can come and go as they please. But I think what’s more interesting is, given the past blow-ups of centralized systems, it’s bringing a lot more attention to liquid staking derivatives like those offered by platforms like Lido and Rocket Pool. I think it’s certainly bringing more attention to not only just centralized staking but decentralized staking as well.
Q2. From a community standpoint, what is the Ethereum Shapella Upgrade, and what are its goals?
Mark: Aside from the staking portion, I think it’s an important upgrade because it aims to improve the performance, security, and functionality of Ethereum. From a community standpoint, the Shapella Upgrade represents a significant milestone in the ongoing development of the network. And as I mentioned, it completes the transition to a POS consensus mechanism which, compared to, let’s say, Bitcoin, which is off proof-of-work, is much more energy efficient without sacrificing any of the security. It’s really focused on improving the efficiency and scalability of the Ethereum network. The upgrade is expected to reduce some of the energy consumption, making it more sustainable in the long term and making it more environmentally friendly. And it’s also designed to increase the transaction throughput so it’ll be able to handle more transactions per second and support a wider range of use cases such as DeFi, NFT, and any other kind of high transaction dApp use cases.
Q3. In your opinion, how will the Shapella Upgrade impact Ethereum’s overall performance and scalability?
Mark: Yeah, so it is expected to impact scalability and performance notably. Generally speaking, from a high level, the finalization of this migration to POS replaces the POW mechanism. This will change and increase the efficiency of the network and reduce energy consumption. Like I mentioned, the merging of the two networks, Ethereum 1.0 and 2.0, will unify the network and make it easier for developers to build on. And then, with the introduction of the beacon chain, it’ll better coordinate communication between Shards and the Ethereum network. So this will increase the scalability of the network, allowing it to process more transactions more efficiently. Overall, I think these changes will increase the usability not only for the users of the dApps that are deployed on Ethereum, but also for the developers building on it.
Dora: I think it’s a big deal for the Ethereum blockchain. This particular upgrade, it’s all about withdrawals. It makes the Ethereum blockchain more complete, and people have a little concern about the withdrawal. It’s going to influence the price of Ethereum. However, as a validator, you see, only over 200 validators signed up to access the data status. So, we shouldn’t have a lot of concern on this.
Q4. What do you think are the more notable or significant changes implemented in the Shapella Upgrade?
Dora: Following this upgrade, people must ensure they’re up-to-date. Otherwise, you will lose your stake money. So, one of my friends actually already saw that if you forget to update. This upgrade improves the scalability and will help improve the scalability and keep the gas fee low. So, it’s a good thing for the community overall.
Mark: Yeah, I think the biggest thing is the staking component of this upgrade. As I mentioned earlier, I think the big change with this upgrade is that it de-risks staking for potential stakers. Now there’s no lockup period. And so what’s interesting is the big question was whether this major event will add to selling pressure for Ethereum as people can unstake and sell their holdings. But we’ve seen that many of the initial validators have been re-staking back onto the beacon chain. So I think it really speaks volumes about what the sentiment is. It’s still a relatively bullish sentiment for Ethereum and the ecosystem in general. But also, it really points to the fact that this has significantly de-risked the idea of staking Ethereum.
Q5. What is the importance of the Ethereum community in the Shapella Upgrade, and how can developers continue to contribute to the growth of Ethereum?
Dora: Overall, it’s a good thing for the developers. It will increase the activity of developing more applications on the Ethereum blockchain since the throughput has improved a lot since the last upgrade, and the gas fee has been kept low. So it’s very compatible for the other alter chains in the space. So overall, it’s going to increase in building a healthy ecosystem for the Ethereum blockchain.
Mark: Yeah, and I completely mirror what Dora said. This is a significant event not just for stakers, but for developers. It gives them a lot of flexibility regarding how they build on Ethereum. And I use that term flexibility because Ethereum directly improves the throughput and efficiency and, ultimately, the scalability and sustainability of the network. But it also speaks to the growing Ethereum ecosystem, right? So, developers, today benefit from the Shapella upgrade in terms of increased efficiencies. But even looking beyond that, developers have a lot of optionality as to where and how they deploy on Ethereum. One example of this is that they can explore the mainnet and look at other Layer Twos that are building on top of Ethereum.
Q6. How does the Shapella upgrade compare to other upgrades like Berlin, London, or The Merge last year?
Dora: I really like how they named all the milestones, using city names. So for this one, it’s named Shanghai. As an Asian who visited Shanghai, I think this is why we’re discussing this here. So that is the execution layer of the Shapella Upgrade. Compared to other ones, every upgrade actually has its own purpose, and specific goals. And since The Merge last year, Ethereum had transitioned from POW to POS, and it really impacts not only the environmental friendliness, but also gives a lot of room in the performance area in scalability and to lower the fees and for further development. This particular upgrade this month allows people to withdraw and make it complete, giving them more confidence in the long run.
Mark: Yeah, and like Dora mentioned, every upgrade plays a significant or essential role in developing the Ethereum ecosystem. Right? So if we look at the last upgrades as an example, like Berlin and London, those primarily focused on the Ethereum 1.0 network, whereas Shapella or Shanghai focuses exclusively on 2.0. And again, the big theme for CHAPELLA is being able to unstake. Right? Whereas Berlin and London were focused on improvements to the gas fee structures. So, I think overall, every upgrade has some specific focus, but all point to making the Ethereum network more scalable, efficient, and productive.
Q7. With the Shapella Upgrade live now, validators will be able to partially or fully withdraw their previously staked ETH. What do you think will happen? Will the ETH be re-staked on other platforms? Will there be a sell off?
Dora: I believe there will be some sell off, but the impact will be kept to a minimum because of those upgrades. In the long run, the Ethereum blockchain will be more useful and user-friendly for applications. But in the short run, some people may like to sell their ethereum. But however, you’ll see a lot of re-staking activities, and the withdrawal won’t happen overnight. It will be done over a period of time, like weeks and months. So, there won’t really be a sell-off impact on the market.
Mark: Yeah, and it’s still early. Right. So, as Dora mentioned, unstaking and withdrawals won’t happen all at once. But from the early data, we’re seeing that I think something like 1 million has been withdrawn already or so. But a lot of it is getting re-staked into the Beacon chain directly, so it’s going right back in, which is really a bullish signal for, I think, the midterm. And then it’s brought a lot of attention to liquid staking derivatives. So I don’t think any immediate movement suggests that there will be a huge wave of staking on some of the decentralized protocols. But I think just the sheer fact that people are starting to talk about this more and the fact that liquid staking derivatives are one of the big narratives of this year suggests that maybe the initial fears of the selling pressure from the unlock is a little overblown. Again, it’s still early, too early to say, but I think from the on-chain activity that we’re seeing, it seems relatively stable, and it seems a lot of validators are committed to kind of doubling down on Ethereum staking.
Q8. When discussing Ethereum and staking, we want to discuss Liquid Staking Derivatives (LSDs). There are some concerns about centralization and the risk of de-pegging when it comes to this. What are your thoughts on these concerns?
Dora: The centralized concern plays a role here for staking. Since its transition from POW to POS and there are a lot of staking programs going on, and you have more money, then you have more opportunities to make more money, and people have a lot of discussion on the Ethereum blockchain becoming the rich people’s blockchain. So, you will see institutional stakeholders and more big stakeholders and have a bigger influence on the Ethereum blockchain. So it’s definitely a bit of a concern, but however, I think in order, this is one of the solutions, there are quite a bit of solutions for scalability on the public blockchain, and this solution that Ethereum 2.0 is taking right now is definitely fit for its entire design. And I personally support this. I think it’s a good change for the Ethereum blockchain. There are all other blockchains out there, and you can also take a look at them in taking a different route. I believe those stakings and programs encourage the investor and also the user to use their actual assets to make some money people love DeFi so far, but however the regulators SEC, they start to regulate this space. So definitely, we need to embrace the regulations and enhance our risk management if we are running an exchange, either a centralized or decentralized exchange. So, we definitely really want to do it without the custody responsibility. However, we do want to embrace change and also follow regulations.
Mark: I was going to say, yeah, I think the point about regulation is important, and it’s a great point that was brought up. I think it really influences where users focus. I think in the short term, just with the current regulatory environment, especially in major markets like the US, it’s getting stricter and stricter for even centralized staking services. Right. Which is part of the reason I think people think that LSD is making more market share, at least in the short term. Right. Because it’s a flight to kind of safety. You don’t know whether some major centralized platforms will shut down the staking services in markets like the US. If you go back over the last year, we’ve seen all these centralized failures with exchanges and lending platforms.
And so I think there’s a migration in general for the average kind of DeFi user to shift from centralized services to decentralized. And LSDs and the rest of DeFi bring in many benefits compared to centralized services. It’s not always one or the other, it’s sometimes a nice alternative to have that’s noncustodial, fully on-chain, and transparent. Right, but I think the point that you brought up in the beginning about concerns about LSDs being centralized, there is some truth in that, and this is true with not only LSDs, but a lot of kinds of Web 3 projects as they are today. They’re not as decentralized as we hope they would be. And it’s not intentional.
I think it’s because we’re still in a nascent industry, and everyone’s trying to get to all the DeFi projects that I know of, including LSDs, which are moving toward full decentralization, but they’re not quite there yet. But I will say the concerns about centralization, at the very least, these DeFi protocols are certainly less centralized than their centralized counterparts. And then, when you think about LSDs and just DeFi in general, there are many other kinds of risks that a user should think about the risk of de-pegging is one of them, and smart contract security is another.
So I think as a user, it’s important to really do your own research on which platform has the most robust risk management protocols in place and what their kind of audit reports look like. If we’ve learned anything from the centralized exchange blow-ups and even the recent banking crisis with Silicon Valley Bank and Signature Bank, we should also be diversifying risk across protocols. Right. So this means as a user, especially if I have sizable holdings, you don’t want to put everything in one protocol even after you do all your research. You want to try to spread it across as many as you can within a reasonable perspective.
Dora: I totally agree with Mark. This really gives people a sense that risk management is important. I support some sort of regulations instead of everybody can run staking and DeFi (either centralized or decentralized). People could get confused. You see a lot of scammers out there. I mean, a lot of them, and people have been contacting me every day, complaining about how they lost the money. Safety is the first concern. We should keep safety as the number one issue, and we want to use a platform that is safe, and won’t run away or get hacked easily. Definitely, that’s my opinion.
Mark: Yeah. One big misconception in the DeFi space is that DeFi projects don’t like regulation and they want to operate in this lawless environment. But that’s not true. For every DeFi project, including ours and many partners, we would welcome some regulation if it was informed and well intended. Right. Because ultimately, the goal of regulation by major regulators across the world is just a single purpose to protect consumers and protect investors. And I think most of the DeFi projects that are legitimate, that’s their ultimate goal as well. They’re doing everything they can to ensure the security of their users’ assets and things of that sort. Regulation is not necessarily bad. The current challenge is there’s so much kind of uncertainty in the regulatory environment, I think the industry urges regulators to bring some clarity into the space. Yeah, I think the future of DeFi could be with some regulation involved. Again, the goal is to ultimately protect users and their assets.
Q9. How do you think the Shapella Upgrade will affect LSD protocols, its token prices, its staking volume, and so on?
Dora: After the upgrade, it will encourage the LSDs, and you’ll see many similar programs going on across all kinds of other blockchains as well. And for the Ethereum blockchain, I think this upgrade, it provides people with more complete service. You can stake, and withdraw everything smoothly while giving people confidence.
Mark: Yeah. And as it relates to LSD governance tokens and how they’ve been performing, I think all of the anticipation leading up to the Shapella upgrade has made it. I think LSDs have been some of the best performing assets of this year (2023). If you look at Lido and Rocket Pool. On average, their tokens have increased this year anywhere between like 100% to 150% against the USD. And it has outperformed Ethereum by about 40%. The question now is what we see, not just in crypto markets, but even in TradFi markets, is the concept of “buy the rumors, sell the news”, right? So the question that I have personally is whether these LSD projects have performed really well in the market this year, given the anticipation. But now that the upgrade is live, do we see some cooling off? And I think that largely depends on what we see in the next 2 to 3 months in terms of new user adoption of LSDs. So I think it’s yet to be seen, but I personally am tracking prices a bit more closely now that the news is out.
Q10. How will the Shapella Upgrade impact Ethereum’s adoption and mainstream use?
Dora: It seems to be a mainstream trend to move from POW to POS. And I think it’s positive. The Shapella Upgrade positively impacts the Ethernet blockchain’s ecosystem. But however, I think there are Pros and Cons for POW and POS, respectively. And I still support it, I think when it comes to POW, there’s still some sort of electricity consumption, and it’s withdrawals, and everything costs some kind of energy. If you compare it to the traditional banking system, you see all those branches, and they print out bills and coins, and everything really costs. Compared toTradFi energy consumption, the energy consumption of POW is not really a concern.
POS seems really popular right now. Regardless of it being POW, POS, or POH, whatever the people have on the public blockchains, I think they are going to coexist, and it’s not going to disappear. Researchers have also revealed that there won’t be a situation where a certain consensus model will rule it all. That won’t be possible. I think coexisting will be the future.
Mark: Yeah. And to add to that, the Shapella upgrade, I think could bring more liquidity to the market. Right. Because it makes withdrawals more accessible, could help attract more users to participate in staking. The upgrade could also drive more competition across liquid staking platforms because there now is a more comparable solution to compete with them. And this means users may benefit in the mid to long term. What they might see as increased competition is user platform, lower platform fees, and other kinds of perks that go along with it. In the long run, Ethereum’s dominance is being it feels like the Ethereum dominance is being cemented. As I mentioned before, the network is now extremely flexible, and developers and users have a lot of optionality as to what type of apps they use across different kinds of Ethereum-supported networks.
So not just on the Mainnet, but also on the zk roll-ups that are coming up and the optimistic roll-ups like Arbitrum. So again, I think this brings much more utility to the Ethereum network. It’s not like a “one solution fits all” type of approach. And then, as it specifically relates to the Shapella upgrade, I think because it’s mainly focused on the Staking component, I don’t think it immediately has this huge impact on Ethereum’s potential adoption and mainstream use. Rather, I think it really builds on the kind of existing infrastructure of Ethereum, just making it easier for people to get involved, not just developers, but also now validators. And I think it really speaks to the efforts of the Ethereum Foundation to make these significant improvements over time to make the network more robust and bring a lot more utility to it.
Q12. I also wanna bring some attention to the environment. Now that Bitcoin is on PoW and Ethereum is on PoS, do you think that Ethereum will be more attractive to people looking for an environmentally-friendly option?
Dora: Yeah, for people who really care about environmental friendliness, I think definitely Ethereum right now is one of the biggest ecosystems, so it’s definitely the number one choice for most of the developers, it seems. But there are a lot of other alter chains. They are compatible with the Ethereum blockchain, and being environmentally friendly is definitely the way to go. Energy won’t be a concern in the future, I think? Still, people care about global warming, and they would like to stay environmentally friendly. However, there are concerns with centralization, and maybe we can find more and more 100% decentralized solutions in the future. And it’s always pros and cons in every solution.
Mark: Yeah, and I think the question of POW versus POS is becoming less and less relevant, partly because there is a lot of Layer Twos that you can utilize even for Bitcoin. You have different projects working on, like a DeFi layer for Bitcoin, but the reality is Bitcoin is still largely seen as just a single-purpose blockchain. It only exists to support Bitcoin as an asset. And because of that, I think the POW consensus works pretty well for Bitcoin, but it’s not necessary for maybe Ethereum, which means the POS move makes a lot of sense because Ethereum has always been like the application layer, almost like an operated system for Web 3 apps. Although I will say maybe again, it is becoming less and less relevant to Ethereum’s mainnet scalability, because so many people are building these amazing scaling solutions on top of Ethereum. And then, as Dora mentioned, developers have even more optionality now that they can go beyond just Ethereum and Ethereum Layer Twos and into other EVM-compatible ecosystems. But I don’t think this takes away from Ethereum. I think this actually adds to it because the sheer fact that EVM-compatibility is becoming somewhat of an industry standard really speaks to the growing influence of Ethereum in general. And. Really holds a lot of promise for what the future of Web 3 is going to look like with a lot of it being kind of powered by EVM or EVM-compatible networks.
