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What is The Ethereum Shanghai Upgrade – When will it Occur, What will it Bring, What to Expect and What’s Next?

The Shanghai Upgrade is currently probably one of the most anticipated events in the cryptocurrency world. The whole community around Ethereum is very hopeful about the changes that it will bring, with mainly the validators and developers really benefiting from it. So what will it bring and what can we expect from it?

Key things about Ethereum’s Shanghai Upgrade

  • The Ethereum Shanghai Upgrade is a hard for that is set to occur on April 12th 2023
  • The main change the fork will allow for is the option of withdrawal of the staked ETH in the Beacon Chain
  • The upgrade has already passed the last test on the Goerli Testnet
  • The upgrade also contains other EIPs, with most of them aiming for reducing the gas cost for Ethereum transactions
  • Sharding becomes the next major goal after the upgrade is successfully implemented

Things to know before understanding Ethereum Shanghai Upgrade

Before we look at what the Ethereum Shanghai Upgrade is, here are a few things and concepts that everyone needs to understand. 

  • Validators are the users (nodes) in the Ethereum network who are creating the blocks and verifying them along with the transactions. These are also the entities that are currently staking at least 32 ETH within the Beacon Chain, for which they are collecting a staking reward in the form of ETH. In case they misbehave, their staking reward will be slashed.
  • Beacon Chain is the Ethereum’s Proof-of-Stake chain that locks the stakes of the validators. It also grants them staking rewards. It was launched at the end of December 2020 and ran side by side with the Proof-of-Work blockchain that Ethereum was using prior to The Merge.
  • The Merge was an event that occurred in September 2022, during which the Ethereum network moved away from the Proof-of-Work consensus mechanism and started using Proof-of-Stake consensus mechanism.

And now, let’s dig deep into what the Ethereum Shanghai Upgrade actually is, when it is happening and other nuances that need explanation about the biggest event on the Ethereum network since The Merge.

Source: Academy Guarda.com

What is The Ethereum Shanghai Upgrade?

The Ethereum Shanghai Upgrade is a hard fork that will allow the stakers of ETH in the Beacon Chain to unstake their tokens. It is also the first major upgrade since The Merge took place in September 2022. While it was first scheduled for March, the core developers have now announced that it will go live on 12th of April.

The Shanghai Upgrade will include several Ethereum Improvement Proposals (EIPs). The most important one is the EIP-4895, which will enable the validators to withdraw their ETH staked on the Beacon Chain. This allows all the validators that have taken part in the staking, going back all the way to December 2020, when the Beacon Chain was launched.

The Shanghai Upgrade will also include several other EIPs. These are for instance EIP-3651 (Warm Coinbase), EIP-3855 (Push0 instruction), EIP-3860 (limit and meter initcode) and EIP-6049 (deprecate selfdestruct). The goal of most of these EIPs is to decrease the gas fees and transaction costs, mostly for the developers, and increase the speed of transactions.

They should thus help Ethereum to fight against many of its competitors such as Solana and Cardano. Especially the layer-2 solutions on Ethereum, such as Polygon, should see the main benefits of the other EIPs. Charles Guillemet, CTO of Ledger, is very hopeful about the upgrade:

“With the Shanghai upgrade, the completion of the blockchain migration to Proof of Stake is a significant milestone in the evolution of Ethereum. Users will be able to withdraw their Staked Ethereum, which will not only bring more liquidity to the market but also encourage those who were previously hesitant to stake their ETH due to uncertainties around locking time. This upgrade highlights the Ethereum community’s remarkable ability to adapt and update its protocol seamlessly. I’m eagerly anticipating upcoming updates that will further enhance blockchain scalability.”

The Shanghai Upgrade should also have incorporated the EIP-4844, which would lead to an improvement in scaling thanks to sharding. However, the proposal was not included in the upgrade and “proto-danksharding.” which it represents, will be looked at as the next stage development of Ethereum after Shanghai Upgrade successfully rolls out.

When is Ethereum Shanghai happening?

Initially, the Shanghai Upgrade was planned to occur in mid-March 2023. However, due to some delays that the execution on the Sepolia testnet brought up it has now been postponed, with the date set for April 12th, 10:27 at the epoch 6209536. This was announced at the #157 Ethereum All Core Developers Execution (ACDE) call that happened on 16th of March.

Why is Shanghai Upgrade being implemented?

The main reason why there has been a need for upgrade of this style ever since the Beacon Chain was launched is the fact that the validators have not been allowed to unstake their staked ETH in the Beacon Chain. After the protocol had successfully changed from Proof-of-Work to Proof-of-Stake, the need for unstaking became a bit more dominant as there was no way of how the validators could get their staked ETH back.

And that is the main reason why Shanghai Upgrade is going to take place. To allow the stakers to withdraw their money from the Beacon Chain, if they want to. And with it, to also withdraw the staking rewards, which they have been earning ever since they started with the staking.

Source: Yahoo

The withdrawal process – partial and full withdrawals

The whole withdrawal process will have few conditions that would need to be met. These are there to ensure that in case too many stakers want to take their money out, the network will not be in danger. A waiting time for validators to access their ETH that they want to unstake will be present. This means that not everyone will be able to unstake their ETH whenever they want, with the daily cap for withdrawals being set at 43,200 ETH.

Only 16 partial withdrawals can take place in each slot, with slots occurring every 12 seconds. Partial withdrawals are only applicable to the rewards that the staking address has collected over the staking period. This means that it will only be possible to unstake anything that is above the 32 ETH minimum that is necessary per one validator. If the validator has their withdrawal credentials set on the Ethereum address, the whole process should be automatic.

The second type of withdrawal is the full withdrawal, also known as unstaking. During this process, the validator can remove not only the staking rewards, but also the stake itself (32 ETH) from the Beacon Chain. This is where the validators will also need to create “withdrawal credentials” and wait in the “exit queue.” This has the goal of protecting the performance of the whole blockchain.

Capella Upgrade occurring in the same time

Interestingly enough, there is one more upgrade that is happening at the same time that Shanghai Upgrade is. It is called Capella, which often leads to people calling this whole event Shapella (Shanghai + Capella). Capella Upgrade went live on 15th of March on Goerli testnet as well as the Shanghai Upgrade.

The main difference between these two is that while Shanghai Upgrade will run on the execution layer, which is responsible for the transactions, the Capella Upgrade is happening on the consensus layer, where the nodes run the Beacon Chain. Thus,Shanghai Upgrade is used as a reference to the execution chain hard fork, while Capella is used as a reference of the consensus chain hard fork.

Will the Shanghai Upgrade impact the price of Ethereum? And if so, how?

Now to the million-dollar question. Will this upgrade affect the price of Ethereum and how? The answer to this question may be a bit more complex that meets the eye. The initial response would be pretty straight-forward, with the answer being: Yes, Shanghai Upgrade will affect the price of Ethereum, which would fall. The reasoning is as follows:

The Shanghai Upgrade will allow people, who have been staking ETH in some cases for more than two years, to finally unstake it and reap the rewards of their staking decisions back in the days. With more than 15% of all the Ethereum that is in the circulating supply being currently staked, if everyone decided to do this, the exchanges could get flooded with the unstaked coins. Currently there is about 17.6 million ETH staked by more than half a million validators, which may be eager to find buyers for their selling positions.

If that happens, the simple economics of supply and demand will likely come into play. With more people willing to unstake, and hence, probably willing to sell Ethereum, the price of the ETH could fall. This could create a significant pressure downwards, which could lead to cascades if some long positions get stopped out or stop losses get triggered.

Source: Forkast News

However, and this is where the answer to the simply-looking question gets more complicated, if Shanghai Upgrade does take place, it can manifest a positive outcome for Ethereum, thus leading to price increase. By implementing the upgrade, the team of developers behind the project may improve the perception of Ethereum. The staked coins can be easily unstaked and the users can do whatever they want with them.

This thus improves the trust in the whole project, but more importantly, it shows that it delivers on its promises. The roadmap of Ethereum is pretty long, with several other phases and plans after the Shanghai Upgrade. And if the Ethereum developers were able to pull off both, The Merge as well as the Shanghai Upgrade (among other impressive developments), why would they not be able to fulfill all of their goals? Thus, a wave of optimism can spread around the market towards Ethereum, which can lead to a buying pressure and pushing the price up.

When we combine both of these effects together one thing is sure. Noone knows and can know what will happen to the price of Ethereum. The arguments for both, the price decrease as well as for price increase are there, which only means that we just need to wait and see what actually happens. The key metric that everyone will need to pay attention to is the number of ETH that is being unstaked. The higher the number, the bigger the chances that a more volatile move, probably mostly to the downside, can occur and vice versa.

What’s next for Ethereum?

After The Merge, which took Ethereum from PoW to PoS, the Shanghai Upgrade has become the most important and dominant event that many were following. Once it goes live, the whole Ethereum community will definitely shift its focus to other plans for the future and it is likely that sharding will become the main talking point.

Thus, it is expected that most of the future updates, or at least the ones that are being planned in the nearer future, will be mostly about scalability and scaling solutions on the network. The EIPs that should include the sharding solutions are currently expected to come in two stages with the first stage being implemented later this year, while the second phase being implemented in 2024. This should finish the stage that is now known as The Surge.

After that, The Verge should help Ethereum become more efficient, The Purge should help with decreasing the amount of the historical data that the nodes must store and The Splurge, currently the latest development stage of Ethereum, is aiming to improve all the previous phases. However, all of these are years ahead and many new updates or upgrades might come by the time The Splurge is in development.  

Final Thoughts

The Shanghai Upgrade is without any doubt one of the most anticipated changes that Ethereum will undergo ever since The Merge. It will change a whole lot of things connected to validators as well as the overall operations of the network. After it is successfully completed, the users will be able to unstake their ETH after more than two years. Yet, the question remains, whether they will want to do that.

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