How Shanghai Could Change Institutional Appetite for Ethereum

Ethereum is expected to complete its highly anticipated Shanghai upgrade just minutes from now. 

That means the network behind the world’s second-largest cryptocurrency will finally allow users to withdraw the ETH that has been locked up over the past two years.

But what does that mean for institutional investors? Will they be more attracted to the asset? Will big money be more attracted to the new, improved blockchain? 

A bit of background first: Ethereum used to run on a proof-of-work blockchain—just like Bitcoin. This energy-intensive consensus mechanism uses miners to solve complex equations with massive computers, all to generate new blocks and earn digital currency rewards.

But Ethereum last year moved to a proof-of-stake blockchain, which eliminated the need for miners and instead replaced them with validators: people who pledge Ethereum (Ether—or ETH) to keep the network running. 

The latest network upgrade will allow those validators to withdraw the ETH they’ve staked to the network—currently over $34.7 billion in cryptocurrency. Before the upgrade, those who’d pledged ETH to the network could not take it out. 

The upgrade means that there will now be more liquidity with investments, and this is attractive to large, conservative investors, according to Diogo Mónica, the co-founder of digital asset trust bank Anchorage Digital. 

Mónica told Decrypt that the lack of liquidity previously scared funds away from Ethereum. But with this upgrade, institutions which previously didn’t stake cryptocurrency (and instead just bought ETH and sat on it) would now be interested in pledging ETH. 

“I expect a flip to happen: the large majority of them [institutions] will stake and very few of them are going to have unstaked Ethereum,” he said. 

He added that the move will also attract big funds focused on having an ESG (environmental, social and governance) investment strategy: Ethereum is now far-more energy efficient—99.95% more, according to the Ethereum Foundation—and therefore a greener digital asset. 

Lachlan Feeney, founder and CEO of Australian blockchain consultancy Labrys, echoed Mónica’s comments, and told Decrypt that he “expects more, not less, ETH to be staked” in the long-term by institutions.  

The upgrade “should alleviate risk for investors because their assets aren’t locked, as they were prior to the upgrade,” said Feeney.

“Previously, institutional investors would likely have been reluctant to lock their assets without the option to withdraw,” he said. “Now that such an option exists, it de-risks their investment, removing the deterrent that previously existed.”

Marc Arjoon, a research associate at investment firm CoinShares, told Decrypt that hedge funds will be more attracted to Ethereum because they will be able to delta neutral hedge ETH—an investment strategy that aims to reduce risk associated with price movements in the underlying asset.

This is because hedge funds that are shorting the price of Ethereum (betting on its future price to go down) will have some protection because they will be earning rewards on the staked crypto anyway, he explained. 

If Ethereum’s upgrade goes according to plan tonight, many are betting that the cryptocurrency will attract more mainstream, traditional investors, which could prove bullish for the price of the asset long term. Since the start of the year, ETH is up 60%, currently trading for around $1,916.