What is Ethereum Shanghai Upgrade? What’s IN and Out

Introduction

The shanghai upgrade is gunning to bring some dramatic changes in Ethereum’s proof-of-stake (POS) consensus mechanism. Apparently, stakers long awaited the upgrade. Besides its effect on staking, it is anticipated that there would be some visible ramifications on ETH’s market demand. Therefore, understanding the upgrades that ETH is preparing for is more crucial than ever.

In this blog, we will decode Ethereum Shanghai Upgrade, every aspect related to it, and its future effects. So, let’s begin.

What is Ethereum Shanghai Upgrade?

Next month, i.e., March 2023, is when the most awaited Ethereum Shanghai Upgrade will occur. Validators and stakes will be able to remove assets from the beacon chain thanks to the upcoming hard fork. In September of last year, Ethereum saw the most significant change in a decade. In it, Ethereum’s consensus mechanism proof of work was switched to proof of stake. Users could participate in validation owing to the 2022 hard fork, and the staking limit was increased to 32 ether (ETH). This staking was now feasible without requiring challenging mining machinery challenges.

Users have yet to be able to withdraw their staked assets since the Merge, which combined the PoS Beacon Chain and the Ethereum mainnet. The Shanghai update (EIP-4895) fixes this problem and adds withdrawal capabilities. The launch date of this upgrade moved from January 05, 2023, to March 2023.
The users can test the update on a public test network once installed in Shanghai.

Furthermore, the upgrade is subject to huge ramifications because staked Ether represents around 16 million coins or almost a sixth of the token’s total supply. Over $26 billion is currently the market value of all staked Ethereum.

What Is Staking in Ethereum?

Ethereum’s move to POS enabled users to stake ETH as a part of the consensus mechanism. The energy-intensive PoW mining technique used on a network like Bitcoin has an alternative: PoS. Users can temporarily lock 32 ETH to run creator validator nodes, contributing to network security and transaction validation.

Other validators send new blocks to each validator on the Ethereum network. After examining the transactions and block signature, the validator certifies that a block is valid. Stakeholders will now be able to withdraw their locked ETH thanks to the Shanghai update. Before the Beacon Chain’s introduction in December 2020, this feature wasn’t accessible.

The potential impact on ETH’s price will be one of the top concerns for traders. According to Staking Rewards, 13.81% of all ETH coins are staked at the time of writing. Withdrawals are now permitted, which increases liquidity significantly and gives holders of staked ETH the ability to sell existing staked holdings. The proportion of tokens staked out of the total supply is something to keep an eye on for many buyers and sellers.

Since the merge, which saw the Ethereum mainnet combine with the PoS Beacon Chain, users have yet to be able to remove their staked funds. The Shanghai update (EIP-4895) resolves the withdrawal functionality issue. As per the latest news, Ethereum developers have agreed to a March 2023 date for the upgradation of the network. Furthermore, the users will now get to test the upgrade with a public test network, most probably by the end of February 2023.

How will Ethereum Shangai Upgrade benefit the users?

Along with Ethereum Improvement Proposal-4895, or EIP-4895, the Shanghai upgrade’s most significant change—allows validators to withdraw staked tokens. Around 16 million ETH have been staked by validators to aid the mechanism’s security. Since September 2022, when Merge started switching Ethereum’s consensus method from proof-of-work to proof-of-stake, validators have been particularly important to the Ethereum network. Following the Merge, validators can stake 32 ETH in the chain to be eligible to participate in validating blocks. Each ETH staked increases a validator’s chance of obtaining block rewards.

However, its increased liquidity makes staking on ETH more appealing to users. The opportunity to stake ETH directly with Ethereum is now available to anyone who wants to refrain from employing liquid staking mechanisms. The better staking circumstances may result in a demand for ETH.

The price of users’ native tokens held on liquid staking platforms can also change. The justification is that Ethereum eliminates the exceptional functionality that liquid ETH staking provides by allowing withdrawals.

Bottom Line

The upgrade has opened an essential feature for Ethereum stakers or those considering staking is enabled by the Shanghai update. With this merger, those anxiously awaiting a fully operational Proof of Stake system can smile. Anyone with access to ETH would benefit from understanding the upgrade and what it offers, even though its possible impacts on the market remain unpredictable.