Ethereum is the second largest cryptocurrency in the world, with a market cap of nearly $225 billion. In addition, the blockchain underpins most high-growth corners of the market, including Web3 and decentralized finance (DeFi). Traders, investors, consumers, and businesses should keep up with the latest changes and upgrades involving Ethereum.
Aside from the Merge last year, Ethereum's Shanghai Upgrade is one of the most significant updates in the blockchain's history. It also marks a critical milestone in the transition to Ethereum 2.0 over the coming years. But there could be some bumps along the way. So, it's worth taking a few minutes to understand what's happening and how it could impact you.
In this article, we'll look at the ramifications of Ethereum's Shanghai Upgrade and what it could mean for both the cryptocurrency's price and its long-term outlook.
A Brief Backstory
Ethereum launched the Beacon Chain in December 2020 as part of a migration from proof-of-work to proof-of-stake. In September 2022, the Merge switched the Mainnet to the Beacon Chain, moving the entire blockchain onto proof-of-stake. The results promise to speed up transactions, lower gas prices, and unlock other benefits.
Under the proof-of-stake mechanism, individuals or groups willing to stake 23 ETH (~$150,000) could validate transactions in exchange for rewards. However, these individuals couldn't remove their staked ETH until Ethereum developers finished the withdrawal mechanism in the Shanghai Upgrade, which was expected sometime in early to mid-2023.
Validators Get Liquidity
Ethereum's Shanghai Upgrade will enable validators to withdraw their staked ETH (IEP-4895). And with ~16 million staked tokens worth over $26 billion, the change could spark some volatility in the world's second most popular cryptocurrency. It's worth considering all possible outcomes to prepare for every possible eventuality.
Validators could decide to pull their staked ETH from the system, potentially leading to lower ETH prices. In particular, they could create a "withdrawal credential" to unstake any rewards they've accrued over the past few years. Or, they could exit the Beacon Chain completely by unstaking all 32 ETH (the initial investment).
However, many analysts think that's unlikely due to high staking yields and the cryptocurrency's strong presence in decentralized finance (DeFi). As of late March 23, on-chain staking yields are paying roughly 5% APY. Plus, some analyses suggest that many stakers are in the red and would experience significant losses if they sold.
Some analysts believe there will be a positive impact on Ethereum's price because there will be more staking options. These new stakers could include institutional investors, pouring more capital into the cryptocurrency and helping stabilize capital flows. The risk of staking will also drop since stakers could take money out anytime.
Gas Prices Could Ease
Ethereum's Shanghai Upgrade also introduces some measures to lower gas prices. While gas prices are about half what they were a year ago, they still amount to about 25 Gwei in late March, which translates to paying between $10 and $20 for most common transactions. So, there's still plenty of room for improvement – especially during congestion.
The Shanghai Upgrade changes impacting gas prices include:
- EIP-3651 will lower gas costs related to Maximal Extractable Value (MEV) payments when accessing the COINBASE address. Note: COINBASE is unrelated to the crypto exchange and refers to the software enabling developers to receive new tokens.
- EIP-3855 will lower overall gas costs for developers.
- EIP-3860 will cap developer gas costs for some use cases.
- EIP-6049 addresses similar gas-related concerns.
What's Next for Ethereum?
The Shanghai Upgrade is just one of several updates planned for Ethereum over the coming year and beyond.
The most significant upcoming change, EIP-4844, will introduce the concept of "danksharding" to scale transactions and reduce gas fees. In essence, danksharding will bring massive amounts of space onto the Ethereum blockchain for rollups to dump their compressed transaction data – making rollups much cheaper to execute.
Other improvements will focus on enhancing the Ethereum Virtual Machine (EVM). As Ethereum has grown, EVM has become much slower. Developers hope to replace the EVM with eWASM, which compiles code much faster and speeds up processes on the network. Gas also works more efficiently with eWASM, helping lower development costs.
These upgrades could help Ethereum 2.0 become a much more widespread platform for developers in particular. With lower gas fees and faster transactions, the blockchain could see more use cases open up across Web3, DeFi, and beyond.
The Bottom Line
Ethereum's Shanghai Upgrade will open the floodgates for validators to sell their staked ETH. But don't expect to see a rush for the exits since many stakers are underwater. Instead, many analysts believe the upgrade will help support ETH prices by democratizing access to staking, lowering gas fees, and making other improvements under the hood.
At the same time, the Shanghai Upgrade is just one piece of the larger Ethereum 2.0 puzzle. With plans for danksharding and the new eWASM, the blockchain could see a flurry of new updates over the next two years, ushering in a new era of lower gas fees, better performance, and perhaps opening the door to broader adoption.
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