What is the Ethereum Shanghai update and its impact on users?

The Ethereum team has set a date for the Shanghai-Capella (Shapella) mainnet hard fork. The long-awaited update is announced approximately on April 12 (epoch 620.9536). This will allow network validators to withdraw delivered ETH coins from the protocol to wallets or exchanges for further trading and involves several improvements to the system. Many community members are concerned about the potential pressure on the price of Ethereum because of the opening opportunities.

While some believe the upgrade will harm tokens of liquid staking services and the market, another part of the community is confident that the upgrade will bring only positive outcomes. Is there any reason for anxiety? In this article, I will discuss the update, its prospects, and its impact on the crypto market and prices. Let’s break this down together.

The reason for the implementation of the Shanghai Upgrade now?

This upgrade is second in importance only to The Merge, when Ethereum changed its consensus mechanism from Proof of Work to Proof of Stake in September 2022, entailing that the network relies on validators instead of miners to run it. To become a validator, participants must stake 32 ETH, which was locked until the next update. Since the launch of Ethereum’s Beacon Chain, validators have accrued rewards for validating blocks. The Shanghai Upgrade will enable validators to cash out their rewards.

What is included in the Shanghai update

The Shanghai update comprises several Ethereum Improvement Proposals (EIPs) to enhance the network’s efficiency and scalability. These proposals include :

• EIP-4895, which introduces a mechanism for withdrawing ETH coins from staking, allowing validators to access their rewards.
• EIP-3855 improves transaction speed by reducing the size of smart contracts and optimizing contract code.
• EIP-3860 optimizes transaction fees.
• EIP-3651 reduces the cost of block creation.

The Shanghai update is just one of the steps towards improving the network’s scalability, with more major updates expected in 2023. These updates will include sharding, a process that segments the Ethereum network, thereby increasing its scalability potential.

Preparation for the updates

Ethereum developers activated the Shapella hard fork on the Goerli test network on March 15. According to them, it will be the last before the update is activated on the main network. But the team ran into problems during the update — due to network participants’ low involvement, the hard fork implementation took 15 epochs. According to developer Tim Beiko, this is due to a lack of incentive for users to become validators, as “ETH [in testnet] isn’t worth anything.” This hard fork was the last step before updating the main network.

If the EOF implementation proves too difficult, the technology’s implementation will be pushed to the fall of 2023. Another update is planned for that time, which will activate EIP-4844. It involves implementing “most” logic and formats from the dunksharding technology specification.

How will the Ethereum Shanghai update affect users and price

The following information is neither intended as financial advice nor should it be construed as a call to take any particular action.

The Ethereum Shanghai update, which will allow investors to release blocked ETH for the first time since 2020, is expected to have varying impacts on users and price. The update will increase liquidity for ETH stakers, who can withdraw and sell their blocked assets and may lead to increased demand for ETH due to improved staking conditions. However, the update may affect the price of native tokens of liquid-staking platforms. The ability to withdraw funds to Ethereum deprives liquid-staking ETH of one of its key functions.

Experts believe that a mass withdrawal of funds is unlikely, as the withdrawal of funds will not happen overnight and depends on many factors. The withdrawal process has two options: partial and full. In the second option, the validator takes place in the withdrawal queue, which controls the number of validators who can withdraw at once and ensures system stability. Once the queue is passed, network members move on to the withdrawal period, which can take from a few hours to weeks or even months, depending on the number of validators trying to withdraw funds at the same time.

While the probability of a significant drop in the price of Ethereum is low, it is difficult to predict the rate of ETH after the Shanghai update. However, an amount of the ETH freed up by the update may flow into DeFi protocols, which will likely revitalize the decentralized finance sector, increase its aggregate TVL, and boost the recovery of the rest of the market.

What these updates mean for developers?

The Shanghai update is expected to have several long-term impacts on the Ethereum ecosystem. One significant outcome is the expected increase in the number of liquid staking providers, which will likely lead to greater competition and innovation in the market.

Furthermore, the increased liquidity provided by the update may also spur the development of DeFi protocols as more ETH becomes available for lending, borrowing, and other financial activities.

However, this update also highlights the importance of user-friendliness in the development of Ethereum. As the platform continues to grow, it will become increasingly important for developers to prioritize the user experience and make it easier for individuals and businesses to participate in the network. Overall the Shanghai update marks a crucial milestone in the advancement of Ethereum.

Conclusions

The attention of ETH investors and traders will soon be riveted on the Shanghai update, and its developers will do their best to ensure the rollout goes as smoothly as possible. While this update is not as important as Merge, it lays the groundwork for future improvements. If you want to develop a new Ethereum-based project or improve an existing one, the INC4 team of experts is ready to help. We have extensive experience in developing decentralized applications, smart contracts, and other Ethereum-based solutions.

Whether you have a specific idea or need guidance on the best approach, we can work with you to create a custom solution that meets your needs.