Ethereum's Shanghai Upgrade: what you need to know

EIP-4895 enables ETH withdrawals, lowers transaction fees, and enhances processing capacity, while debate surrounds its impact on ETH price

By Ahmed Azzam | @3zzamous | 10 April 2023

Shanghai upgrade allows validators to withdraw staked tokens and has significant implications for Ethereum, with 16 million ETH staked on the network
The Shanghai upgrade may impact the price of ETH, with concerns about flooding the market, but investors may not immediately withdraw due to potential losses
The upgrade includes smaller EIPs to reduce gas fees and more upgrades are expected later in 2023, including those for scalability and improving the Ethereum Virtual Machine

Ethereum's highly-anticipated Shanghai upgrade (EIP-4895), dubbed the Shapella upgrade, is set to occur on April 12, 2023. The hard fork is set to enable stakers and validators to withdraw assets from the Beacon Chain, which is a major development associated with the upgrade. The Shapella upgrade is a combination of two Ethereum Improvement Proposals: Shanghai and Capella. With staked Ether accounting for roughly 16 million coins, or a seventh of the total supply, this upgrade has significant implications. The current value of all staked Ether stands at over $30 billion.

Ethereum upgrade enables ETH withdrawal and reduces transaction fees

The Shapella upgrade marks the culmination of Ethereum's transition to a proof-of-stake consensus mechanism for network maintenance. This hard fork will enable stakers to withdraw their ETH, among other benefits. Additionally, the upgrade will help lower transaction fees for users while enhancing Ethereum's capacity to process transactions.

The most crucial development associated with the Shanghai upgrade is Ethereum Improvement Proposal-4895, which allows validators to withdraw staked tokens. Validators have staked around 16 million ETH to secure the mechanism, which has become increasingly vital to the Ethereum blockchain since the Merge transitioned Ethereum's consensus mechanism from proof-of-work to proof-of-stake in September 2022. According to the new rules post-Merge, validators that stake 32 ETH in the chain can participate in validating blocks, and each staked ETH increases the likelihood of a validator receiving block rewards.

Following the Merge, validators had to lock up their ETH and any rewards earned until a later chain update. Despite the Merge taking place in 2022, validators have been staking ETH since December 2020, when the Beacon Chain was released, relying on proof-of-stake as a mechanism.

Since the Beacon Chain's launch in December 2020, over 16 million ether has been staked in the network. Although not the entire balance can be unstaked immediately after the upgrade, roughly 1.1 million coins received as staking rewards can be withdrawn instantly. ETH is used to pay rewards to ether stakers.

Since that time, Ethereum staking has been unidirectional. Users are able to stake their ETH to become validators and receive rewards in their wallet for performing their duties. However, they are currently unable to withdraw their staked ETH.

Additional EIPs to reduce gas fees and support Ethereum developers in Shanghai Upgrade

Aside from Ethereum Improvement Proposal-4895, the Shanghai fork also includes several other smaller EIPs that aim to reduce gas fees during periods of high activity to benefit Ethereum developers. These include EIP-3651, EIP-3855, EIP-3860, and EIP-6049.

While the Shanghai upgrade may seem relatively small compared to the Merge, it has the potential for a significant impact on those with staked ETH on the chain. Further upgrades to the Ethereum protocol are expected later in 2023, including those aiming to improve the Ethereum Virtual Machine and another that seeks to split the Ethereum blockchain into several "shards" to enhance scalability. EIP-4844, which aims to split the Ethereum blockchain, had initially been considered for inclusion in the Shanghai upgrade, but was later pushed back.

How the Shanghai Upgrade will affect the price of ETH is a point of some debate

There is a debate on how the Shanghai Upgrade will impact the price of ETH. One concern is that the release of more than 16 million staked ETH, valued at over $30 billion currently, could lead to a flood of ETH into the crypto market, causing an immediate price drop due to an increased supply without a corresponding increase in demand. However, it is important to note that two years ago, the price of ETH was nearly three times its current price, and it is currently trading at almost half the price it was a year ago. In addition, many investors who staked their ETH could face losses if they withdraw immediately, which may discourage them from doing so.