Ethereum Shanghai Upgrade: Making the blockchain more scalable

Ethereum Shanghai/Capella update (Shapella), scheduled for April 12 at 22:27:35 UTC is almost here. The upgrade will enable users to withdraw their staked ETH (stETH) via the “Beacon Chain,” a platform that initially supported the Proof-of-Stake (PoS) migration. As the countdown draws near, speculation about its potential impact on the market also grows.

Ethereum will introduce notable improvements to users beginning upon the launching of the Shanghai Upgrade. In comparison to the Merge in September 2022, this development will be much bigger and will include making staked Ether available for withdrawal.

Since the Beacon Chain went live in December 2020, serving as a consensus layer for the Ethereum network, anyone seeking to become validators had to lock at least 32 ETH in the arrangement. This means that roughly 10% of the total Ether supply is locked in the consensus layer deposit contract. The upcoming Shanghai upgrade will solve that problem.

Ethereum Shanghai Upgrade captures the attention of the crypto community

The Shanghai Upgrade is a much-anticipated change to Ethereum’s proof-of-stake (PoS) consensus mechanism. Before the upgrade is launched, developers have scheduled testnets with Sepolia, being the second-largest testnet set to deliver a safe and secure environment for testing smart contract functions. Only authorized persons can run validator nodes on Sepolia’s new consensus layer. The upgrade will allow users to withdraw tens of billions of dollars of Ether.

Uncertainty around the upgrade has caused volatility in the crypto market, delivering a moderate impact on derivatives markets. For instance, ETH open interest has increased by $400 million since the onset of April. Nevertheless, Bitcoin (BTC) continues to dominate market headlines, with open interest rising faster than ETH on April 10 as prices hit their highest level since June 2022.

It remains unclear how many users will be looking to cash out once the Ether is unlocked. Nevertheless, the token’s value has fluctuated by a significant margin over the years right from when staking was initiated. ETH soared as the popularity of the staking feature grew among institutional and retail investors alike before plunging in 2022.

Shorter-term vs longer-term expectations pre- and post-upgrade 

However, initially, demand for withdrawals is expected to outweigh new staking deposits on Ethereum. As regards to the longer term, however, the opportunity to withdraw staked ETH is likely to make Ether staking more appealing as it will reduce the risk for participants.

Investors also expect volatility in the so-called liquid staking tokens, representing staked Ether, and can be used in decentralized finance (DeFi) applications where people can lend, borrow and trade coins. Notably, the price of some of the tokens have increased over the past few weeks, and risk falling in tandem with Ether around the time of the Shanghai upgrade.