If Ethereum withdrawals are enabled today $1.5 billion in ETH would be on the move, here’s why this matters

Ethereum withdrawals will be enabled with the Shanghai upgrade, for the first time since the launch of the Beacon chain staking contract in December 2020. This marks a key milestone for ETH holders as token unlock by validators could increase the volume of ETH on the move in the circulating supply. 

Hypothetically, if ETH token unlock happened on February 1, a total of $1.5 billion worth of Ethereum tokens would be unlocked within a period of 4.4 days. This could influence the sentiment among market participants, therefore the token unlock and the Shanghai upgrade matter to ETH holders in the ecosystem. 

Also read: Is this the bullish signal that Ethereum holders are waiting for?

Ethereum network’s dress rehearsal for token unlock, Zhejiang testnet goes live on Wednesday

Ethereum holders and crypto market participants are closely watching Ethereum’s Zhejiang public testnet that is set to go live at 10 AM EST on Wednesday. The testnet will help validators (nodes in Ethereum’s proof-of-stake system responsible for processing transactions) simulate withdrawals. 

Hypothetically, if Ethereum withdrawals were enabled today, approximately 1 million ETH tokens worth $1.5 billion would be automatically withdrawn within the next 5 days. This is just the tip of the iceberg when one considers the total volume of ETH tokens staked in the Beacon chain contract. 16.3 million ETH is currently staked on the deposit contract. 

The following chart shows the partial and full withdrawals if Shanghai upgrade was to occur on February 1. 

Partial and full ETH withdrawals if Shanghai upgrade’s token unlock occurs on February 1

The upcoming token unlock event is a key milestone for ETH holders as validators in the network have not been able to withdraw their staked or earned rewards since 2020. The upgrade is set to occur in March/ April 2023 and it has been referred to as Shanghai/ Capella. 

Shanghai is the name for the Execution Layer (underlying ETH Blockchain) and Capella represents the Consensus Layer (Proof-of-Stake consensus mechanism on the Ethereum blockchain). 

Both Shanghai and Capella upgrades will occur simultaneously and enable partial/ full withdrawals for Ethereum’s validators. Interestingly, all Ethereum withdrawals will be gasless and won’t represent transactions on the blockchain. Partial/ full withdrawal will be represented as a gasless state change on the Ethereum blockchain. State changes from staked to unstaked and so on. 

How long will Ethereum withdrawals take after Shanghai and Capella upgrades?

The withdrawal process may take days, weeks or months depending on the number of validators that want to exit. To understand this better, let’s consider that 25% of the current validators on the Ethereum blockchain want to exit in one day, withdrawals would take 82 days to complete. The withdrawal time includes time spent in the exit queue and the waiting period. 

If 25% validators wanted to exit 

The withdrawn Ethereum tokens would enter circulation and this opens up an opportunity for liquid staking dApps like Lido that allow users to stake their ETH and use stETH across the DeFi ecosystem while earning staking rewards. ETH market participants and liquid staking dApps are therefore closely watching the Zhejiang testnet for a smooth rollout of the Shanghai upgrade.