The Ethereum network underwent a technical upgrade on April 13th, allowing users to withdraw billions of dollars worth of ETH. This is known as the "Shanghai" upgrade, which is a necessary step for Ethereum, the world's most commercially significant cryptocurrency platform, to transition its consensus mechanism from Proof-of-Work (PoW) to Proof-of-Stake (PoS).
01.The Origin and Evolution of the Ethereum Shanghai Upgrade
Since its launch in 2015, the Ethereum blockchain has implemented several major upgrades, including Byzantium (2017), Constantinople (2019), Petersburg (2019), Istanbul (2019), Berlin (2021), and London (2021). The so-called Ethereum Shanghai upgrade (EIP-4895) is the name given to a version of Ethereum's technical upgrade in development and updates.
In September 2022, Ethereum successfully completed its transition to the Proof-of-Stake (PoS) consensus mechanism. Before this, Ethereum used Proof-of-Work (PoW) and mining mechanisms to process and verify transactions. After transitioning to the PoS consensus mechanism, specialized mining equipment is no longer required to solve computational problems, but users need to stake 32 Ether (ETH) to become a validator node of Ethereum.
Due to the merge, which combines the Ethereum mainnet with the PoS Beacon Chain, users can not withdraw staked Ether (ETH) or related token rewards at any time in the current technical mechanism of Ethereum.
In October 2022, in preparation for the Ethereum Shanghai upgrade, Ethereum developers launched a test network with the codename "Shandong" to find errors and potential issues. In December, Ethereum developers tentatively scheduled the implementation of the Shanghai upgrade on the Ethereum mainnet in March 2023. On January 5th, 2023, Ethereum developers agreed to launch this upgrade in March 2023, implementing it as a network hard fork. Users will be able to test this update through the Shanghai-implemented public test network by the end of February 2023.
However, due to technical progress, the Ethereum Shanghai upgrade (EIP-4895) will be delayed until April.
02.What is the market impact of the Ethereum Shanghai upgrade?
Once upgraded, ETH stakers will be able to withdraw their staked funds as validators. Following Ethereum's implementation of proof of stake, users can stake 32 ETH to become network validators, but these funds are locked indefinitely. This upgrade may affect the proportion of staked ETH in its total supply, which in turn may affect the market supply and demand for ETH.
The exact impact of the Ethereum Shanghai upgrade will depend on the actual situation of the users. If users have directly used Ethereum or staked ETH through staking products, they will be able to withdraw their funds after this upgrade is completed. Please note that not everyone directly stakes 32 ETH, and many users stake smaller amounts on liquidity staking platforms.
For traders, a big issue is that this upgrade may have an impact on the price of ETH. After this upgrade is completed, users will be able to withdraw their funds, thus unlocking a large amount of liquidity, and staked ETH owners will have the right to extract and sell their staked assets. For many traders and investors, monitoring the proportion of staked ETH in the total supply will be necessary.
On the other hand, because the liquidity of staked ETH has been improved, it may be more attractive to users. Those who were originally unwilling to use liquidity staking protocols will now have the opportunity to directly stake ETH on Ethereum.
Improvements in staking conditions may trigger an increase in demand for ETH.
For users holding native tokens of liquidity staking platforms, the price of their tokens may also be affected. This is because the opening of Ethereum's withdrawal function cancels the unique functionality provided by ETH liquidity staking.
It should be noted that the start of ETH staking was in November 2020, when the price of ETH was between $500 and $600. These long-term staked users are likely to be eager to withdraw their ETH and rewards. Staking since February 2021 is currently unprofitable compared to current prices. Most withdrawal requests will be "partial withdrawals." It is expected that after the opening of withdrawals, the selling pressure on ETH will not be too severe, mainly due to the selling behavior of early players.
Overall, allowing the withdrawal of staked ETH increases the market freedom of ETH, and ETH holders may respond to staking demand and supply to achieve market balance. This reduces the artificial control effects on ETH prices and circulation and should be seen as a positive impact.
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03.Why is the Ethereum Shanghai upgrade so important?
The hype around the Ethereum Shanghai upgrade is higher than before, so what changes will this upgrade bring to the entire Ethereum ecosystem?
Gas fees reduction:
One of the expected impacts of the Shanghai upgrade is to lower the gas fees related to Layer-2 solutions running on Ethereum, such as Polygon and Optimism.
These Layer-2 solutions have made Ethereum faster and cheaper to some extent, and the Shanghai upgrade will further optimize the gas fees for transactions on Ethereum.
Beacon chain opening for staking withdrawal:
Before the Ethereum merge, anyone interested in becoming a validator in the ETH2.0 beacon chain must stake a certain amount of ETH into a smart contract, which will remain locked even after the merge. However, with the Shanghai upgrade, the staking lock will be released, and ETH stakers can gradually withdraw their ETH according to certain rules from the beacon chain.
Smart contract infrastructure update:
This is another important update expected in the Shanghai upgrade. Ethereum is the largest blockchain network that supports smart contracts, and the Shanghai upgrade will introduce EIP 3540, also known as the EVM object format.
The core of this EIP is to separate code from data, which can be extremely beneficial for validators on the ETH network. In addition to separating code and data, EIP 3540 also introduces a new contract code section to help optimize processing and solve complex functional modules, such as account abstraction and control flow in EVM.
Furthermore, the Shanghai upgrade will also improve the security of the Ethereum network, introduce new anti-attack techniques, such as redemption contract anti-attack technology, and simplify the contract code of the Ethereum network. Additionally, the Shanghai upgrade will expand Ethereum's programming language, supporting more programming languages such as Solidity, Vyper, Bamboo, etc. This is good news for developers and users because it eliminates the dependence on a single programming language, expanding the developer's choice.
Conclusion: The Ethereum Shanghai upgrade is coming, and it will undoubtedly be an important moment for the development of the Ethereum blockchain. The upgrade is named after the Chinese city of Shanghai, which reflects Shanghai's early roots and role in the development of Ethereum. The main goal of the Ethereum Shanghai upgrade is to allow staked Ether in the Ethereum beacon chain to be withdrawn, providing stakers with the option to unlock and withdraw their funds. The Ethereum Shanghai upgrade is another big step in improving the scalability and decentralization of the Ethereum blockchain, and is expected to be a significant event in the development history of Ethereum.
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