Will the Shanghai upgrade impact the price of Ethereum?

The Shanghai upgrade will allow network validators with staked Ethereum to unstake funds that have been locked since work started on switching the Ethereum from a proof of work consensus mechanism to proof of stake (POS) in December 2020. 

The big question investors are asking is how much selling pressure this event will put on the price of Ethereum (ETH)? 

Analysts are mainly looking at how many stakers withdraw their Ethereum. How many of these stakers withdraw their rewards earned versus how many withdraw rewards and the base amount staked. And how many new investors will stake Ethereum now that there’s no longer uncertainty around locked coins.  

How large will selling pressure be? 

Probably much less than many people think, say those that have been watching and analysing Ethereum for a long time. For starters, there are built-in processes to ensure unstaking happens gradually, seeing that the network relies on stakers for its security. 

Stakers that want to withdraw their Ethereum go into something called a “dynamic withdrawal queue”. Rich Falk-Wallace, CEO and founder of research firm Arcana, explains the slow-release mechanism of the withdrawal queue in the below tweet. It’s complicated, but the gist of it is that it is impossible for staked Ethereum to be unstaked all at once, seeing that it would have a crippling effect on the network.

https://twitter.com/rfw_arcana/status/1630570841221079040?s=20

Full and partial withdrawals

It’s worth distinguishing between the two different types of withdrawals validators can action following the upgrade.

A partial withdrawal enables withdrawals of any ETH above the 32 ETH staked, the minimum amount required of validators to stake Ethereum, meaning that the withdrawal is only of the rewards earned.

A full withdrawal, on the other hand, would mean that a validator collects the rewards and the 32 ETH staked. 

Both types of withdrawals go into a withdrawal queue, but full withdrawals have to also line up in the exit queue to ensure that the security of the network isn’t compromised. Partial withdrawals bypass the exit queue and go straight to withdrawal. Read the full take from Juan Pellicer of Into The Block on how the queues work for a better understanding of the withdrawal process.  

Nick Hotz, vice president of crypto investment firm Arca, expects “withdrawals and inflows from new stakers will be netted out.” In other words, new stakers and outgoing stakers may level out the impact on the price. 

Lachlan Feeney, CEO of Australian blockchain development agency Labrys, mentioned to Blockworks she expects an uptick in stakers over time. “We expect more, not less ETH to be staked in the medium-to-long term.” 

In a comment to investors in January, JP Morgan also said that Ethereum staking following Shanghai is likely to appeal to crypto investors, with “few wanting to forego the potential investment income generated from staking.”

Risks? Of course, there are risks 

Ethereum is a complex ecosystem and an upgrade of this size may stress test the various levers and dynamics in the system. 

One such lever is the increase in rewards as the number of validators in Ethereum goes down. Less validators means a larger slice of the pie for all. It’s an incentive for new stakers to come on board but the opposite is also true. 

“It will be exciting to see those dynamics play out,” Christine Kim, vice president of research at Galaxy Digital, said on the Unchained podcast. If these levers don’t work as planned, there is a security risk, but as with the Merge in September last year, Ethereum developers run many simulation tests before an upgrade to ensure that everything works as it should.

As for the number of full withdrawals, Kim said it’s unlikely that many validators will initiate this type of withdrawal, seeing that if they needed access to their funds they could get liquidity in the form of something called stETH, a token replica of staked Ethereum, without having to unstake funds. It also doesn’t make much sense to sell at the moment, she added, seeing that many investors will sell at a loss.

The current downturn in the markets, a hangover from last year’s events in crypto, may play in Ethereum’s favour. 

Community-based crypto analysis firm CryptoQuant says the majority of Ethereum currently locked in stalking wallets are worth less than it was when it was initially staked. It may mean that investors hang on to their ETH until they can sell it at a profit. “Typically, selling pressure emerges when market participants are sitting on extreme profits, which is not the case right now for the Ethereum staked,” the firm said in its breakdown of the upcoming upgrade. 

Staking ratios 

Ethereum as a fully operational POS blockchain is still in its infancy, which is one of the reasons why the ratio of staked coins to coins in circulation is much lower than that of other established POS blockchains. 

Compared to Cardano and Solana’s staking ratios of around 70%, Ethereum at 14% has a way to go, but Falk-Wallace expects Ethereum’s numbers to grow in line with other POS cryptocurrency networks. “We think ETH staking [percentage] is likely to increase secularly from 14% today into the 30%-50% range over the next 18 months to get closer to parity with other proof-of-stake blockchains,” he told CoinDesk. 

The data looks promising. The total staked amount in ETH (17.4 million) has increased by 4 million since the Merge in September last year, while Lido, a staking services provider, recorded its highest-ever inflow of staked Ethereum in February this year. 

Learn more

What does it mean to stake cryptocurrency? 

What are liquidised staking derivatives? 

What was the Merge?

How much do I need to stake Ethereum? 

Can I stake Ethereum with Luno? 

How much rewards can I expect for staking Ethereum? 

What does it mean to stake cryptocurrency? 

When you stake cryptocurrency, you become what is known as a validator. To qualify as a validator on a cryptocurrency network that uses proof of stake (POS), validators must lock up, or stake, a certain amount of cryptocurrency as collateral. 

What are liquidised staking derivatives (LSD)? 

Liquid staking derivatives are tokenised versions of staked coins. stETH is a liquid staking derivative representing a 1:1 token of the Ethereum staked. This allows investors to use stETH while the ETH counterpart is locked up in staking. 

What was the Merge? 

The Merge was an upgrade to the Ethereum network which changed its consensus mechanism from proof of work (POW) to proof of stake. 

Read all about the Ethereum Merge HERE.

How much do I need to stake Ethereum? 

Each cryptocurrency network sets a minimum amount to qualify as a validator. Ethereum’s current minimum is 32 ETH. 

Seeing that not many people have this kind of money, some cryptocurrency platforms offer staking pools, in which they pool customer funds and stake crypto on their behalf. As a reward, customers earn interest on the amount staked. 

Can I stake Ethereum with Luno? 

Luno users will be able to stake Ethereum after the Shanghai Upgrade, when there’s no longer uncertainty around the withdrawal of staked coins. 

There’s no set date for when Luno users can stake Ethereum, as it’s dependent on the date of the upgrade and what happens afterwards, but the date’s been tentatively set for around mid-April.

To note: Ethereum staking will only be available to customers in South Africa, Nigeria and Uganda, for now, due to varying regulatory requirements in different regions.

How much rewards can I expect for staking?

It varies depending on the number of stakers and from one service provider to another, but, on average, validators are rewarded about 4% per year on the amount staked.