All About Ethereum's Shanghai Upgrade

Ethereum

The Ethereum Shanghai Upgrade is coming and will allow validators to withdraw staked ETH from the Beacon Chain. Here’s what else will happen.

What exactly is the Shanghai Upgrade?

Scheduled for March 2023, the Ethereum Shanghai Upgrade is a significant hard fork that comes after the Merge in 2022. Its primary objective is to enable validators and stakers to withdraw staked ETH from the Beacon Chain, as described in the Ethereum Improvement Proposal (EIP-4895). This proposal will enable validators to withdraw staked ETH dating back to the inception of the Beacon Chain in December 2020. Besides EIP-4895, the Shanghai upgrade also includes numerous other EIPs that focus on lowering gas costs for Ethereum developers.

What are the changes introduced in the Shanghai Upgrade?

The Shanghai Upgrade encompasses several EIPs, including EIP-3651, EIP-3855, EIP-3860, EIP-4895, and EIP-6049. These proposals target various aspects of the Ethereum network, such as optimizing the COINBASE operation, improving the PUSH0 instruction, limiting and metering initcode, and enabling Beacon Chain push withdrawals as operations. If you're curious about the specifics of each proposal, you can find them on Ethereum's GitHub. It's worth noting that EIP-4844, a proposal for scaling the Ethereum blockchain via sharding, is not included in the Shanghai Upgrade. Sharding is a scalability solution that partitions a blockchain's network into smaller networks, known as shards.

What is the reason for implementing the Shanghai Upgrade at this time?

After shifting its consensus mechanism from Proof of Work (PoW) to Proof of Stake (PoS) through The Merge in September 2022, Ethereum has become reliant on validators instead of miners to power its network. To become an Ethereum validator, participants must stake a minimum of 32 ETH. Ethereum network informed validators that their stake would remain locked up until the next chain update. Since the launch of Ethereum's Beacon Chain, validators have been staking ETH and earning rewards for validating blocks, which marked the initial phase in a sequence of events culminating in the transition from PoW to PoS. With the implementation of the Shanghai Upgrade, validators will finally be able to withdraw their accrued rewards.

How will the withdrawal process work in practice?

Once the Shanghai Upgrade is activated, validators will have access to roughly 16 million staked ETH for withdrawal. However, there will be a waiting period for validators who want to unstake their ETH because there is only one queue for both full and partial withdrawals on the blockchain. Only 16 partial withdrawals can occur during each slot, which occurs every 12 seconds. Validators have two options for unstaking their ETH. They can create a "withdrawal credential" to receive their staking rewards accumulated over the years, or they can exit the Beacon Chain entirely by unstaking all 32 ETH, which is the maximum amount permitted per validator.

Testnet results

The Zhejiang testnet has successfully conducted simulations for the withdrawal of staked ETH. Two more testnets, Sepolia and Goerli, will also simulate the same process in the coming weeks.

Will the upgrade impact users if they staked ETH on a crypto exchange?

If users have staked their ETH on a crypto exchange instead of directly on the Beacon Chain, the Shanghai Upgrade is unlikely to affect their ability to withdraw staked ETH. However, the price of ETH they have locked up may be impacted by the upgrade.

Conclusion

As the Shanghai Upgrade unlocks staked ETH, traders are closely monitoring its potential impact on the market. Opinions are divided, with some predicting a selling wave as staked ETH is unlocked, while others believe the upgrade will encourage more staking. About 1 million ETH of rewards will be available for withdrawal once the upgrade goes live, and traders are waiting to see how much of this will be cashed out, which could potentially push the price of ETH down.

Although the short-term effects of the Shanghai Upgrade on Ethereum's price and the specifics of the upcoming withdrawal process remain unclear, it is widely anticipated by the cryptocurrency community as a crucial step towards full functionality of Ethereum's PoS network.

Moving forward, developers are looking to implement sharding and other upgrades to scale the network even further. It's important to note that the examples mentioned in this article are for informational purposes only and should not be considered legal, tax, investment, financial, or other advice. 

March 23, 2023

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