Ethereum, a blockchain that supports the world’s second largest cryptocurrency, ether, is set to go through an important upgrade on Wednesday, which, upon completion, would allow holders who withdraw their coins that they locked up for rewards.
Ethereum’s
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so-called Shanghai upgrade, which is also referred to as the Shapella upgrade, is set to be completed at around 6:30 p.m. Eastern time Wednesday.
It is the biggest transition for Ethereum since its “Merge” upgrade last year, when the blockchain overhauled the way it operated.
Before the “Merge,” Ethereum relied on so-called “miners,” who use computers to solve complicated mathematical puzzles to secure the blockchain. Now, the network counts on validators, or ether holders who stake, or lock up their coins to verify new transactions. These validators are rewarded with certain amounts of new coins, which allow them to earn passive income without selling the coins they hold.
The “Merge” allowed Ethereum to reduce its energy consumption by over 99%, according to the Ethereum Foundation.
But there was one problem — holders who staked their ether were yet to be able to unlock their coins.
It created liquidity concerns among some ether holders, who were hesitant to stake their coins. The ratio of staked ether to the coin’s total supply stands at around 15.6%, much lower than that of Ethereum’s competitors such as Solana
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and Polkadot
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where from 40% to over 70% of the native coins are staked, according to David Lawant, head of research at FalconX.
The Shanghai upgrade is expected to solve the problem and could encourage more investors, especially institutions, to participate in staking, Lawant said.
Still, staking is not risk-free. For example, validators may be punished and see some of their staked coins removed if they go offline or validating incorrect transactions.
Another complication is that U.S. regulators have been increasing their oversight of the crypto industry, including the staking services some exchanges provided.
In February, crypto exchange Kraken agreed to pay over $30 million and ended its staking program in the U.S., to settle charges brought by the U.S. Securities and Exchange Commission. The agency charged Kraken for failing to register the offer and sale of their crypto asset staking-as-a-service program.
Coinbase in March received a Wells notice from the SEC, which could lead to formal charges. The notice regarded several assets the exchange listed and some services it provided, including its staking program, Coinbase said.
Unstaking ether takes time
While most industry participants expect the Shanghai upgrade to be successful, the process of unstaking ether takes time.
If an investor seeks to withdraw all their original coins and rewards, they have to go through a queue, noted FalconX’s Lawant. The time it takes for the queue to be processed depends on how many people are trying to pull out their ether at the same time. It may take over 30 days to process withdrawal requests from 10% of current validators, according to Lawant.
If an investor is only withdrawing their staking rewards, it would take far less time, usually a few days, Lawant said.
Meanwhile, staking ether also takes time. “The network has a limit of how many validators it can add. And it has a limit on how many validators it can exit at a certain point in time,” according to Lawant.
It makes it harder to examine the Shanghai upgrade’s immediate impact on ether price, Lawant noted.
Bullish or bearish?
The Shanghai upgrade would likely be a “nonevent” for ether price in the short-term, according to Brian Mosoff, chief executive at Ether Capital. Ether is trading at around $1,901, up 0.3% over the past 24 hours. The crypto has rallied over 58% so far this year, but is still down over 60% from its record high set in November 2021.
“My observation has been that price appreciation comes later as investors just grow comfortable with that change in the protocol,” Mosoff said in a phone interview.
Still, Mosoff said he expects the upgrade to be bullish for ether in the long run. Investors who are concerned about the liquidity risk would be more comfortable participating in staking after the upgrade is completed, Mosoff said.
However, analysts at QCP capital are less optimistic. “We fail to see what the bullish case can be for this event,” the analysts wrote in a Wednesday note.
Ether holders who are at front of the withdrawal queue are likely to sell the coins, while those who are further back and couldn’t immediately unstake their coins are expected to hedge their positions via perpetual futures and other derivatives, according to the analysts.
“The market has already seen bearish price action in anticipation of this event, with ETH underperforming BTC in recent weeks,” according to the analysts.
What’s more, some ether holders might change their ways of staking, noted Diogo Mónica, co-founder and president of Anchorage Digital.
Some ether holders may have been staking their coins with some liquid staking service providers, such as Lido, where the users receive different tokens that are pegged to ether one to one. In this way, they can trade their ether while still earning rewards from staking.
However, after the Shanghai upgrade, some users might choose to directly stake on Ethereum, as they’d be free to withdraw their crypto, noted Diogo.
