The Ethereum Shanghai Upgrade Explained
On Wednesday, the Ethereum blockchain implemented a hard-forking upgrade, which will complete the Ethereum network’s transition from proof-of-work (PoW) to proof-of-stake (PoS).
The Shanghai upgrade brings a series of technical improvements that improve the transactional aspects of Ethereum. In addition, all rewards earned by validators, amounting to just over 1 million Ether, became liquid.
What Is the Ethereum Shanghai Upgrade?
The Shanghai upgrade is a hard fork meaning that it is a significant network protocol change where nodes of the new version of the protocol no longer accept the original version. This hard fork is the final step in Ethereum’s move from a PoW to a PoS consensus mechanism.
The upgrade includes a number of changes to Ethereum’s code base, known as Ethereum Improvement Proposals (EIPs). The most important among these changes is EIP-4895, which enables the withdrawal of staked ETH from the Beacon Chain, Ethereum’s PoS consensus engine, which guarantees all transactions are valid and secure.
At this point a little history is needed. Ethereum began as a Proof-of-Work network and in December 2020, the Beacon Chain was launched. It operated in parallel to the Ethereum blockchain and served as a sandbox for developers to test the PoS code. Then in September 2022, “the Merge” occurred, and the Ethereum blockchain merged with the Beacon Chain, transitioning Ethereum to a Proof-of-Stake network.Since the launch of the Beacon Chain users have been able to stake, but not unstake their ETH. Now however, the Shanghai update finalizes the move to PoS, completing the transition by enabling the withdrawal of staked ETH.
What Are the Benefits of the Upgrade?
In addition to the ability to stake ETH, the Shanghai hard fork has a number of other EIPs, including EIP-3651,8 EIP-3855,9, and EIP-3860,10, all of which enhance the efficiency of transactions on the Ethereum network and lower gas fees for various decentralized applications (dapps).
The upgrade is designed to transform the world of staking, by enabling Ethereum to increase the number of transactions it can handle per second, decrease transaction costs, and enhance the security and efficiency of smart contracts.
What Is the Expected Impact of the Upgrade?
While it is still a little early to assess the full impact of the hard fork, there are some likely outcomes.
The Impact on the Environment
The Shanghai upgrade completes Ethereum’s transition to PoS and this is a more environmentally friendly means of verifying blockchain transactions than the previous POW mechanism.
While Proof of Work requires miners to utilize a great deal of computing power and demands a huge electricity expenditure, a Proof of Stake mechanism simply requires the funds to be staked to maintain network security.
The Impact on Staking
The Shanghai upgrade will likely boost institutional participation because it minimizes risk. Soft staking, also known as liquidity staking, allows participants to access locked funds for other crypto-based activities while still earning rewards. Liquid staking yields will be familiar to those in the traditional finance space, as they are similar to those earned on bonds or stocks that offer interest payments, opening the door to a new audience. As a result, the upgrade is likely to lead to increased innovation in the sphere of liquid staking and major growth in participation.
The Impact on the ETH Price
Some fear, at least in the short term, that the upgrade will have a negative impact on the price, since for the first time, it will enable those who have previously staked their ETH on the network to make withdrawals. At present, around 15% of the total ETH supply is staked on the network and up to $2.4 B worth of selling pressure could potentially hit the Ethereum market.
Ether has climbed about 60% so far in 2023 and recently traded at more than US $1,900. Yet the Ether that is staked is not sitting on extreme profits, which would usually be the catalyst for selling pressure.
Also, it is important to understand that there is a limit on the number of staking withdrawal requests per day of 115,200, meaning that it would take two months for just 20% of network validators to unstake, making a sharp, rapid drop highly unlikely.
Here at ArbiSmart, our yield-bearing wallet and investment platform offers high-yield staking contracts with a pre-set daily payout that remains consistent regardless of the actions of other participants, or whether the market is bullish or bearish. Stakers will earn up to 49% a year on all 30 supported FIAT and cryptocurrencies, or up to 147%, if the balance is in RBIS, the native token, with the exact yield depending on the deposit amount, account level, and contract length, which can be as short as 1 month or as long as 5 years.
We will also be offering staking via our upcoming decentralized yield farming protocol which is set for launch later this quarter. The protocol will include never-before-seen gamification features that will enable users to boost their yields through the use of unique ArbiSmart NFTs.
To learn more about the latest crypto market developments and gain insight into various areas of blockchain technology and digital asset trading, check out the ArbiSmart blog today.