What is Ethereum Shanghai Upgrade?
Shanghai upgrade is a hardfork upgrade on the Ethereum blockchain network, allowing users to withdraw ETH staking on Beacon Chain.
Proposals to be implemented in the Ethereum Shanghai Upgrade include EIP-4895, EIP-4860, EIP-4855, and EIP-4851. The process is expected to take place in March 2023.
According to Ethereum’s roadmap, the important upgrades of this network include The Merge (taken on September 15, 2022), The Surge, The Verge, The Purge, and The Splurge. Ethereum Shanghai Upgrade takes place before The Surge (scheduled for 2023-2024 – to focus on improving transaction speed).
Background of Ethereum Shanghai
- June 2015: Ethereum is officially launched by Vitalik and his team. In the first stage, this blockchain worked under the PoW (Proof of Work) mechanism. To validate transactions, users had to rely on the hardware power, which led to a waste of energy for miners. In addition, the other problem that Ethereum faced during this period was scalability and processing speed (TPS of 15-20).
- To solve these problems, the team developed a roadmap to upgrade the network to PoS (Proof of Stake).
- In December 2020, the team launched Beacon Chain. This blockchain works with a PoS consensus mechanism, independent and parallel to Ethereum. This is the stepping-stone for Ethereum to move from PoW to PoS. During this period, users could stake their 32 ETH into the Beacon Chain network.
- On September 15, 2022, Ethereum The Merge officially took place, marking the merger of Ethereum PoW and Beacon Chain (PoS). The Ethereum network has officially operated with a Proof-of-Stake mechanism, which reduces energy consumption by about 99.95%.
- Since the time Beacon Chain (December 2020) launched, a total of about 16,394,888 ETH (~$26.7 billion) has been staked (13.6% of ETH in circulation). This is a very large amount of liquidity, equivalent to 39% of entire market trading volume at the time of this writing (24h vol = $68.4 billion).
- Ethereum Shanghai Upgrade allows users to withdraw their ETH staking on Beacon Chain.
What Will Happen During the Shanghai Upgrade?
This upgrade incorporates many EIPs, including:
EIP-4895: Beacon chain push withdrawals as operations. Support validator withdrawals from the beacon chain to the EVM via a new “system-level” operation type. There are 2 types of withdrawing ETH:
- Partial Withdrawal: Allows withdrawing rewards from staked ETH (earned rewards) to wallet. The original 32 ETH will remain, the validator will continue to be part of the Beacon Chain.
- Full Withdrawal: Allows withdrawing all 32 ETH of initial staking and rewards.
EIP-3860: Limit and meter initcode – Limit the maximum size of initcode to 49152 and apply an extra gas cost of 2 for every 32-byte chunk of initcode
EIP-3855: PUSH0 instruction – helps to reduce the size of the smart contract (smart contract) and optimize it.
EIP-3651: Warm COINBASE – helps to reduce gas fees for builders interacting on the network. (This Warm COINBASE is not related to Coinbase exchange.)
*Note: Ethereum Improvement Proposals (EIPs) are proposals for the improvement of new features or processes on the Ethereum network. Shanghai upgrade (Shanghai) is another name for EIP-4895 and the other aforementioned EIPs.
Impact of Ethereum Shanghai Upgrade on Ethereum and ETH Staking
For Liquid Staking Derivatives (LSDs) users and projects
Before Shanghai Upgrade, to participate in staking on Ethereum, users had 2 options:
- Option 1: Stake at least 32 ETH and become a validator of Ethereum network. However, not everyone has enough 32 ETH. All staked ETH assets will be locked.
- Option 2: Use protocols belonging to the Liquid Staking Derivates (LSDs) group such as Stakewise, Lido and Rocket Pool. Users need to lock ETH to the protocol and get back stETH, or rETH,… (depending on the protocol). This is a synthetic asset generated from the original ETH. Users can use them to participate in other DeFi activities provided by the protocol such as lending, yield farming, collateral, etc.
With the second option, users can free up liquidity. However, these are only assets that are derived from the amount of staked ETH. And they are limited to some of the protocols that support these assets.
After the Shanghai upgrade, users can withdraw their ETH (mainnet) from the Beacon Chain network instead of just depositing and staking. This helps users to be more active in managing investment assets. This is an opportunity for new users to stake their ETH easily.
The “Staking as a Service” team projects specializing in providing Liquid Staking Derivatives (LSDs) services will also benefit. Users who previously hesitated not to stake ETH (due to fear of long lock-up time) are new potential customers of these LSDs projects. This is also the reason for the surging of this group of tokens: LDO, RPL, SD, FIS,…
For developers
With the Ethereum blockchain, the Shanghai upgrade is a stepping-stone event for The Surge – an important update aimed at maximizing the TPS transaction speed of the Ethereum network. Developers will benefit from reduced gas fees.
For the market
Part of the unlocked ETH will create selling pressure in the spot market. However, it also helps ETH (native token) liquidity become better compared to the period before Shanghai Upgrade.
Final Words
Shanghai is a relatively minor upgrade, compared to The Merge. But it will significantly impact ETH holders participating in on-chain staking and the total market.
Other upgrades to the Ethereum protocol are likely to go live in late 2023 to improve the Ethereum Virtual Machine, and another one that hopes to split the Ethereum blockchain into various shards to enhance scalability. This improvement proposal, called EIP-4844, was once considered for inclusion in the Shanghai upgrade, however, it was later moved to subsequent updates.
As of the end of January 2023, tests for the Shanghai upgrade using a shadow fork that supports withdrawal of staked ETH have begun.