Ethereum Shanghai Update: Key Things You Need to Know

After developers activated The Merge update in Ethereum on September 15, 2022, the blockchain switched from the Proof-of-Work (PoW) consensus algorithm to the Proof-of-Stake (PoS). Several upgrade phases have been planned to fully transition the network to Ethereum 2.0, including Surge, Verge, Purge, and Splurge. However, in the end, the developers decided to change the original plan.

The next update, called Shanghai, marks the completion of Ethereum’s full transition to the Proof-of-Stake (PoS) consensus algorithm. Shanghai will allow users and validators to withdraw Ethereum (ETH) coins from staking to their wallets.

In this article, we will examine why a new update is needed and what to expect from it.

What is the Ethereum Shanghai update?

The Shanghai update is a hard fork and a major update of the Ethereum network that could potentially affect the market value of the ETH cryptocurrency, as stakers and validators can now withdraw ETH from the Beacon Chain deposit contract. This change makes the network complete in terms of PoS consensus, allowing users to not only stake coins but also liquidate them if necessary.

Staking allows users to earn rewards by keeping their coins locked up for a selected period. Before the Shanghai update, users could not withdraw their ETH from the contract, as the system only worked in one direction.

EIPs of the Shanghai hard fork

EIP stands for “Ethereum Improvement Proposal.” It is a standard for describing new features, protocol changes, and improvements on the Ethereum network. The EIP document describes innovations and proposes changes to the Ethereum protocol to improve its functionality and efficiency.

The main improvement of the Shanghai update will be EIP-4895: Beacon Chain Push Withdrawals as Operations. The update allows validators to withdraw ETH locked in staking on the Beacon Chain contract since December 2020. This offer provides liquidity for long-term stakers and ETH holders, allowing them to withdraw their coins from staking with low gas fees after two years of waiting.

In addition to EIP-4895, several other improvement proposals are planned to be implemented in the Shanghai update:

• EIP-3651: Warm COINBASE — this proposal should not be confused with the centralized cryptocurrency exchange of the same name. It is aimed at reducing costs when creating new blocks and contracts. This will reduce gas fees for network members, and the users who execute complex operations will no longer need to pay for unsuccessful transactions.

• EIP-3855: PUSH0 instruction — this proposal includes a new Ethereum Virtual Machine (EVM) guide to reduce the size of smart contracts and optimize code.

• EIP-3860: Limit and Meter Initcode — it sets the maximum gas price for developers.

• EIP-6049:Deprecate SELFDESTRUCT — this EIP will deprecate the SELFDESTRUCT operation code, warning developers.

When will the ETH Shanghai update happen?

The update’s release was initially planned for the second half of March 2023. However, on the 28th of March, the development team confirmed that the hard fork would happen on the 12th of April.

How will ETH coins be taken out of staking?

More than 15% of all ETH coins, totaling $34.5 billion, are now in staking. However, given the current price of ETH and its all-time high reached $4700, there is reason to believe that a mass sale of the entire volume of coins will not occur. Investors understand that selling at the current price is not very profitable, especially after a continuous period of falling prices.

The withdrawal of ETH coins will occur gradually and will take some time. The protocol will set limits on the withdrawal of coins in the number of 43 000 ETH per day after the update’s release.

How can unlocking coins affect the price of ETH?

Given the number of ETH coins and trading volumes on exchanges, such volumes will not significantly impact the asset’s market price. The expectation and how information about the withdrawal of coins will be distributed through information channels may have a greater effect on the price.

Why can the price of ETH increase after Shanghai?

The Shanghai update could result in more users staking their ETH. The ability to withdraw ETH as soon as possible can attract investors to receive passive income. Therefore, the price of ETH is expected to rise, and an influx of large institutions and investors will continue to add ETH to staking, earning up to 5% APY.

In addition, the update will solve many problems for users and developers, such as reducing gas fees and the number of transaction errors. These fixes will be implemented before the other major update EIP-4844: Proto Danksharding, ensuring minimal delays in preparation for the release of Surge.

Also, to earn on holding ETH, you can invest in the Crypto Deposit plan, one of the products of the WhiteBIT Earn family. Thus, depending on the chosen plan, you can earn up to 23.19% per annum.

Can the price of Ethereum fall as a result of a hard fork?

Negative sentiment continues in the digital asset market, with large organizations struggling due to the collapse of Celsius, Three Arrows Capital, Terra (Luna), and FTX. Macroeconomic factors can also put pressure on the market. As a result, early adopters of the Ethereum staking program who have joined since December 2020 may be forced to sell their ETH to gain more liquidity and protect the rest of their portfolio during a bear market.

To mitigate this situation, the Ethereum Foundation has set a limit on the daily withdrawal of ETH from the contract, which is about 43 000 ETH, to reduce selling pressure and short-term volatility of the digital asset.

What to expect from the Ethereum Shanghai network upgrade?

The planned Ethereum upgrade will change the mechanism for staking ETH and allow investors to withdraw funds from the Beacon Chain with low gas fees, which will improve the interaction of retail and institutional investors with ETH. This is an important step in the development of Ethereum, which confirms its position as one of the leading projects in the crypto industry.