Ethereum Shanghai Upgrade: How Will It Change The Market?

2023-01-12, 08:30

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**<font size=5>[TL; DR]</font>**

The Ethereum Shanghai Upgrade has been a hot topic of discussion within the Ethereum community for several months now, with the upgrade promising the ability to unstake ETH tokens, amongst various other new additions to the network in light of the recent Ethereum Merge, accomplished in the latter half of 2022. However, with the Merge having relatively minimal impacts on the valuation of Ethereum, bar a brief spike and dip due to whales orchestrating a mass sell-off, and the market at large, can the Shanghai upgrade leave a more substantial impact on the wider market?
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## FAQs About The Shanghai Upgrade

### What Is The Shanghai Upgrade?
The Ethereum Shanghai Upgrade is the first upgrade to be deployed on the Ethereum network since the Merge in September, which migrated the Ethereum network from a proof-of-work (PoW) to a proof-of-stake (PoS) consensus mechanism. Now that the Ethereum network operates via the latter, the network no longer has to be validated by energy-intensive mining processes, instead, those who stake their Ethereum can validate network activity. These stakers can earn ETH tokens as rewards for validating transactions and securing the network with their staked Ethereum; yet on the flip side, if a staker is partaking in malicious activity, their ETH will be slashed.

Whilst this current system is all well and good, the only caveat is that the Ethereum staking mechanism only allows ETH tokens to be deposited, not withdrawn. As of now, there are approximately 15.5 million ETH tokens locked away (which totals an estimated $19 billion). The total amount of locked ETH totals almost 13% of the entire circulating supply, with this portion locked away and unable to partake in the Ethereum economy, even if the investor wants to use the ETH elsewhere. However, according to Ethereum developers, it was the intention all along to not have a withdrawal function immediately after the Merge. With this confirmed by the Ethereum Foundation, they have also stated that upgrades have been structured in a manner that seeks to ‘simplify and maximise focus on a successful transition to Proof-Of-Stake’, as opposed to overloading the network with an influx of complicated functions and tasks immediately.

As of now, ETH stakers are able to earn up to 4.5% APY, but many have argued what is the point of being able to generate revenue if you cannot withdraw it? This is where the Shanghai Upgrade comes in. The Shanghai Upgrade, otherwise known as the EIP-4895 proposal, is set to allow stakers on the Beacon Chain the ability to withdraw their funds and staking rewards. This was initially trialled in October of 2022 via the Shangdong testnet as a part of the upgrade plan to better position the Ethereum network for its deployment. In addition to withdrawal capabilities, the Shanghai Upgrade is also anticipated to include EIP-3651 (Warm COINBASE), EIP-3855 (PUSH0 instruction), EIP-4895 (Beacon chain push withdrawals as operations) and EIP-3860 (Limit/Meter initcode).

Previously, however, it was expected to include the greatly anticipated EIP-4885, which was set to introduce ‘proto-danksharding’ to help enhance layer-2 rollup scalability prior to the full implementation of the ‘Sharding’ upgrade expected between 2023 and 2024. However, this was scrapped for the time being, with Ethereum core developers noting that this would be too intensive for the time being and would prolong the process of enabling withdrawal functions. It is instead set to be deployed on the network in late 2023. As of now, the Ethereum core development team have set a tentative deployment date for the Shanghai Upgrade, this being March 2023. Yet, this is subject to change, as is often the case for the Ethereum network.

### What Will The Other EIPs Do?

Aside from the primary function of the Shanghai Upgrade being to revamp the current staking and unstaking mechanisms of the Ethereum network, the other EIPs included in the upgrade are also pivotal for the development of the network. The other EIPs included in the Shanghai Upgrade are set to upgrade the Ethereum Virtual Machine (EVM), introducing a new EVM contract format, code and date separations, and new operation codes to better prepare the network for the deployment of EIP-4885.

However, the EIP-3651, or so-called ‘Warm COINBASE’ upgrade (not to be confused with the exchange, COINBASE is the software used by builders to receive new tokens on the network) is anticipated to support the reduction of costs across the network, particularly in relation to gas fees. Whenever there are new transactions occurring on the network, there is an interaction with the COINBASE software, however, due to the time taken for the COINBASE software to ‘warm up’, initial transactions have a tendency to start off as more expensive than later ones. However, with the implementation of EIP-3651, the ‘warm up’ process will be improved and cut down, thus potentially reducing gas fees when builders are interacting with the network, hence the name ‘Warm COINBASE’.

All of the other mentioned EIPs included in the Shanghai Upgrade have been confirmed to be early-stage deployments that will ready the network for the later implementation of the Sharding Upgrade in 2023 and 2024. As per the Ethereum Foundation, Sharding is a multi-phase upgrade designed to significantly improve Ethereum’s ‘scalability and capacity’ via the implementation of shard chains, which will give the network significantly ‘more capacity to store and access date’, hence the delayed process by which Sharding is being introduced to the network.
## What Factors Affect Ethereum’s Price?
Currently, the valuation of Ethereum is dictated by a range of factors including institutional adoption, the overarching trend of the market (whether the market is in a bear or a bull market), the volume of stakers within the network, and traditional supply and demand mechanisms.

### Institutional Adoption
With the blockchain world having garnered an increasing volume of support and interest from mainstream industries and institutions in recent years, it comes as no surprise that many have begun to integrate blockchain technology into their business infrastructures.

For example, if a traditional institution (such as a tech company or finance firm) onboard the Ethereum blockchain to facilitate payments or migrate data to a blockchain format, this can often have positive repercussions on the entire blockchain and potentially provide price momentum leading to an uptick in value.

### Current Market Trend
The overarching market trend undoubtedly influences investor sentiment and the overall volume of funds entering the market. As seen currently, the bearish crypto winter has led to a decreased inflow of funds and a negative investor sentiment, thus leading to red candlesticks across the market.

However, when a bull market is in full swing, there is an influx in funds entering the market, adoption, and overall an improved sentiment amongst investors. As a result, this often leads to a majority of major cryptocurrencies gaining value and being privy to price momentum.

### The Volume of Stakers
Now that the Ethereum network has migrated to a proof-of-stake (PoS) mechanism from a proof-of-work (PoW) mechanism, the network relies on those staking Ethereum to secure nodes and provide strength and liquidity to the wider network. More individuals doing so provides an increase in network security, liquidity, and overall community strength which is essential to improving investor sentiment and encouraging more people to follow suit and provide integral support to the network. In turn, this can provide a critical basis from which price momentum and bullish sentiments can be built, thus improving the value of Ethereum.

### Supply and Demand
As with any financial product or asset, it relies on supply and demand mechanics. This means that the more lucrative an asset becomes, the more people want to invest, yet with a majority of cryptocurrencies having a limited supply pool, the more that are bought and held drives up the asking price of each individual unit. Similarly, if people are more inclined to sell their assets and interest wanes, the supply will increase and demand will fall, thus plummeting value.
## How Will The Upgrade Affect Ethereum’s Price?
Many within the Ethereum community have expressed valid concerns relating to whether the enabling of staked ETH withdrawals following the Shanghai Upgrade will prompt a massive ETH sell-off. Fortunately, however, this concern may be minimised as the Ethereum Foundation has confirmed that the withdrawal of staked ETH will be arranged systematically, with stakers having to queue up in order to withdraw their ETH. Based on current arrangements, it is expected that a maximum of 6 validators can withdraw their stake for each epoch (i.e. 6.4 minutes), meaning that whilst withdrawal will be possible, it will be a prolonged process. This will obviously incur frustration among those looking to withdraw their ETH imminently, but it also acts as a preservation tool for the network, thus preventing any decimating price plunges in the event of a mass sell-off.

Others have also speculated that the Shanghai Upgrade may lead to bullish repercussions for the ETH token and the overall Ethereum ecosystem. With the upgrade facilitating withdrawals, some analysts have predicted that this will lead to investors becoming more interested in partaking in the staking process as they will be witnessing those who have previously staked being reimbursed for their contributions. This in turn could lead to more investors staking their ETH tokens as they will have evidence of the incentivisation of the process, which could in turn have positive impacts on the overall sentiment surrounding the Ethereum network and ETH’s price activity. Additionally, Ethereum upgrading in such a manner may set it further apart from similar Layer-1 blockchains and support the reaffirmation of its [Status](https://www.gate.io/trade/SNT_USDT) as the main Layer-1.

Overall, it is highly anticipated that the Shanghai Upgrade will have significant positive influences on the overall performance and accessibility of the Ethereum network, as well as the potential to positively impact Ethereum’s own valuation and positive sentiment.

Button: [buy Ethereum](https://www.gate.io/trade/ETH_USDT) - link to https://www.gate.io/c2c/ETH_USD

<div class="blog-details-info">
<div>Author:** Matthew W-D**, Gate.io Researcher
<div class="info-tips">\*This article represents only the views of the researcher and does not constitute any investment suggestions.
<div>\*Gate.io reserves all rights to this article. Reposting of the article will be permitted provided Gate.io is referenced. In all cases, legal action will be taken due to copyright infringement.
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