Everything you need to know about the upcoming Shanghai update Ethereum

  • The Shanghai upgrade allows staked ETH to be withdrawn
  • Find out how this will impact liquid staking derivatives (LSDs) such as Lido DAO
  • And what affect it might have on ETH’s price
Shanghai Update Ethereum, Everything you need to know about the upcoming Shanghai update Ethereum

The Shanghai upgrade is an upcoming Ethereum update that will finally enable withdrawals of staked ETH. Due to take place on 12 April 2023, approximately 18,000,000 staked ETH (about $32 billion) will be free for its validators to unlock from the Ethereum blockchain.

The testnet was successful last month, so the crypto community is hoping for a repeat performance for the main event.

What does the Shanghai update Ethereum mean for liquid staking?

Previously, staking ETH has been a one-way street – validators could deposit ETH to the Beacon Chain in order to support proof of stake (PoS) on Ethereum. But once staked, they could not withdraw it. The Shanghai update Ethereum is soon to complete, will finally enable these withdrawals.

Liquid staking derivatives (LSDs) such as Lido DAO and Rocket Pool allow people to stake their ETH and get representative tokens such as stETH that trade at a 1:1 price of ETH. This means validators can then use their staked ETH token in other DeFi protocols to maximize opportunities.

Lido is the leading liquid staking derivative accounting for nearly 6 million staked ETH and 74% of the market, according to stats from DeFiLlama.

How will the withdrawals work for the Ethereum Shanghai upgrade?

Not all staked ETH will be available to be withdrawn or unstaked immediately. There will probably be a maximum withdrawal limit of about 50,400 ETH per day. However, that still equates to approximately $90 million of potential selling pressure every day.

So many are wondering, how will this affect Ethereum’s market price. And will ETH fall after the upgrade? It’s certainly seen an upswing due to the anticipation of Shanghai, finally punching through $1,900 for the first time this year. 

Through LSDs and other services, more than 57% of ETH stakers have already been able to access liquidity, with both their principal investment plus rewards. Therefore, it’s fair to assume this group of users have no real reason to suddenly sell after the Ethereum Shanghai Upgrade.

Another point worth considering is that over 72% of stakers are underwater (in USD terms), meaning that their staked ETH is worth less now than when they originally staked it. So not only is this a group of classic ETH hodlers, they also have very little financial incentive to sell their Ethereum at a loss.

Shanghai update Ethereum

Price volatility due to the Ethereum Shanghai upgrade 

As we’ve discussed, the Shanghai upgrade could cause short term selling pressure which is likely to be significant for Ethereum.

Another point of FUD (Fear, uncertainty, doubt) that is likely to play a role is that U.S. regulators have set their sights on ETH staking platforms and protocols.

Back in February, Kraken was fined $30 million by the SEC (Securities and Exchanges Commission) for providing an unregistered ETH staking service.

Coinbase has stated that they will fight the SEC on staking services and crypto being labeled securities. But it’s likely the SEC will pursue legal action against them and other ‘decentralized’ staking protocols in the near future. Due to America’s global influence this will almost certainly affect the market.  

Since the Ethereum Merge in September 2022, the ETH supply has decreased slightly, by approx. -0.12%, so Shanghai and unlocking staked ETH could be bullish in the long-term. But because of the sudden influx of sell pressure, this could make the Ethereum ecosystem volatile in the short term.

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