The Shanghai update is scheduled for March. Know everything about the next stage of the Ethereum upgrade!
Five months ago, Ethereum changed its working principles and became a Proof-of-Stake (PoS) based consensus algorithm from Proof-of-Work (PoW). The result? We have burnt $48 million worth of Ethereum. Ethereum is rare and is getting even more so. The carbon footprint of the blockchain is less than 1% of what it used to be.
Honestly, there are too many good points to list them all. But there is one small problem. You cannot un-stake your Ethereum. To understand this problem, let us first go over the changes in the Ethereum blockchain:
- The validators stake 32 ETH (around $54,000) and earn staking rewards.
- The validators take a cut of the gas fees generated by the blockchain. This fee is their payment for keeping the blockchain running.
- Validators CAN NOT unlock their staked Ethereum. If you have staked your 32 Ethereum, you have to wait.
Do you see the problem here? If the prices of Ethereum go down, the validator can’t save their assets from evaporating. During the FTX saga, Ethereum was around $1100. Thus, the value of the staked Ethereum was just 60–70% of what it used to be during the merge.
Fortunately, the next update of the Ethereum blockchain, known as the Shanghai update, will fix this issue. The Shanghai update is rumored to come next month, in March 2023. This update will allow all the validators to unlock their staked Ethereum out of staking protocols and reclaim their assets.
So, how will it affect the crypto market?
For starters, expect a lot of validators to unlock their Ethereum. This new ETH will then re-enter the market. And what happens when an asset’s availability increases? Prices go down.
Additionally, the number of validators might also go down. And what happens when fewer people take up an essential task like validating a blockchain? The incentives to do these jobs increase. As such, I believe that the gas fees for Ethereum transactions will increase for a few days. Thus, the remaining validators will enjoy better income during this transitional period in the immediate aftermath of the Shanghai update.
In my tiny brain and its limited economic capacity, these two outcomes are likely:
- ETH prices will go down. Not by a lot, but enough for traditional media to notice and spell the death of crypto once again.
- The staking rewards will increase for validators who are still staking their Ethereum.
However, things will be different in the intermediate to long-term duration. For starters, staking Ethereum will be a lot more user-friendly.
First of all, a lot more transactions will happen through liquid staking protocols like Lido Finance. This change will strengthen the DeFi market and the Ethereum ecosystem alike.
Secondly, The Shanghai update will introduce flexibility to the Ethereum blockchain’s staking process. After the update, people wouldn’t need to ‘pledge’ their assets. The validators can easily forgo the validator role if they need the money for other purposes.
Furthermore, there are plans to change the requirement to become a validator. 32 ETH is a big sum of money. Thus, the role of an Ethereum validator isn’t accessible to everyone.
Right now, if you want to stake your Ethereum, you have to ensure that you can support the project with more than $50,000. In other words, to be an Ethereum validator, you need to have lots of disposable income. Imagine becoming a validator with just 1 ETH. Such a change will allow lots more people to work closely with the blockchain.
After all the changes are live, imagine an Ethereum blockchain network where:
- The network’s carbon footprint is minuscule compared to its previous version.
- The total sum of the asset reduced gradually. Reverse inflation, if you will!
- The people running the network can work easily in the role. Ethereum whales can’t gatekeep the validator role. True decentralization!
One of the biggest Ethereum events, ETHDenver, is scheduled on 24th Feb. Let’s see if they confirm the Shanghai update rumors! Honestly, I am a little scared of the short-term results of the Shanghai update. But in the long run, I am confident that Shanghai will benefit the Ethereum ecosystem.
Let’s head to Denver to look for Shanghai!
Interested in a tl;dr version? Check out my Twitter thread on the Shanghai update:
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