The Shanghai hard fork of the Ethereum Network was finalized late yesterday evening and withdrawals for staked Ether went live. In anticipation of this upgrade there has been a lot of speculation online surrounding the market effects of allowing all Ethereum Validators the potential to withdrawal their Ether at once. In this article we will break down the upgrade and it's potential effect on the price of Ether.
Shanghai Upgrade Explained
The Final Move to Proof-of-Stake
As referenced above the Shanghai Upgrade(Also known as Shapella) is the final big component of "The Merge" which is the Ethereum developers plan to transition the blockchain from Proof-of-Work to Proof-of-Stake. The most publicized part of this upgrade was the ability for validators to withdrawal part or all of their holdings. However withdrawals are released on a set schedule and there is a wait time of a few days for withdrawals to be processed. The amount of Ether that can be withdrawn from the Staking Contract each day is limited as well to prevent a bank run or mass withdrawal event that could affect the security of the network.
Now that the upgrade is live Ethereum Validators who have provided a withdrawal address will begin receiving their reward payment automatically every few days. This will bring a reduction in the amount of staked Ether, however this Ether wasn't contributing to the security of the network as any validator with a balance of over 32 ETH will receive the same weight and rewards as other validators. Since all of these operations are enacted on the consensus layer there won't be any transaction fees when being issued rewards.
Withdrawal payments are now being processed through a method called Validator Sweeping. When a validator proposes a new block to add to the blockchain it is now required to build a withdrawal queue of up to 16 eligible withdrawals to include within the block. The validator proposing the block works through the list of validators until it can find 16 available for withdrawal, and the next validator to propose a block begins its search at the place the previous validator left off. Unlike normal transactions and interactions with smart contracts, withdrawals don't compete for execution layer block space or require any transaction fees.
Potential Market Effects
Will Shapella destabilize the price of Ether?
Looking at the stats from Beaconcha.in we can get a good idea of the recent activity of validators since the upgrade has gone live. We can see a predictable decline in validators and staked Eth begin when the upgrade was triggered last night. So far we've seen 1,230 validators exit the network and there's about 34,000 less Ether staked than yesterday evening, but how do we quantify these numbers?
1. Validators: The validators that have chosen to exit the network make up less than 0.25% of the currently active validators
2. Staked Ether: The Ether that has been withdrawn represents less than 0.20% of the currently staked Ether
Neither of these figures seem particularly mind boggling at the moment and will likely have a very limited effect on a market of this scale. As of writing this article Ether has rallied 5% today to a price of $2,050. While some would attribute this to the success of the Shanghai upgrade it's most likely just a natural price fluctuation.
More time is needed to see the final effects of the Shanghai upgrade on the Ethereum market but it's likely that a multitude of effects will cancel out the sell pressure of those withdrawing. Many potential validators have likely waited until withdrawals were enabled before making the leap, especially institutional players who have a duty to minimize risk even when making moves into highly speculative assets. Those running multiple validators have likely earned enough rewards to spin up an additional validator, and the amount of Ether that is being burned from EIP-1559 likely makes the current withdrawal rate negligible.
The Shanghai upgrade, the final component of Ethereum's transition from proof-of-work to proof-of-stake, has gone live, allowing validators to withdraw part or all of their Ether holdings. However, withdrawals are released on a set schedule, and the amount of Ether that can be withdrawn from the Staking Contract each day is limited to prevent mass withdrawals that could affect network security. The upgrade is unlikely to destabilize the price of Ether as the amount of Ether that has been withdrawn represents less than 0.20% of the currently staked Ether. The final effects of the upgrade on the Ether market are yet to be seen.