Everything You Need To Know About The Ethereum Shanghai Upgrade

Everything You Need To Know About The Ethereum Shanghai Upgrade

Ethereum News
February 21, 2023 by Diana Ambolis
In September 2022, the Ethereum blockchain went through a change called “the Merge,” which changed how the chain reached a consensus. Around the middle of March, a new link called the “Shanghai” is expected to be added to the chain. This may have effects on the economy all over the world. The “Ethereum Shanghai fork”
Everything You Need To Know About The Ethereum Shanghai Upgrade

In September 2022, the Ethereum blockchain went through a change called “the Merge,” which changed how the chain reached a consensus. Around the middle of March, a new link called the “Shanghai” is expected to be added to the chain. This may have effects on the economy all over the world. The “Ethereum Shanghai fork” is another name for the Ethereum Shanghai upgrade. Five Ethereum Improvement Proposals (EIPs) are expected to be rolled out as part of this upgrade. EIP-4895 might be the one that gets all the attention because it will make it possible to withdraw staked Ether (ETH).

Through the Merge, which happened in September 2022, the blockchain moved from proof-of-work (PoW) to proof-of-stake as its consensus mechanism (PoS). By doing this, the chain’s governance moved away from a system that used a lot of resources and towards one that was better for the environment, society, and governance (ESG).

Even though PoS might be better for the environment, it still needs to be staked. To take part in the consensus mechanism, people who owned ETH had to risk at least 32 ETH. They get a stake yield of just over 5% at the moment. At the moment, 32 ETH is worth about $52,000, which makes it impossible for smaller investors to take part. But platforms like Lido and Coinbase let users stake even if they only have a small amount of Ether and charge them a fee on their staked income.

Since the staking market started about two years ago, the staked Ether has been locked. With the Ethereum Shanghai update, users will be able to get their staked Ethereum back. So, the Ethereum community can’t wait to get access to their Ethereum after the upgrade.

What does the Shanghai fork mean for people who have invested in Ethereum?

When it went live on July 30, 2015, the Ethereum blockchain only had the Bitcoin blockchain to look at for ideas. Because of this, it still has some features that aren’t the best, which other blockchains have learned from and fixed. Can the upgrade help deal with these problems?

In the past, transactions on Ethereum have been slow, and transaction fees have been high. This has been especially clear since the boom in decentralised finance (DeFi) made the transaction value locked (TVL) on the chain bigger. The popularity of minting nonfungible tokens (NFTs) through 2021 and early 2022 has worsened user experiences and increased gas fees.

Aside from EIP-4895, which is mostly about Ethereum stakes, the upgrade is expected to include EIP-3855 and EIP-3860. EIP-3855 should help speed up transactions, and EIP-3860 should bring down the cost of transactions.

Some of the DeFi and NFT ecosystems had problems with high gas fees and slow transactions, which these improvements should fix. Because of these problems, projects had moved to other chains, like Solana or Ethereum layer-2 scaling solutions like Polygon. With these changes, these and newer projects look at Ethereum more favourably.

A stronger network effect could help the chain in the long run if staking was more flexible, performance was better, and there were more ecosystem stakeholders.

What will happen to ETH traders because of the Ethereum Shanghai upgrade?

Most changes to the blockchain have an effect on how prices move. The Ethereum upgrade to Shanghai would be the same. As investors move their assets to self-custody, the amount of ether on exchanges has already begun to drop.

The last Ethereum update made the market very volatile, which traders took advantage of. The price of ETH went from around $1,000 in July 2022 to over $2,000 in August and $1,800 just before the Merge. Since the amount of Ether on the exchange is going down quickly, traders may see another price spike that leads to the Shanghai upgrade.

But short-term traders may want to pay attention to the fact that Ether’s price has decreased since the Merge was pushed in 2022. This upgrade might not change much. The other thing to keep in mind is that Ethereum users who haven’t been able to withdraw their staked Ether for more than two years will be able to do so right after the Shanghai upgrade.

With over 16.4 million ETH staked, if some of that hits the market, it could increase the supply of Ether and bring prices down right after the Shanghai upgrade is done. This relationship between supply and demand is a basic principle of economics and a key factor in figuring out the price of any asset, including cryptocurrencies, stocks, bonds, and commodities.

Also, it’s important to know that staking withdrawals could cause the price to go down after the Shanghai update, but ETH withdrawals will only be possible in small amounts. For example, traders who want to withdraw their Ether after the upgrade are only able to do so in stages over time.

This could make it less likely that Ether’s price will decrease. But the fear of a bigger supply could hurt the market’s mood in the short term.

How will the Ethereum Shanghai upgrade affect people who use ETH?

Due to slow transactions and high costs, Ethereum has had bad user experiences for a long time. The Ethereum Shanghai upgrade should make some of these things better for users.

Since the bear market in 2018, more and more ways to use Ethereum have come up. This has led to exponential growth in TVLs and the use of the chain, which has led to network effects. The chain wasn’t built to handle such rapid growth, so it has had trouble with high gas prices and slow transactions. Because of this, Ethereum is often called the “chain for the rich.”

One of these events was the minting of Yuga Labs’ “The Otherside,” where gas fees of up to 2.5 ETH were paid to get the NFTs. Such expensive things don’t happen on next-generation blockchains like Solana, where the user experience and low transaction fees have helped attract a large user base.

If Ethereum fixed the problem with gas fees, it could become everyone’s favourite chain. As micro-transactions became more important in gaming, many projects moved off of Ethereum and onto Solana, Polygon, and Immutable X. For these kinds of projects to be interested in Ethereum, it needs to become more useful, faster, and scalable. Sharding is one of Ethereum’s pipeline features. In traditional computing terms, it is similar to parallel processing. The Shanghai upgrade is a step towards sharding, which will be possible in 2023.

As time goes on, transaction speeds will get faster, and costs will go down. When this happens, Ethereum will have more interesting uses for its users and won’t just be for rich people.

Also, read – Four Errors About The Ethereum Merge Exposed

What do investors need to know about the Ethereum Shanghai upgrade?

Investors tend to look at an asset over a longer time than traders. So, they pay more attention to the big picture than to short-term price action and technical indicators. In this way, the Shanghai upgrade improves the chain’s fundamentals, so investors should be happy about it. Ethereum has the potential to be the first major institution to use cryptocurrency. The Merge was the first step in that direction. Checking the ESG box could bring more institutional capital to Ethereum and, eventually, to the whole crypto ecosystem.

Also, institutional investors can take part in staking and earn a return, which is similar to how fixed financial instruments, like bonds, work in capital markets. As Ether becomes the most valuable cryptocurrency, its staking yields could become the same as the risk-free rate that traditional capital markets often use to price assets.

So, staking rewards from other chains and DeFi applications native to Ethereum must at least match, but ideally beat, Ethereum staking yields. So, the Ethereum upgrade is likely to change how other chains and applications design their products and services in response to the upgrade. With Ethereum’s fundamentals getting better thanks to the Merge, the Shanghai upgrade, and the sharding feature coming in 2023, both small and large investors will want to be a part of the ecosystem’s growth.

What is Ethereum’s next update?

The Shanghai upgrade is a step towards making the Ethereum blockchain more scalable. The Ethereum roadmap is full of features like sharding, zero-knowledge (ZK)-SNARKs, and more. The EIPs that are part of the Shanghai update will be a good step towards sharding by the end of 2023. Sharding is a very important way to speed up transactions because it allows the chain to do “parallel processing.” It is expected that sharding will be done in two steps in 2023 and 2024.

In the first step, more data will be on the Ethereum blockchain. When you combine this with the rollup feature of layer-2 chains like Polygon and Immutable X, Ethereum could be able to handle several thousand transactions per second. Still up for debate is whether the second stage should let each shard have its own smart contract, which would make them smarter. This upgrade will also make it possible for shards to talk to each other. But this stage’s details are still being discussed, and they may change when zk-SNARKs are added to the Ethereum blockchain.

Vitalik Buterin hinted in his speech at the Ethereum Community Conference in July 2022 that quantum resistance would be one of Ethereum’s most important milestones. But making sure that sharding and zk-SNARKs have the right architecture should keep the Ethereum community busy and excited for the next couple of years.