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What is the Ethereum “Shanghai” Upgrade?

The first step in Ethereum’s switch from a Proof of Work consensus mechanism to Proof of Stake involved the launch of the Beacon Chain, a PoS chain that ran alongside PoW Ethereum from its launch in Dec 2020 until “The Merge” in Sept 2021.

The Beacon Chain introduced staking to Ethereum. So since Dec 2020 users were able to stake $ETH but could not withdraw it.

The Shangai uprade will allow all these stakers to withdraw $ETH staked since December 2020 as well as the rewards accumulated since.

So, how much $ETH has been staked?

Since the launch of the Beacon Chain in late 2020, over 16.5M $ETH (worth over US $25B as of Feb-23) has been staked by approximately 520K validators.

Where it is staked?

LidoFinance is the largest player in the market, accounting for nearly 5B staked $ETH and 29.2% of the market. The top exchanges in the staking market are Coinbase, Kraken, and Binance, accounting for over 4B $ETH and ~26% of the market.

Note that 57 % of staked $ETH is already liquid. The point is that 57% of $ETH stakers have been able to access liquidity, with both their principal and rewards, for many months already.

So the question is, are the “illiquid” stakers i.e. those that have not received a liquid staking derivative and thus been unable to access liquidity for their staked $ETH, likely to sell their $ETH as soon as it is unlocked?

So let’s see how many stakers are in profit..

2⃣ Price Impact

Only 31 % of $ETH stakers are in profit, the majority is at loss.

Stakers will not be able to withdraw all staked $ETH at once, there will be a withdrawal process.

- The rewards can be withdrawn directly, which represents $1.03M ETH or US $1.8B.

Given that ETH’s daily volume closes to US $8-10B this will be negligible selling pressure.

- The amount staked per validator cannot be withdrawn directly, they are limited to 50,400 $ETH per day or US $85M, such a negligible amount compared to the daily volume.

There is therefore a very strong chance that the price will not be too impacted given the low seller pressure which is also diluted.

What about buying pressure?

Staking rewards are inversely correlated to the number of validators. This means that if the number of validators drops (validator withdraw their $ETH) rewards will increase and attract other validators.

Many are waiting for the Shanghai upgrade to begin $ETH staking because:

- They can withdraw their $ETH at any time (no locking)

- They will be confident about the technical success of this upgrade (less risk)

Especially the institutional ones who might enter the $ETH staking. On top of that since January 2023 $ETH has become deflationary.

There is therefore a buying pressure which is likely to be greater than the selling pressure.

3⃣ Conclusion

The main effect of the Shanghai upgrade will be the release of $ETH staked since December 2020. There will therefore be a seller pressure but which will be limited by:

- a potential loss for stakers

- a gradual withdrawal process

- 60 % of staked $ETH is liquid

In contrast, it can be estimated that there will be buying pressure due to:

- if validators exit, rewards will increase and more will enter

- new stakers who will be more confident ( $ETH not locked)

- $ETH deflationary since January 2023

Additional Content

What are LSDs?

  • LSDs are financial instruments which enable stakers to stay liquid, hence the name.

  • When you stake your token on an LSD platform, you get a derivative coin in return. The derivative is pegged to the token, keeping you liquid.

Example: For staking ETH with Lido Finance, you get stETH in return, which is an LSD. It is pegged to $ETH, so you can trade/loan the LSD just as you would the token.

Benefits of LSD:

  • They help stakers stay liquid. It's as simple as that. When staking, we usually have to put in significant amounts of $ETH to make appreciable gains.

  • LSDs allow us to put in that significant amount, while also not 'losing access' to it.

  • Further, it makes staking a much more intuitive process, through the LSD platforms, as stakers don't need to get involved with technicalities of the blockchain, and hence mitigates the risk of losing funds.

Note, the Shanghai upgrade reduces significantly the minimum ETH for staking. 32E -> 0.1E minimum. This means that a lot of people might stake for passive rewards (LSDs).

Please note that the information provided here is for educational and informational purposes only and should not be considered as financial advice. does not guarantee the accuracy, completeness, or suitability of the information provided. Please consult a licensed financial advisor for personalized financial advice.

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