Introduction
Undoubtedly, Ethereum has undergone several updates since its introduction. These upgrades have ranged from small changes to the complete network or fundamental shifts. One such significant shift was the “Merge” that turned Ethereum into a Proof of Stake (PoS) blockchain followed by a Shanghai update. So, let’s understand what is Shanghai upgrade and how will it affect the Ethereum ecosystem.
What is the Ethereum Shanghai Upgrade?
Before the Ethereum Merge happened in September 2022, the Ethereum network used the Proof of Work (PoW) consensus algorithm. As a result, for verifying the transactions and solving the computational puzzles powerful computers were used which made the process inefficient and time–consuming. To address this concern Ethereum was shifted to a Proof of Stake (PoS) mechanism where users can achieve consensus directly by staking. It required users to lock 32 ETH that was locked in indefinitely and had no clarity on how this could be withdrawn. As a result, the Shanghai update brings some hope to validators as it would facilitate stakers to withdraw their locked assets. The Shanghai upgrade which is also termed as “Shapella Upgrade” took place on April 12th, 2023.
How Ethereum Shanghai Benefits The Network?
The Ethereum Shanghai upgrade has several beneficial impacts on the network participants and also the ecosystem as a whole. Some of the benefits of the Ethereum Shanghai updates are as follows –
Rewards for validators
With the Shanghai upgrade, Ethereum validators get the chance to withdraw their accrued ETH while giving them better returns on their investments. While some validators choose to cash out, others choose to use these funds alternatively within the ecosystem.
Creates purchase opportunities
Usually, the sale of staked ETH is expected to create a dip in the prices of the token. This phenomenon creates the potential opportunity for traders and investors to increase their share of ETH holdings. When the price of the ETH declines the traders get the chance to buy more tokens for the same amount of investment.
Boosts the ecosystem
As discussed above, validators have more funds available to them for investing. As a result, these funds generally get reinvested in the ETH in DeFi applications. The individuals thus receive services for crypto borrowing, lending, and liquidity mining too. As a result, it creates liquidity for the entire DeFi ecosystem while boosting the Ethereum economy.
Additional Improvements In The Shanghai Upgrade
EIP–4895 is considered the key development in the Shanghai upgrade i.e. the Shapella fork. Furthermore, the upgrade aims to reduce the gas gees during the period of high activity so that it can reap benefits for the developers. The upgrades also include EIP – 3651 which proposes to lower gas costs concerning Maximal Extractable Value Payments while accessing the COINBASE address. Here, COINBASE refers to the software that allows developers to receive new tokens, not the regular exchange. Ideally, Shapella remains a relatively smaller upgrade when compared to the Merge. However, it will have a more significant impact on the staked ETH.
How Ethereum Shanghai Upgrade Affects ETH Prices And Staking?
How the Shanghai upgrade affects the prices depends largely on the decision made by the stakers. If most of the stakers choose to withdraw their funds and convert them into fiat, it will create high selling pressure in the market and drive the price of ETH to fall significantly. On the contrary, if stakers choose to retain their funds or reinvest them in the ETH ecosystem itself the price drop can be stopped.
However, there can be certain price fluctuations while stakers would be managing their holdings. Furthermore, the amount of staked funds may also decline in the short run due to many stakers and validators focusing on reaping the investment rewards. However, the Shanghai upgrade overall increases the total ETH stake in the long run.
Final Words
The Shanghai upgrade is the latest in a long series of Ethereum upgrades and modifications. It finally fixes the staking dilemma for users who made direct deposits into Ethereum staking contracts. It also provides various benefits to both validators and traders. While ETH prices may fall in the short term, this decision is overall beneficial to the Ethereum ecosystem.
