Fri. Feb 23rd, 2024

Ethereum, the second-largest cryptocurrency in the world, is gearing up for a significant upgrade called the Shapella or Shanghai upgrade. The upgrade is scheduled for April 12 at 22:27:35 UTC, and it is almost here. And as the countdown draws near, the speculation about its impact on the market also grows.

Understanding The Shanghai Upgrade

The Shapella upgrade combines “Shanghai” and “Copella” upgrades. In short, it enables ETH staking withdrawals on both the Ethereum’s execution and consensus layers, which deliver two different types of rewards to those who run validator nodes. This upgrade is a follow-up to Ethereum’s famous Merge update of September 2022, which switched Ethereum’s consensus mechanism from proof-of-work to proof-of-stake. In layman’s terms, proof of work uses a lot of energy to power the mining equipment, whilst PoS is much more loyal to the environment.

Since the Beacon chain, which initially supported the proof-of-stake migration, went live in December 2020, anyone seeking to become a validator had to lock at least 32 ETH in the smart contract. To date, roughly one-seventh of the total ETH supply is locked in the consensus layer deposit contract. The Shanghai upgrade aims to solve this problem by enabling Ethereum stakers to withdraw their staked Ethereum from the Beacon chain. Other proposed improvements include reduced gas fees during periods of high activity for developers.

Uncertainty around the Shanghai Upgrade has caused severe volatility in the crypto and derivatives markets. For example, Ethereum’s open interest has increased by over $400 million since the onset of April. At the same time, according to Bitcoin price prediction platforms, the cryptocurrency continues to dominate the crypto market, with its price increasing much faster than Ethereum.

Withdrawal of Validators

As the Ethereum community prepares for the Shanghai hard fork, some validators have withdrawn from the network. Validators play a crucial role in the Ethereum network, helping to validate transactions and maintain the integrity of the blockchain. The withdrawal of validators could significantly impact the network’s security and performance.

However, the number of validators that have withdrawn from the network is relatively low. According to Etherscan, only 0.6% of validators plan to withdraw their stake after the hard fork, just 3,614 out of 562,717 Ethereum validators. This indicates that the vast majority of validators support the upcoming upgrade and are willing to continue to support the network.

Also, it’s important to note that the withdrawal of validators doesn’t necessarily mean that they are abandoning the network altogether. Validators can withdraw from the network temporarily and then rejoin later. In fact, some validators may have withdrawn to prepare for the upgrade and ensure that they are fully prepared to support the network during and after the upgrade process.

Short-Term vs. Long-Term Expectations

While the Shanghai upgrade may have a short-term negative impact on the price of Ethereum, experts believe it to be highly bullish for Ethereum in the long term. Validators would now be able to withdraw their funds that have been locked on the network since December 2020. Hence, around 18 million ETH will be available for withdrawal following the upgrade. Of course, the most obvious way to think about what happens next, would be to expect everyone to withdraw, but one must not forget that original stakers did it whilst having no clear understanding of whether their ETH will even be unlocked. It’s a loyal bunch – the solo stakers!

Popular crypto exchanges like Gate.io anticipate a high volume of withdrawal requests once the Shanghai upgrade is live. And this could take weeks or even months to process fully. However, in the long term, the ability to unstake Ethereum will significantly lower the risk of staking ETH. Institutional investors who were previously uncomfortable in staking Ethereum can now feel more comfortable once ETH can be unstaked. Essentially, it will help Ethereum attract more capital to staking and will help improve the network’s security in the long run.

Ethereum Price Analysis

In the past few months, Ethereum has surpassed multiple resistance levels while experiencing a significant surge in price. Ethereum saw a substantial rally in March after finding support at the 200-day moving average of $1,400.

Today, the Ethereum bulls have effectively safeguarded the 20-day EMA of $1,830, signifying a sustained positive trend. The bulls must tackle the resistance at $1,960, aiming to push Ethereum prices toward $2,250. However, the Bears will likely have a strong defense in the $2,000 to $2,200 range. If ETH prices reverse from this range without going below $1,940, it would indicate that the rally has the potential to extend further.

At the time of writing, Ethereum’s price is $1,915, experiencing a slight uptrend of over 0.25%.

Conclusion

While Shanghai remains a relatively small upgrade compared to the Merge, it has the potential to significantly impact those with staked Ethereum. The Shanghai hard fork represents a significant step forward for the Ethereum network. It will be interesting to see how it affects the network’s performance and user adoption in the coming months. Other upgrades for the Ethereum protocols will likely come later in 2023, including some improvements to the Ethereum Virtual Machine and the aim to split the Ethereum blockchain into several “shards” to enhance its scalability.

By BNA

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