What is the Ethereum Shanghai Upgrade?

By Gaurav Roy

The Ethereum network launched in 2015 using a proof of work consensus, much like Bitcoin. However, unlike Bitcoin, it can execute smart contracts. This functionality meant more and more projects joined the network. As a result, the Ethereum network became busy, which made transactions both slow and expensive. Ethereum was facing a scalability issue. 

So, you might be thinking “Can’t you just improve the network to handle more data?” And you’d be right because you can…but it’s not that simple. 
To explain, improving the scalability of a blockchain also impacts its decentralization and security. This is what the co-founder of Ethereum, Vitalik Buterin, coined ‘The Blockchain Trilemma’. Essentially, Ethereum chose to solve this problem by changing its whole consensus mechanism from Proof-of-work (PoW) to proof-of-stake (PoS).

The History of Ethereum Upgrades

The concept of a PoS Ethereum was originally called ETH 2.0. But to transition to its new state,  Ethereum needed the help of a separate chain that used a PoS consensus. This was named the ‘Beacon Chain’. 

To explain, PoS blockchains require users to stake their ETH to secure the network. Then these validators have the power to create new blocks and secure the network. In return for their stake, they receive ETH rewards.
Specifically, the Beacon Chain required users to stake 32ETH to become a validator. However, the validators on the Beacon chain could not unstake this ETH or receive their rewards until it merged with the mainnet. The Merge took place in September 2022 and following that, the beacon chain became part of the new PoS Ethereum mainnet. However, the staked ETH remained locked up.

What is the Ethereum Shanghai Upgrade?

The Ethereum Shanghai Upgrade is the next major upgrade after “The Merge”. Also known as the Shapella upgrade, the Ethereum Shanghai upgrade is an important step towards the continued development of the Ethereum protocol. In short, it finalizes Ethereum’s move from PoW to PoS.

What does the Shanghai upgrade mean for the Ethereum Ecosystem?

The Ethereum Shanghai Upgrade has the potential to increase accessibility and flexibility for users and improve the overall scalability and security of the network. Plus, it opens the door to new developments in Ethereum’s future. However, the main impact will be the ability to withdraw staked ETH from the Beacon Chain – the feature everyone has been waiting for.

Unstaking ETH from the Beacon Chain

The Shanghai upgrade will allow the phased withdrawal of Ether (ETH). In short, the upcoming upgrade will allow validators to withdraw their  ETH and cash out their rewards. 

Since many participants staked their ETH and nobody could withdraw it, there’s a lot of liquidity at stake. To avoid transactional chaos, there will be some limits. For example, there will be a limit on the number of withdrawals in each block. Fortunately for validators though, they won’t have to pay gas fees to withdraw.

Those who wish to withdraw their ETH have two options – partial withdrawals or full withdrawals. Partial withdrawals involve withdrawing only the rewards, which can be withdrawn to any Ethereum wallet. However, the validator account will still be active on the beacon chain, and you will continue to validate transactions as usual.

A full withdrawal, on the other hand, involves withdrawing your entire staked balance, including the 32 ETH required to become a validator, plus any rewards earned. To initiate a full withdrawal, you must submit a voluntary exit message with your validator keys. This message will start the process of exiting from staking, and your validator account will be placed in the exit queue. The time it takes to exit will depend on how many others are planning to do the same thing.

Once the exit process is complete, your validator account will no longer be responsible for validating transactions, and you will no longer be eligible for rewards. At this point, your account status changes to “withdrawable,” and you can provide your withdrawal credentials.

Following that, you’ll receive your full account balance at the withdrawal address.

Will the Shanghai Upgrade Impact ETH Price?

There is no way of telling if the Shanghai Upgrade will impact the price positively or negatively.

 However, upgrades to the Ethereum network often create a buzz that can increase demand. Furthermore, as the Ethereum network becomes more efficient and accessible, it attracts more users. With increased network functionality, new use cases arise. And this innovation usually leads to further demand. So perhaps, the Shanghai upgrade will spark off a whole new wave of Ethereum projects bringing something new to the table. Since ETH has been deflationary since the Merge, some believe it could lead to bullish price action.

 On the other hand, some anticipate a selling wave as unlocking staked ETH will increase the circulating supply of ETH. This could potentially lead to a decrease in price due to selling pressure. However, Ethereum has a staking ratio of 14%, meaning only that percentage of its circulating supply is locked up. That might not mean much to you, but it’s much less than the Solana network’s 70%.

Ultimately, it’s important to approach any speculation about the impact of the upgrade on ETH price with caution, as market dynamics are complex and can be difficult to predict with certainty. One thing is certain, though, approximately 1 million ETH in rewards will be available for withdrawal once the upgrade goes live. 

What Else Could The Upgrade Impact?

The Shanghai Upgrade may also impact liquid staking services like Rocketpool and Lido. But why?

Well, staking on Ethereum requires you to lock up 32ETH for a specific length of time. For example, Kiln uses this method to allow users to fund a validator through Ledger Live and earn rewards. 

Liquid staking services, however, allow you to unstake at any time. However, instead of unstaking ETH, you get a token representing the staked ETH instead. You can use these tokens to participate in various DeFi activities just like regular ETH. But in fact, the service still has the staked ETH. Considering liquid staking accounts for 41.69% of the ETH staking market share, and there will be so much ETH flooding into the market, it may impact the price of these platforms’ tokens. That said, how the upgrade will affect these platforms and the wider ecosystem is still hard to predict. 

When will the Ethereum Shanghai Upgrade happen?

The last test before the upgrade took place on 28th February, when the Goerli Test network forked successfully. While it processed deposits just fine, the test wasn’t all smooth sailing. Allegedly, some validators did not update their client software, leading to a small delay. That said, the rest of the event was a success, with the mainnet upgrade scheduled for some time in April.

The Next Ethereum Upgrade: EOF

After Shanghai, Ethereum will prepare for its next big change: The EOF upgrade. To explain, EOF stands for EVM Object Format. While its name is very technical, the upgrade itself will allow for practical functionality.

In short, the upgrade will focus on improving the Ethereum Virtual Machine (EVM). This is the virtual machine responsible for executing smart contracts on the Ethereum blockchain. If you want to learn more, check out the Academy article on the Ethereum Virtual Machine. But without getting too technical, the EOF upgrade is the first major upgrade to the EVM since its inception in 2015.

It consists of five Ethereum Improvement Proposals (EIPs) that aim to make EVM execution more efficient and easily upgradeable. It will introduce a new binary format for smart contracts, making it easier to create, execute, and upgrade them. This will ultimately lead to better performance and more efficient use of resources on the Ethereum network.

However, the EOF upgrade has been delayed and will launch a few months after the Shanghai Upgrade. 

Laying the Foundation for Sharding

EOF will allow the Ethereum network to implement sharding. To explain, sharding is a scaling solution that will dramatically improve Ethereum’s capacity, gas cost, and transaction speed. Sharding allows for the parallel processing of transactions across multiple shards or smaller partitions of the Ethereum network. By using sharding, the Ethereum network can handle significantly more transactions per second (TPS) than it currently does, making it more suitable for widespread use in mainstream applications.

Future Ethereum Upgrades

Besides Shanghai and EOF upgrades, Ethereum has several other major upgrades in the pipeline. Ethereum co-founder Vitalik Buterin stated ETH’s transition to Ethereum 2.0 is only 55% completed after the merge.

So, the future Ethereum upgrades include the following:

Surge – This will bring sharding to Ethereum later this year, leading to improvements in scalability, gas costs, and transaction speeds.

Verge – This one will focus on optimizing storage on the network and reducing node size to improve scalability further. 

Purge – This will help reduce the amount of space required to store ETH on a hard drive, freeing up space for developers.

Scourge – This one aims to provide censorship resistance and avoid centralization and other risks associated with MEV. 

Splurge – This upgrade includes various miscellaneous innovations to make Ethereum better. 

There is no concrete schedule for these upgrades yet, but they may be completed around 2025.

How to Stay Safe when Interacting with the Ethereum Network?

Staking ETH doesn’t have to be difficult. For those ready to get stuck in already, you can also find staking options directly through Ledger Live.

Via the discover feature, you can fund a validator and earn rewards with Kiln. Or you could even take part in Liquid Ethereum staking with Lido.

The Ethereum Network is at your fingertips through the power of the Ledger Ecosystem. Firstly, you can also access countless blockchain apps directly through Ledger Live. Through this single app, you can access countless web3 services to help you with staking, trading, and lending crypto – and even managing NFTs.

Secondly, Ledger devices help you protect any value you accrue. Ledger devices keep your private keys offline, and therefore your assets secure. Not only that, these hardware wallets offer you full custody over your belongings. This means that no matter what happens to any service you use, or even to Ledger itself, you still have control over your assets, and thus your Ethereum network experience.