April 9th, 2023
Crypto has been trading relatively flat the last week despite a recent influx of capital from banking into crypto following the collapse of Silicon Valley Bank in March. Some speculate this is in anticipation of the upcoming Ethereum Shanghai Hardfork which will unlock somewhere in the ballpark of $33 Billion worth of Ethereum will be unlocked after having been staked by validators in 2020 ahead of the upgrade from proof of work to proof of stake.
With the possibility of a lot of Ether hitting the market, many traders are uncertain which could explain some of the flat price action of other crypto assets in the last week. When this Eth was locked, it was trading around $600. At the time of writing, Eth is trading over $1800. Some see this as an obvious "take profit" opportunity for these validators. However, others speculate that much of this Eth will be re-staked to either continue collecting staking rewards, or continue running validator nodes.
Some are concerned about the potential influx of Eth that might abruptly flood the market following the update. While this could potentially happen, there are narratives and history and some narratives that suggest all this Eth hitting the market at once is an unlikely scenario. A year ahead of the bitcoin halvening, there are a few more realistic scenarios that we believe have a greater likelihood of playing out.
Some Background: What is the Shanghai Hardfork?
Any time a blockchain upgrades to an improved consensus or change in protocol, this change is called a "hardfork," and it usually requires validators to upgrade the validation software and protocols. With Ethereum Shanghai, there are several EIP's (Ethereum Improvement Proposals) that will be introduced with the goal of improving the performance and experience of the network.
Aside from unlocking the 18 Million Ether, The Ethereum Network will also update the protocol with several improvements with a few of the EIP's being implemented specifically for optimization, including EIP-3855 aimed at reducing contract size (reduced code size means less gas fees and faster transaction processing times) and EIP-4895 aimed at introducing a new "withdrawal" operation that will work at the consensus layer.
In order to avoid a mass outflow of Ether, the Shanghai protocol will limit withdrawals to 1350 validators per day (about 43,200 Eth potential withdrawal per day), this is designed to ensure the network is not disrupted by losing a large number of validators in a short amount of time, and by proxy should also limit the amount of Eth hitting the market at once. This means that if everyone did decide to withdrawal, the full number of withdrawals wouldn't be completed until 417 days after the upgrade.
For a more robust write-up on the Ethereum Shanghai update, check out this post from cryptonews.net where they talk about the update in greater detail.
Impact to Trading and Investors
The uncertainty associated with the upgrade appears to be priced into the current market. Since it's highly unlikely that there will be a massive outflow from Ethereum (because many will continue to run validator nodes and keep their stake on-chain), there will still be some Eth that enters the market as a few long-term holders take profit. This will likely play out a few different ways:
Long-term holders un-stake some assets and take profit in the form of cash after transferring to centralized exchanges (short-term impact to price action sending Eth slightly lower in the next few months).
Un-stakers transfer Eth for other on-chain assets like Bluechip NFTs or Altcoins they intend to buy and trade short-term or hold with conviction as a hedge against the upcoming price action with Ethereum. Minimal impact to Ethereum price action short-term, but potential to affect other assets.
Majority of users continue to hold stake and validate Eth nodes in exchange for rewards.
"While many believe that the Shanghai upgrade is likely to cause a price drop, fundamentals suggest that Ethereum’s percentage of total supply is much lower compared to its competitors, indicating that we may not see a significant price drop. In fact, numerous analysts are calling for a push past the $2,000 mark before the upgrade lands on the mainnet. On the other hand, ETH technicals are showing that a reversal may be at play, with the daily RSI hovering near the overbought zone. When looking at the upside, we can see strong resistance at the $2,300 level, as well as a strong support level at $1,800. The market is currently very divided, and predicting the direction of the move could prove extremely difficult."
Kucoin.com
Our opinion is that the upgrade will not have a substantial affect on the price of Ethereum short-term, but will position the network better for long-term growth. For a more in-depth write-up on the potential impact to the price impact of Ethereum following the Shanghai update, check out this post from KuCoin. This is not financial advice, and you should not base your investment decision on anything in this article.
Probably no Reason to be Concerned
In order to avoid a mass outflow of Ether, the Shanghai protocol will limit withdrawals to 1350 validators per day (about 43,200 Eth potential withdrawal per day if every validator chooses to un-stake and withdraw), this is designed to ensure the network is not disrupted by losing a large number of validators in a short amount of time, and by proxy should also limit the amount of Eth hitting the market at once. This means that if everyone did decide to withdrawal, the full number of withdrawals wouldn't be completed until 417 days after the upgrade. Which means it would take over a year for the market to be fully saturated with the unlocked Eth. In that time, other would-be validators would likely accumulate and begin validating the network in their stead.
According to ethereum.org, "The process of a validator exiting from staking takes variable amounts of time, depending on how many others are exiting at the same time. Once complete, this account will no longer be responsible for performing validator network duties, is no longer eligible for rewards, and no longer has their ETH "at stake". At this time the account with be marked as fully “withdrawable”.
Once an account is flagged as "withdrawable", and withdrawal credentials have been provided, there is nothing more a user needs to do aside from wait. Accounts are automatically and continuously swept by block proposers for eligible exited funds, and your account balance will be transferred in full (also known as a "full withdrawal") during the next sweep."
More information about the upcoming Shanghai hardfork and the effect of staking and withdrawals can be seen here.
Following the update, the network will be more secure, better optimized for smart contracts, and will provide a better experience for validators as the "lock-up" mechanism for staking will be changed to allow validators to make withdrawals easier. A year ahead of the upcoming Bitcoin halvening, much-needed upgrades to the network will only pave the way for more users to be able to transact on and interact with the Ethereum network. Price action will probably remain relatively flat until the update and we will likely see trading volumes start to pick back up once the uncertainty sates.
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