This article contains a complete guide to understanding what is Ethereum Shanghai upgrade, how does the Ethereum Shanghai upgrade impact users, and more.
Introduction
Ethereum completed its transition to a Proof of Stake (PoS) consensus mechanism in September 2022. Previously, Ethereum processed and validated transactions using Proof of Work (PoW) and a mining mechanism. Users who want to participate in network validation can now stake Ether (ETH) rather than solving computational puzzles with specialized mining equipment.
LEARN MORE: What is Ether in Blockchain? “The Currency of Ethereum Apps.”
Users may stake 32 ETH to become network validators after Proof of Stake was implemented, but the money was locked indefinitely. This issue is addressed by the recently implemented Shanghai upgrade (EIP-4895), which includes withdrawal functionality.
With the withdrawal functionality, ETH holders might remove their staked funds as validators.
What is Ethereum Shanghai Upgrade?
Ethereum’s Shanghai upgrade, also known as the Shapella upgrade, occurred on April 12, 2023. One of the most significant changes brought about by the fork is the ability for stakeholders and validators to withdraw assets from the beacon chain.
The Shapella upgrade’s most notable advancement is Ethereum Improvement Proposal-4895, or EIP-4895, which allows validators to withdraw staked tokens.
How it Started
People have deposited about $34.56 billion in ETH with the network since the launch of ETH staking in 2020. Although Ethereum users were able to stake their ETH, they were unable to unstake it. The Shanghai upgrade, EIP-4895, changed everything and completed the shift to PoS.
Validators have invested over 18 million ETH (about 15% of the total ETH supply) to help safeguard the blockchain. Since September 2022, when the merge began the process of converting Ethereum’s consensus method from proof-of-work to proof-of-stake, validators have been crucial to the Ethereum blockchain.
LEARN MORE: Ethereum Merge Explained: All you need to Know!
After the merge, validators that stake 32 ETH in the chain can participate in validating blocks, and each staked ETH increases the possibility of a validator getting block rewards.
The merge required validators to keep their ETH and any incentives they earned until the chain was updated later. Despite the fact that the merge occurred in 2022, validators have been staking ETH since December 2020. The Beacon Chain, which used proof-of-stake as a method, was released around this period.
How Does the Ethereum Shanghai Upgrade Impact Users
The precise impact of the Shanghai update will be determined by your circumstances. If you staked ETH directly using Ethereum or with a staking tool, you can now withdraw your cash. It should be noted that not everyone invested 32 ETH directly and that many staked smaller amounts through liquid staking services.
Staking on ETH, on the other hand, may be more appealing to users due to its increased liquidity. Those who did not wish to employ liquid staking methods can now stake ETH directly with Ethereum. Because of the enhanced staking conditions, this could increase demand for ETH.
Overall, allowing withdrawals from staking fosters a freer ETH market by allowing ETH holders to react to staking demand and supply in order to reach market equilibrium. This should be seen favorably because it eliminates the artificial control effects on the price and circulation of ETH.
Unstaking and Withdrawals
Validators can unstake in a variety of ways, with the two most common being partial withdrawals and full withdrawals.
Partial Withdrawal
A partial withdrawal occurs when a staker withdraws the rewards gained from staking but leaves the original ether (32 ETH) in place. Also, partial withdrawal occurs automatically.
As a solo staker operating your own validator, you’d have to move your credentials from 0x00 to 0x01 withdrawal credentials for a partial withdrawal to happen automatically. When the upgrade was activated, partial withdrawals were available, allowing consumers to immediately reap their long-awaited rewards.
Ethereum, on the other hand, can only handle 16 partial withdrawal requests in a single slot (which occurs every 12 seconds). The withdrawal queue could take hours depending on how many requests come in.
According to Barnabas Busa, a DevOps engineer at the Ethereum Foundation,
“During the first few epochs, there most likely won’t be any partial withdrawals, as the first few hundred validators are all 0x00.”
This is due to the fact that those are genesis validators who joined the network when the Beacon Chain was launched and so have the old withdrawal credential set.
Full Withdrawal
Full withdrawals, in which stakers also redeem their original capital, went live at the same time, allowing validators to fully unstake their 32 ETH and any incentives they’ve collected. By departing the chain, the validator ceases to participate in the block validation process and network security.
Full withdrawals do not happen automatically, so validators who want to leave must send a message to the blockchain to be added to the queue. Staking services have their own deadlines for releasing staked ETH withdrawals.
Coinbase had stated that they would begin processing withdrawal requests for their stakeholders approximately 24 hours after Shanghai was completed. Stakeholders, according to Lido, will not be able to recover their withdrawals until another upgrade in May.
Other Shanghai Improvements
The Shapella fork’s main development is EIP-4895, although there are several other lesser EIPs included as well. EIP-3651, EIP-3855, and EIP-3860, for example, are all meant to improve the efficiency of Ethereum network transactions and minimize gas fees for various decentralized applications (dapps).
Bottom line
The Shanghai upgrade introduced an important feature for Ethereum stakers and those thinking about staking. Shapella is still a minor upgrade, especially when compared to the merge. However, it has the potential to have a big impact on people who have staked ETH on the chain.
Other Ethereum protocol updates are expected later in 2023, with one attempting to improve the Ethereum Virtual Machine and another intending to split the Ethereum blockchain into multiple distinct “shards” to boost scalability.
