What is Ethereum Shanghai Upgrade? A Complete Guide!

What is Ethereum Shanghai Upgrade
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This article contains a complete guide to understanding what is Ethereum Shanghai upgrade, how does the Ethereum Shanghai upgrade impact users, and more.

Introduction

In September 2022, Ethereum successfully transitioned from a Proof of Work (PoW) consensus mechanism, where transactions were processed and validated through mining, to a Proof of Stake (PoS) system. With this upgrade, users now have the option to participate in network validation by staking Ether (ETH) instead of relying on specialized mining equipment to solve computational puzzles.

LEARN MORE: What is Ether in Blockchain? “The Currency of Ethereum Apps.”

Following the implementation of Proof of Stake, individuals have the opportunity to become network validators by staking 32 ETH, though the staked funds were previously locked without a specific time limit. The Ethereum network has now resolved this concern through the recently introduced Shanghai upgrade (EIP-4895), which includes withdrawal functionality. As a result, ETH holders who have staked their funds as validators can now withdraw their staked funds when desired.

What is Ethereum Shanghai Upgrade? 

On April 12, 2023, Ethereum underwent the Shanghai upgrade, alternatively known as the Shapella upgrade. This fork introduced a major change, enabling stakeholders and validators to withdraw their assets from the beacon chain. The most notable progress brought about by the Shapella upgrade is Ethereum Improvement Proposal-4895 (EIP-4895), which grants validators the ability to withdraw their staked tokens.

How it Started

Since the launch of ETH staking in 2020, approximately $34.56 billion worth of ETH has been deposited into the network. Initially, Ethereum users could stake their ETH, but they were unable to withdraw it. However, the introduction of the Shanghai upgrade, specifically EIP-4895, changed this situation and completed the transition to a Proof of Stake (PoS) consensus.

To safeguard the blockchain, validators have invested over 18 million ETH, equivalent to about 15% of the total ETH supply, since the process of converting Ethereum’s consensus from proof-of-work to proof-of-stake began in September 2022. These validators have played a crucial role in maintaining the Ethereum blockchain.

LEARN MORE: Ethereum Merge Explained: All you need to Know!

After the merge, validators who stake 32 ETH in the chain can participate in block validation, and each staked ETH increases the likelihood of a validator receiving block rewards.

During the merge, validators were required to hold onto their staked ETH and any earned incentives until the chain was updated later. Despite the merge occurring in 2022, validators have been staking ETH since December 2020, around the time the Beacon Chain was released, which utilized the proof-of-stake method.

How Does the Ethereum Shanghai Upgrade Impact Users

The impact of the Shanghai update will vary depending on individual circumstances. If you staked ETH directly using Ethereum or a staking tool, you now have the option to withdraw your funds. It’s important to note that not everyone staked exactly 32 ETH; many staked smaller amounts through liquid staking services.

Staking ETH directly on the network may become more attractive to users due to the increased liquidity it offers. Now that direct staking is possible with Ethereum, those who preferred not to use liquid staking methods have a viable option. The improved staking conditions could potentially lead to an increased demand for ETH.

In general, enabling withdrawals from staking promotes a more open ETH market, allowing ETH holders to respond to changes in staking demand and supply, ultimately leading to market equilibrium. This is favorable as it removes artificial control effects on the price and circulation of ETH.

Unstaking and Withdrawals

Validators have two common options for unstaking their assets: partial withdrawals and full withdrawals.

Partial Withdrawal

A partial withdrawal involves stakers claiming the rewards they earned from staking while leaving the original amount of ether (32 ETH) staked in place. This process is automated, and solo stakers need to move their credentials from 0x00 to 0x01 withdrawal credentials for partial withdrawals to occur automatically. When the upgrade was activated, consumers could access partial withdrawals, allowing them to promptly receive their accumulated rewards.

However, Ethereum can only handle up to 16 partial withdrawal requests within a single slot, which occurs every 12 seconds. As a result, the withdrawal queue might take several hours to clear, depending on the number of incoming requests.

Initially, during the first few epochs, partial withdrawals might be scarce because the first few hundred validators all have the old withdrawal credentials (0x00) as they joined the network when the Beacon Chain was launched.

Full Withdrawal

On the other hand, full withdrawals became available simultaneously, enabling validators to completely unstake their 32 ETH along with any earned incentives. By performing a full withdrawal and exiting the chain, the validator ceases to participate in the block validation process and network security.

Unlike partial withdrawals, full withdrawals do not occur automatically. Validators who wish to leave the staking process must send a message to the blockchain to be added to the withdrawal queue. Different staking services have their own deadlines for processing and releasing staked ETH withdrawals.

For instance, Coinbase mentioned that they would begin processing withdrawal requests for their stakeholders approximately 24 hours after the Shanghai upgrade was completed. Stakeholders using Lido, however, will have to wait until another upgrade in May to retrieve their withdrawals.

Other Shanghai Improvements

The primary development brought about by the Shapella fork is EIP-4895, accompanied by several other minor EIPs. EIP-3651, EIP-3855, and EIP-3860 are among these additional proposals, all geared towards enhancing the efficiency of Ethereum network transactions and reducing gas fees for various decentralized applications (dapps).

Bottom line

The Shanghai upgrade introduced a significant feature for Ethereum stakers and those considering staking. While Shapella is a relatively minor upgrade, especially when compared to the larger merge, it has the potential to greatly impact individuals who have staked ETH on the chain.

Looking ahead, further Ethereum protocol updates are expected later in 2023. Some of these updates aim to improve the Ethereum Virtual Machine, while others seek to divide the Ethereum blockchain into multiple distinct “shards” to enhance scalability.

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