Just a few months after the enormous upgrade called the Merge — the full transition to proof of stake (PoS) from proof of work (PoW) — Ethereum is slated to undergo another major one, the so-called Shanghai upgrade, within a few weeks.
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Simply put, the Shanghai upgrade — or fork — will implement a series of improvement proposals to the main Ethereum chain, several of which upgrade the technical capacity of the chain and lay the groundwork for future scalability, said Lex Sokolin, chief cryptoeconomics officer at ConsenSys.
We take a look at how this upgrade will affect Ethereum and its stakeholders.
Effects of the Shanghai Upgrade
Sokolin explained that the most talked about change is the ability to withdraw staked Ether. Staking means depositing 32 ETH to activate validator software — the cost of that was $52,763 as of Feb. 22.
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“This staked ether then acts as collateral that can be destroyed if the validator behaves dishonestly or lazily,” the Ethereum Foundation explains. “The validator is then responsible for checking that new blocks propagated over the network are valid and occasionally creating and propagating new blocks themselves.”
So, when Ethereum switched to PoS, miners became validators and were able to earn a rate of return denominated in ETH in exchange for locking up their capital.
“That lock-up was one way, meaning that they could not withdraw their money back,” Sokolin said. “Such illiquidity is a particular type of risk and explains why staking within Ethereum is below 20%, whereas on other PoS chains staking can reach 80% or more of circulating supply. We think that by unlocking the assets, staking will be de-risked and available to more types of participants.”
At the same time, Sokolin added, the newly withdrawn asset will create additional supply on the market, potentially creating pressure. “However, in the long run, we would expect a greater portion of all Ethereum users to avail themselves to the staking returns of the network.”
Some Expect Price Volatility
That pressure causes some industry experts to expect price volatility once the upgrade happens. Whether it will last or stabilize remains to be seen. Indeed, there were 16.7 million staked ETH as of Feb. 22, across approximately 524,000 validators who have an average balance of 34 ETH, according to the Ethereum Foundation.
Hence, by releasing the assets, supply will increase.
“Volatility is a possibility,” said Christopher Alexander, chief communications officer for Liberty Blockchain. “After the Merge, investors were able to stake their ETH and were unable to unstake their coins until after the Shanghai upgrade went live. Because of this, some investors could take their profits now that the upgrade is complete.
“However, the positive attention that the accomplishment has on the industry could attract new investors or cause current investors to ‘double down.’ So that has yet to be seen.”
Easier Access, Expanded Utility
While there might be a temporary dip in ETH’s price, many experts said the longer-term impact will be an influx of new people into the ecosystem, including when it comes to staking.
“This is indeed another step in making Ethereum easy to use for everyday people as well as for institutions,” said John Paller, founder of Opolis. “With staking close to reaching full functionality, the interest among institutions to earn a yield on their ETH will likely grow and grow.”
While there are numerous upgrades to be implemented for Ethereum to reach its full potential, the staking aspect to these upgrades will be critical for further incentivizing the network, which in turn will likely create positive knock-on effects that will eventually impact utility for several other applications, Paller said.
These “include crypto gaming, domain services, using NFTs for identity authentication — you name it,” he said. “These are exciting times. Indeed, the Shanghai upgrade is a testament to the resilience of Ethereum, along with a number of other decentralized networks, following a year that was rather tumultuous for our industry. The lesson here is for our industry to keep focusing on the fundamentals — that is, to keep building and building.”
While the ability for stakers to withdraw their ETH is one of the most buzzed about aspects of the Shanghai upgrade as it reduces uncertainty, which in turn could attract more participants, many experts also point to the fact that it will have a broader impact as well.
“Stepping back, it’s critical to point out how all these upgrades that have been happening in the Ethereum network are really supercharging the overall development of this important blockchain,” said Adrian Baschuk, chief creative officer and founding partner at Ethernity. “Ultimately, the Shanghai upgrade symbolizes one of a number of steps that will make Ethereum a lot faster and a lot cheaper to use.”
According to Baschuk, as Ethereum improves in this regard, a tremendous amount of utility will eventually be unlocked for a widening variety of applications, and an easier-to-use Ethereum ecosystem will eventually be a huge boon not only to DeFi, but also crypto-focused gaming and NFTs.
“It’s important, therefore, to see this particular upgrade as part of a broader evolution that will make all sorts of applications far more functional on Ethereum and, thus, far easier to use for more and more people around the world,” he added. “In short, the successes that are being churned out by Ethereum developers will be a huge benefit to the entire digital asset industry. It’s an exciting time indeed.”
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This article originally appeared on GOBankingRates.com: How the Latest Ethereum Upgrade Will Affect Crypto Investors
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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