Ethereum Shanghai upgrade unlocks US$34 billion in Ether, what does it mean for crypto prices?
Developers at Ethereum, the world’s second-biggest blockchain with a capitalization of US$231 billion, are set to upgrade the software network on Wednesday with reported new features and improvements to efficiency, cost and security.
However, the main feature of the so-called Shanghai upgrade – to take place at 10:27 p.m. UTC on Wednesday, according to the Ethereum Foundation – is the EIP-4895. This allows users to withdraw their staked Ether, or tokens deposited to support the operations of a blockchain in return for a passive income, usually in the form of more tokens.
With around 18 million Ether (US$34.5 billion) – or about 15% of the total supply – staked into the network, according to Etherscan, concerns emerged that holders could rush to sell Ether to lock in profits, which would drive prices lower. Ether has risen about 60% so far this year and recently traded at more than US$1,900.
But on-chain data provider CryptoQuant doesn’t expect a flood of Ether sales, according to a report it released in February.
“We argue that there would be low selling pressure for Ether from staking withdrawals after the Shanghai upgrade,” CryptoQuant said, adding that the majority of the staked Ether was still holding losses compared to Ether prices when it was staked. Ether reached all time highs of more than US$4,600 in November 2021.
“Typically, selling pressure emerges when market participants are sitting on extreme profits, which is not the case right now for the Ether that has been staked,” CryptoQuant said.
CryptoQuant also pointed out that the currently locked Ether cannot be withdrawn simultaneously, estimating it may take up to a year to withdraw the total value staked in the network,
Other benefits
Zhuling Chen, chief executive officer of crypto staking service provider RockX, said some short-term market volatility is to be expected following the upgrade, but he preferred to focus on the “substantial” long-term benefits to the Ethereum blockchain.
“Ethereum’s capacity to handle more transactions per second increases, transaction costs decrease, and the security and efficiency of smart contracts improve,” Chen said in a statement. The staking landscape will be transformed and Ethereum will become the benchmark yield for crypto, Chen added.
That’s a view shared by Alex Esin, chief executive officer of P2P.org, which offers institutional staking and blockchain development services. Expect a substantial increase in staking activity in the year following the Shanghai upgrade, Esin said in a statement.
“We do not anticipate a massive unstaking once this functionality goes live,” Esin said.
Guilhem Chaumont, chief executive officer of crypto-financial service Flowdesk, points out the system to withdraw staked Ether could itself prevent a sell off in the token.
“It’s important to realize that the withdrawal queue only allows a limited set of requests per day (115,200), so while there may be sustained downward pressure on the price, unstaking is not likely to cause a sharp, sudden dip,” he said in an emailed comment.
Chaumont said it’s more likely a sizable portion of Ether will remain staked “with staking rewards outperforming current interest rates.”
Overreact?
Ken Timsit, head of Cronos Labs, the accelerator of the Cronos chain that links the Ethereum and Cosmos blockchains, did caution that Ether stakers will monitor withdrawals after the Shanghai upgrade kicks in and may potentially overreact if there is significant withdrawal demand.
“Once short-term volatility has been smoothed out, however, it is likely that the outcome will be neutral given that this upgrade has been priced into Ether value for some time,” Timsit said in an emailed comment.
Danny Chong, co-founder of Tranchess, a decentralized app that offers Ethereum services, said the Shanghai upgrade will lower the risks associated with liquid staking and “should see increased institutional participation.”
Liquid staking, also known as soft staking, allows investors to access their locked funds for other crypto-based activities while still earning rewards. Users with deposits locked on liquid staking platforms receive a tokenized version of their crypto assets, which then can be stored or traded elsewhere.
The total value of crypto assets locked in liquid staking services stood at US$17.3 billion on Tuesday, up from US$14 billion on March 1, making liquid staking the second-largest service in decentralized finance, following decentralized exchanges, according to data provider DefiLlama.
“Earning yield from liquid staking shares similarities with certain traditional financial instruments such as bonds or stocks that offer interest payments,” Chong said. “Hence it would likely attract TradFi [traditional finance] participants who are familiar with such instruments.”
Chen of RockX shared similar views: “We will see more innovations coming from direct and liquid staking solutions, and liquid staking will start playing a much larger role in the cryptocurrency space.”
Some cryptocurrency exchanges have also spotted opportunities to expand their staking products. For example, Singapore-based crypto exchange Bybit last month launched a new staking pool in time for the Shanghai upgrade.
“The highly liquid and trading-integrated ETH staking options we will be rolling out around the time of Ethereum’s Shanghai upgrade will open up many new opportunities for our users,” Ben Zhou, chief executive officer of Bybit, said in a March statement.
See related article: What impact will Ethereum’s Shanghai upgrade have on ETH and crypto markets?
