The Merge marked Ethereum’s transition to the Proof-of-Stake consensus and a major blockchain infrastructure shift. The upgraded mechanism enables Ethereum to reduce its energy consumption dramatically and improve the blockchain’s scalability and capacity.
Since before the Merge was completed, Ethereum validators have staked ether tokens to the Beacon Chain, the network’s consensus engine. However, the Ethereum developers have made it clear since they announced that validators could engage in the staking process that they are not allowed to withdraw the assets until the market doesn’t complete the Shanghai Upgrade.
The Shanghai update is critical for Ethereum’s success because it directly impacts its price and operability. It can become a fully-operational PoS network only when the users can withdraw the assets they staked.
The Ethereum Shanghai upgrade will eject a large sum of Ether into the crypto market
April 12 marked the end of a long wait for Ethereum validators. They can finally withdraw the enormous sum of $31 billion worth of Ether they started staking in 2020. The network’s latest upgrade, called Shanghai, unlocked 18 million Ether – around 15% of the entire amount of Ether put in circulation.
The upgrade is the final step in completing the Merge – which cuts ties with warehouses of miners to enable the blockchain to use an eco-friendly transaction-validation mechanism. The Proof of Stake algorithm rewards freshly minted ETH to the users who stake their cryptocurrency into smart contracts. The higher the amount of ETH a validator checks, the more likely it is for the market to pick them to validate a block and reward them with newly issued coins.
However, the transition from the proof-of-work to the proof-of-stake mechanism wasn’t free of obstacles. The network had to encourage validators to support the new mechanism, so it offered interest rates that could reach 5% to those who put high amounts of ETH in the network’s smart contracts. The strategy worked, and numerous Ethereum users joined the staking process to support the Merge, which was completed last September. However, validators couldn’t use the staked Ether until the developers gave permission.
The Shanghai Upgrade is the permission they needed because it allows over a half-a-million validators that provided 32ETH to withdraw the funds. Until now, they have gained around 1 million ETH in rewards. However, the number of stakers who joined the trend is higher than 1 million, and many of them collected ETH from investors who couldn’t afford to meet the 32 ETH requirement. Those who pooled ETH staked the coins on their behalf and gained a 5% interest rate annually.
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Will Shanghai impact solely Ethereum or the entire crypto market?
Shanghai brings a series of upgrades, also known as Ethereum Improvement Proposals. EIP-3651, EIP-3860, and EIP-3855 are expected to bring the greatest changes in the sector because they cut down transaction costs for technical applications, which will have a significant impact on reducing the overall fees on the Ethereum blockchain.
This upgrade focuses on the execution layer of the network, which is responsible for protocol regulations and smart contracts. A different upgrade called Capella will focus on Ethereum’s consensus layer to ensure that the network’s validators respect the rules the execution layer promotes.
What will happen with the prices now that the upgrade is up?
Crypto specialists state that the market will witness a flood of ETH because investors have the opportunity to cash out the staked ETH for real ETH. Before the upgrade, they only withdrew tokens that represented staked coins, which were basically derivatives claims. They could use the access fees they earned for staking ETH, but they couldn’t use the newly issued ETH. Market experts predict that Ethereum’s price will dip sharply in the following weeks because 50%-70% of stakers are expected to cash out their ETH. Ethereum’s price has increased steadily since the end of 2022, and the cryptocurrency will definitely trigger profits. The selling pressure will spike due to the paucity of new ETH dumped into the market and the upgrade that established that ETH is burned after each transaction.
Ethereum’s price will quickly rebound if it follows a downward trajectory after the Shapella upgrade because investors will reevaluate their positions. Additionally, new stakers are expected to join the network because the upgrade proved that Ethereum is a reliable project that respects its promises and doesn’t lock the funds.
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The Shanghai upgrade will benefit blockchain security and network liquidity for a long time
Once the Shanghai upgrade removed the restriction on staking withdrawals, it proved that there are no risks associated with staking tokens on the Beacon Chain. One of the goals of the Shanghai Upgrade is to remove the execution risk associated with the Merge and software upgrade. Considering that with the new consensus, capital investment is essential, the upgrade could convince new stakers to join the network. Also, the implementation of staking withdrawals will enhance the liquidity profile of new staked tokens and lower liquidity risk. Ethereum exists in a market known for its increased volatility, and investors are interested in purchasing assets that allow them to enter and exit investment positions efficiently.
A straightforward process of staking and unstaking ETH from the Beacon Chain is also paramount for the blockchain’s overall efficiency. ETH is one of the few cryptocurrencies with a high degree of utility in the real world and can be spent for multiple purposes. Now that validators can withdraw it, they can access a large stream of passive and liquid income.
What do Ethereum developers have in store for the network?
Ethereum developers have more network upgrades in store. Cancun is expected to cause some major changes in the market because it will introduce proto-danksharding, which could speed up the blockchain and welcome more users into the ecosystem through the introduction of multiple smaller chains that function at once.
Market experts believe that Cancun could cause more significant disruptions than Shanghai because it could lower transaction costs on Layer 2 and improve the user experience. The upgrades are meant to enable Ethereum to remain competitive among altcoins and gain greater market share in the following years.