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Ethereum has been in the spotlight lately, undergoing a major update that crypto enthusiasts say could potentially affect the coin's price, at least in the short term.
An Ethereum update called Shanghai is set to be activated soon. The most significant aspect of this upgrade is that it allows users who have staked their Ether (ETH) on the network to withdraw it for the first time, a development that some market analysts believe could negatively impact the ETH price in the future. The upgrade also encompasses the integration of five Ethereum Improvement Proposals (EIPs).
Here are four key aspects to understand about Ethereum's Shanghai upgrade and its potential effect on the Ethereum ecosystem.
Proof-of-Stake Completion
Shanghai marks the culmination of Ethereum's transition from a proof-of-work (PoW) to a proof-of-stake (PoS) consensus mechanism. PoS, a method for verifying cryptocurrency transactions based on staked ETH instead of a competitive race to verify blocks first, as in PoW, is deemed more energy-efficient.
Ethereum initially commenced as a PoW network, but its PoS-based Beacon Chain, operating parallelly to the live PoW blockchain, was inaugurated in December 2020. The union of these two chains, known as The Merge, was executed in September 2022.
Though Ethereum users could stake their ETH since the Beacon Chain's inception, they couldn't unstake their ETH. The Shanghai update amends this with EIP-4895, thereby finalizing the transition to PoS.
Concerns Over Unstaked ETH Flooding the Market
The newfound capability to unstake ETH, along with their associated rewards, has triggered concerns among investors. It could potentially allow many users to sell their previously staked ETH, causing a market dump. Approximately 15% of the total ETH supply is currently staked on the network.
A CoinDesk report suggests that up to $2.4 billion worth of selling pressure could impact the ETH market due to the Shanghai upgrade. However, it's crucial to note that not all staked ETH can be unstaked at once. There's a cap on the number of staking withdrawals per block, and an estimate from Into The Block suggests it could take nearly 60 days for 20% of validators to unstake their ETH.
Environmental Impact Discussion Amplified
The completion of Ethereum's transition to PoS via the Shanghai upgrade revisits the ongoing discussion about crypto's environmental impact. PoW requires significant energy consumption, while PoS follows a less energy-intensive approach involving asset staking.
While PoS advocates deem PoW as wasteful, PoW proponents (including those from Bitcoin's network, where PoW is unlikely to be abandoned) argue that PoS is less secure and leans towards centralization.
Enhancements for Ethereum Transactions
Beyond the ability to unstake ETH, the Shanghai hard fork introduces other changes like EIP-3651, EIP-3855, and EIP-3860, all aimed at improving transaction efficiency on the Ethereum network and reducing gas fees for various decentralized applications (dapps).
Hard fork also includes numerous consensus-layer modifications as part of the Capella upgrade. Thus, many Ethereum developers are referring to the fusion of these two upgrades as Shapella, a blend of Shanghai and Capella.
