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Ethereum Shanghai Upgrade: What Is It?


The Ethereum Shanghai hard fork upgrade in March 2023 is designed to give Ethereum cryptocurrency network users access to their staked ether (ETH) funds for the first time, which is a major change for the platform.

These assets have been allocated toward Ethereum’s proof-of-stake (PoS) Beacon Chain network backbone, so the move will allow ETH holders to stake the tokens without locking them up indefinitely, perform transaction validations, and receive rewards of newly created tokens.

Ethereum is a decentralized global software platform powered by blockchain technology that has been advancing at a steady pace since its launch in 2015. Now, the network is set to change significantly again with the Shanghai upgrade.

Key Takeaways

  • The Ethereum cryptocurrency network’s so-called Shanghai upgrade is a hard fork slated to launch in March 2023.
  • The Shanghai upgrade will let holders of ether (ETH), Ethereum’s native token, unstake the assets for the first time, giving them greater access to their holdings.
  • Ethereum surpassed 500,000 validators on its network, which is a large number considering that stakers’ ETH assets are locked up.
  • Ethereum’s development team will focus its attention on sharding, or database partitioning, and other important changes after the Shanghai upgrade is completed.

What Is the Ethereum Shanghai Upgrade?

It’s important to understand the history of recent events at Ethereum before diving into the Shanghai upgrade. This major upgrade is, after all, the culmination of what came before.

The Ethereum network is designed to be scalable, programmable, secure, and decentralized. It is the blockchain of choice for developers and ventures creating technology based upon it to change how many industries operate and how we conduct our daily lives.

Ethereum started off with a proof-of-work (PoW) validation mechanism but began its journey toward PoS with the launch of the Beacon Chain in December 2020. This was a new era for Ethereum, with the Beacon Chain coordinating user staking, which is only possible on PoS systems, on Ethereum. The contract for the Beacon hit its target of 524,288 ETH a week before the launch.

Staking gives crypto holders a way of putting their digital assets to work and earning passive income without selling the assets, similar to putting money in a high-yield savings account. When someone deposits funds, the bank takes the money and often lends it out. In return for locking up that money, the account holder is given a small portion of the interest earned from lending.

In September 2022, the Ethereum Merge joined Ethereum’s PoS Beacon Chain with the Ethereum Mainnet to transition the Ethereum blockchain off the legacy PoW system. The merge gave birth to Ethereum 2.0, a new version of Ethereum that will lead to a 99.95% reduction in Ethereum’s energy consumption and the ability to further scale its ecosystem.

Over several months, the merge went through many testnet checks before eventually being completed—a development that made the Ethereum network a PoS one. The event was covered in both the crypto industry and the mainstream media.

However, one sizable issue remained: cost. The minimum amount of ETH required for staking to join the Beacon Chain was 32 ETH. The price of ETH, at the time, was about $4,000 (it traded around $1,550 on March 3, 2023). That $128,000-equivalent entry point was beyond the reach of most individuals, but at least it was the start of a more democratic PoS mechanism for Ethereum.

At that time, staked ETH couldn’t be unstaked—which is what the Shanghai upgrade changes. This left users’ ETH funds locked until they could be released.

Some teams in the crypto industry saw opportunities to address this issue. Several projects in the space began working on a more accessible way to stake on Ethereum. Called liquid staking, this allowed individuals to contribute smaller amounts of ETH, receiving a token that represents their staked ETH value. This token can be traded freely and used elsewhere, and in that sense is liquid. 

Some of the most popular liquid-staking options are offered on the platforms Lido, Coinbase, and Rocket Pool. Lido has especially been popular and accounts for the vast majority of the liquid-staked ETH.

Understanding the Ethereum Shanghai Upgrade

The Shanghai upgrade is actually a series of upgrades for the Ethereum network, and, collectively, their effects are significant.

The scheduled March 2023 launch was preceded by the Shandong network test, or testnet, in 2022. Shanghai comprises several upgrades, but the most impactful one allows ETH stakers to remove both their staked ETH and the rewards accrued. This has long been sought by Ethereum users and the crypto community at large. This change is established in the EIP-4895 proposal.

The Shanghai upgrade also has several other proposals related to the Ethereum Virtual Machine (EVM) Object Format (EOF), which is a software component of all EVM-compatible blockchains that contains more than 120 operation codes that give decentralized programmability to the networks. However, developers have said that if these can’t be implemented in time, they will be postponed until later in the year to avoid delaying the unstaking of ETH.

Notably, one of the proposals that won’t be present in the March 2023 release is EIP-4844. This proposal introduces what the team calls “proto-danksharding,” which sets up the highly anticipated sharding upgrade for Ethereum due in 2024. This proposal will increase scalability by sharding data, which is a database-partitioning technique used to enable platforms to process more transactions per second.

Ethereum has been experiencing some heavy deposit activity in the lead-up to the Shanghai upgrade. The platform’s total validators surpassed 500,000 validators in mid-January 2023—a sizable figure, given that ETH can’t yet be unstaked.

MetaMask also has joined in, with the wallet integrating both Lido and Rocket Pool so that their users can stake ETH directly from their MetaMask wallets, once the Shanghai upgrade is complete.

What Will Change with the Ethereum Shanghai Upgrade?

More than $17 million in ETH was staked after the Ethereum Merge, as of March 2023, so that likely means many individuals will want to unstake their ETH. However, there will be a cap of around 43,200 ETH per day for withdrawal amounts. That way, there won’t be a large migration of validators out of the network.

It wouldn’t be surprising to see the price of ETH rise after a successful upgrade. This has happened in the past, and, so far, everything looks on track for the Shanghai hard fork.

What Does the Future Hold for Ethereum?

Ethereum’s future amounts to much more than its switch to proof of stake. The platform’s developers have systematically analyzed the changes that the network needs, not rushing into alterations, in an attempt to ensure that everything is in place for a successful upgrade.  

Allowing stakers access to their ETH will eliminate this concern about Ethereum for the crypto community. The development team can then turn its attention to something even more important for Ethereum’s success: the introduction of sharding. Ethereum’s scalability goals ultimately will determine if the network becomes the future of finance, as many have projected.

What is Ethereum?

VIDEO: Ethereum Shanghai Upgrade EXPLAINED: All You Need To Know
CoinGecko

Ethereum is a decentralized global software platform powered by blockchain technology. It is most commonly known for its native cryptocurrency, ether (ETH).

What is Ethereum’s Shanghai upgrade? When is it scheduled to happen?

VIDEO: Here's what's in store for Ethereum's Shanghai upgrade
CNBC Television

The Ethereum Shanghai upgrade is actually a series of upgrades for the Ethereum network, and, collectively, their effects are significant. Perhaps most impactful is that this scheduled update will give ETH token holders access to their staked assets, a major change for the network and its users. It’s set to launch in March 2023.

What improvements will Ethereum’s Shanghai update bring?

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Coin Bureau Clips

The biggest improvement is that users will be allowed to unstake their ETH. The Shanghai upgrade also has several other proposed changes related to the Ethereum Virtual Machine (EVM) Object Format (EOF), which is a software component of all EVM-compatible blockchains that gives decentralized programmability to the networks. And it sets the stage for sharding later, which should add scalability and faster transaction processing for Ethereum.

The Bottom Line

Ethereum enthusiasts and the crypto market in general should welcome the changes coming from the Shanghai upgrade. It is a relatively small step for the project, but it paves the way for many more major adjustments ahead.

For the crypto movement, the Shanghai upgrade stands as the next major milestone for Ethereum, forever altering how it operates and giving staking users new access to their ETH assets.

Sources


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