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.

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.

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.

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.

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.