ETH Shanghai Upgrade Interpretation: A Key Turning Point for the Staking Ecosystem

Upgrade Background: From Infinite Lock-up Position to Free Withdrawal

Ethereum completed its transition from Proof of Work ( PoW ) to Proof of Stake ( PoS ) in September 2022. This event, known as “The Merge,” integrated the mainnet with the beacon chain. After the transition, network participants can become validators by staking 32 ETH, eliminating the need to purchase expensive mining equipment.

However, since the Beacon Chain went live in December 2020, the staked ETH has been in a state that cannot be withdrawn. This restriction has caused concern among many stakers, as their funds are locked up for a long time and cannot be flexibly allocated. On January 5, 2023, the Ethereum developer team announced that they would address this issue through the Shanghai upgrade (EIP-4895), which is expected to be implemented in March 2023.

What is EIP-4895 and the Shanghai Upgrade?

Ethereum Improvement Proposal ( EIP ) is a mechanism for improving or changing the way the network operates. Anyone can create an EIP in a specific format and submit it for review by the community and the developer committee. Technical changes need to be approved before they can become part of an upgrade.

The corresponding EIP number for the Shanghai upgrade is 4895, and its core function is to open the withdrawal channel for stakers. Previously, staked ETH was considered “permanently locked”, and this uncertainty hindered more users from participating in staking. The introduction of the Shanghai upgrade means that this long-standing limitation will be broken.

How does the staking mechanism work?

To become an Ethereum validator, users need to stake 32 ETH. The responsibilities of a validator include receiving new blocks created by other validators, checking transactions and block signatures, and ultimately verifying the validity of the blocks. Compared to energy-intensive PoW mining like Bitcoin, PoS offers a more energy-efficient alternative.

According to the latest data, the circulating supply of ETH has exceeded 120 million, and the current staking proportion is about 13.81%, indicating that a considerable amount of funds is participating in the staking ecosystem. It is worth noting that not all stakers directly stake 32 ETH; many users stake smaller amounts through liquid staking platforms, which provide users with a more flexible way to participate.

Actual Impact of Shanghai Upgrade on Different Users

Impact on Direct Stakers

Users who have already staked ETH will receive the most direct benefit – withdrawal freedom. The opening of the withdrawal function means that stakers can extract funds according to market conditions and personal needs, no longer troubled by unlimited lock-up positions. This greatly lowers the risk threshold for staking.

Impact on Potential Stakers

The improvement in liquidity may attract more users to participate in direct staking. Users who previously hesitated due to withdrawal restrictions now have the opportunity to stake 32 ETH directly on the Ethereum network. The optimization of staking conditions may lead to an increase in demand for ETH.

Core Concerns for Traders

The most concerning issue for the market is the impact of the Shanghai upgrade on ETH prices. The upgrade has opened up a large amount of locked liquidity, allowing stakers to withdraw and potentially sell their staked ETH, which may create short-term selling pressure. On the other hand, the improvement of the staking ecosystem may also enhance users' long-term optimistic sentiment towards ETH. The final impact depends on the supply and demand balance in the market.

Impact on Liquid Staking Tokens

Users holding native tokens of liquidity staking platforms need to pay special attention. Originally, the “liquidity conversion” function provided by these platforms was their unique value, and the launch of the direct withdrawal function for Ethereum may weaken this differentiated advantage, thereby affecting the value support of these platform tokens.

Long-term Significance at the Market Level

The true significance of the Shanghai upgrade lies in making the ETH market more free and efficient. Holders can make decisions based on the supply and demand of staking, achieving a natural balance in the market. Compared to the previous artificial restrictions, this change should be viewed as a positive factor, as it reduces non-market interference with the price and circulation of ETH.

Open withdrawals create a dynamic market feedback mechanism, allowing staking rewards and market prices to interact positively, attracting more participants or prompting arbitrageurs to exit, ultimately forming a new equilibrium point.

Summary

For ETH stakers and holders, the Shanghai upgrade is a milestone in the formal perfection of the proof-of-stake mechanism. This upgrade is as important as the merger event in 2022 and is a key feature that the community has patiently waited for. Although the exact impact of the upgrade on the market still needs time to be verified, understanding its mechanism and potential effects will help every ETH participant make more informed investment decisions.