Ethereum Shanghai Upgrade: Design, Date and Impacts

 

What is Ethereum Shanghai upgrade? The Shanghai upgrade is another milestone for the Ethereum blockchain after the Merge in September 2022. The Merge completes Ethereum’s transition to proof-of-stake (PoS) consensus, and the Shanghai upgrade will allow stakers to withdraw their ether (ETH). What is the release date? What should investors expect after the update? How will it change Ethereum for the better? Here are the things you need to watch.

 

 

What is Ethereum Shanghai upgrade?

 

Ethereum Shanghai upgrade is a significant update of the blockchain aiming to enable ETH stakers to withdraw their ETH tokens. After the Ethereum Merge, ETH holders locked their cryptocurrency (over 16 million ETH) in the smart contract on Ethereum. The impact of unlocking a significant amount of ETH will be a key market event to watch this year. 

 

The Ethereum Merge: Proof-of-Stake Mechanism

 

What was the Ethereum Merge ("the Merge")? Ethereum’s last big upgrade, the Merge, took several years to build and test. It basically was about joining the original execution layer of Ethereum, with its new proof-of-stake (PoS) consensus layer, namely the Beacon Chain.

 

In 2020, Ethereum launched the Beacon Chain, a proof-of-stake chain running in parallel with the main chain. A proof-of-stake chain basically means that its network security and procedure of processing transactions rely on people locking up cryptocurrencies. 

 

Ethereum Merge explained. Source: Finametics

 

For Ethereum, people locking up (or staking) at least 32 ETH will be eligible to become a block-producing ‘validator’. Also, anyone can lock up their ETH tokens to Ethereum via staking service providers for the staking rewards. Validators will be responsible for validating transactions and securing the Ethereum blockchain. This design eliminates the need for energy-intensive mining associated with proof-of-work (PoW) consensus. This is bringing down Ethereum’s power consumption by over 99.9%.

 

The Merge was like changing a rocket’s engine mid-flight. Through various technical difficulties, on September 15, 2022, Ethereum executed the Merge smoothly. Ethereum’s next update, the Shanghai upgrade, will focus on enabling the ability for stakers to withdraw. 

Proof of Stake: The Making of Ethereum and the Philosophy of Blockchains by Vitalik Buterin.

 

Why ‘Shanghai’: Ethereum co-founder Vitalik Buterin and HashKey Chairman Xiao Feng

 

Shanghai is the codename of Ethereum’s next significant update, and this reveals the city’s relationship with the blockchain network.

 

Since its launch in 2015, Ethereum blockchain has implemented multiple major upgrades: Byzantium (2017), Constantinople (2019), St. Petersburg (2019), Istanbul (2019), Berlin (2021) and London (2021) upgrades.

 

All these upgrades are named after the cities where the Ethereum Foundation hosted its annual conference, DevCon. The codename “Shanghai” of the next upgrade comes from the DevCon 2016 in Shanghai, according to HashKey Group Chairman Dr. Xiao Feng. HashKey Group, via an affiliated corporation, is an early investor of Ethereum back in 2015.

 

In a foreword published for the Chinese version of The Infinite Machine, Dr. Xiao Feng recalled his experience in working with Ethereum co-founder Vitalik Buterin. They first met in April 2015, when Buterin traveled to Shanghai.

 

HashKey Group's Chairman Dr. Xiao Feng.

 

In the early Ethereum days, Dr. Xiao Feng and Buterin had in-depth discussions on accelerating blockchain adoption in China. This led to an early investment of US$500,000 to Ethereum from Xiao Feng via Wanxiang Blockchain Labs. Xiao Feng’s investment in Ethereum essentially helped the project back on track in blockchain development. Since then, Buterin has been closely working with Dr. Xiao Feng, actively participating in Wanxiang’s annual Global Blockchain Summit and the DevCon 2016 in Shanghai.

 

“The Merge is a critical moment of Ethereum and the wider blockchain space,” wrote Dr. Xiao Feng in the foreword.

 

“The Merge puts Ethereum in a strong position to support large-scale applications from a performance and scalability perspective in the future. In a few years’ time, I expect to see other blockchains connecting as Ethereum’s side chains or shards. This will pave the way of a new blockchain universe with interconnectivity and interoperability.” -- Translated quote from Dr. Xiao Feng, HashKey Group Chairman

 

What is the impact on Investors and Stakers?

 

Shanghai upgrade of the Ethereum blockchain will focus on allowing people to withdraw their staked ETH tokens.

 

As the fundamental element of the proof-of-stake consensus mechanism, ETH holders can participate in the validation of the Ethereum network by staking their tokens. This action helps maintain and secure the operation of the blockchain, under the PoS mechanism.

 

Since the launch of the Beacon Chain in December 2020, ETH holders started to lock up on the Beacon Chain.

 

The Merge upgrade in 2022 did not include the ability to withdraw staked ETH, in order to simplify the focus. Anyone who staked ETH on Beacon Chain has not been able to withdraw their stake or rewards since their initial staking.

 

The number of staked ETH and Ethereum validators is increasing exponentially. According to Etherscan data, more than 16 million ETH are sitting on Ethereum’s Beacon Chain staking contract and the number of active Ethereum validators exceeded 500,000.

 

Limit on ETH Withdrawal after Ethereum Shanghai Upgrade

 

Are the stakers expected to withdraw all their staked ETH after the Shanghai upgrade? As of the time of writing, the number of staked ETH tokens amount to over 13% of the total ETH supply. The Shanghai upgrade will enable ETH withdrawals. Moving closer to the release date, the market is closely watching potential selling activity of ETH investors and stakers. With the certainty of the ability to withdraw, those that wanted to free up their ETH for other opportunities may do so. But ‘hodlers’ of ETH who have not participated due to the uncertainty may have the reason to pull the trigger.

 

When can ETH holders unstake their ETH? (08:15). Source: HashKey

 

Will all the ETH be unstaked at the same time creating potential volatility? Not possible, as the Shanghai upgrade will feature a withdrawal queue.The protocol will limit the ETH withdrawals where only six validators may exit per “epoch” i.e., every 6.4 minutes. That is, Ethereum blockchain only allows about 43,200 ETH withdrawals per day after the Shanghai upgrade.

 

Estimation suggests that it will take around 300 days if everyone withdrawals their staked ETH tokens with zero new stakers.

 

The rate limit will adjust depending on the total ETH staked, according to the Ethereum Foundation.

 

What is the Release Date of Ethereum Shanghai upgrade?

 

Initially, the Ethereum Shanghai upgrade is set for launch six to 12 months after the Merge. To ensure minimal delays and issues, Ethereum developers prioritize the enabling of staking ETH withdrawals in the Shanghai upgrade. This refers to the Ethereum Improvement Proposal EIP-4895: Beacon Chain Push Withdrawals as Operations.

 

Here is a development timeline of the Ethereum Shanghai Upgrade:

 

• October 2022: Preparing for the Shanghai upgrade, Ethereum developers launched the “Shandong” test network to find bugs and potential issues.

 

• December 2022: Ethereum developers set March 2023 as a tentative target for Shanghai upgrade on main network.

 

• January 2023: In a core developer call, Ethereum developers confirmed the Shanghai upgrade will prioritize ETH withdrawals over other potential code changes. And they are releasing a public test network for the Shanghai upgrade by the end of February.

 

What’s Next After Ethereum Shanghai upgrade

 

Ethereum's upgrade path. Source: @trent_vanepps.

 

To avoid any potential delays, Ethereum developers dropped some of the Ethereum Improvement Proposals initially packed with the Shanghai upgrade.

 

These proposals include “proto-danksharding”, the first of Ethereum’s two-part process to implement sharding. After the Shanghai upgrade, we can expect the release of this feature later this year. Assuming it all goes according to plan, Ethereum’s next major event is the sharding upgrade.

 

Basically, sharding will split up Ethereum’s workload across small chains working in tandem. Sharding will give Ethereum more capacity to store and access data, making the blockchain faster and more scalable. It will also enable Layer-2 solutions to offer lower transactions fees while leveraging the security of the Ethereum blockchain.

 

The sharding upgrade on Ethereum will roll out over 2023 and 2024.

 

Final Thoughts

 

Targeted to happen in March 2023, Shanghai upgrade will be a consequential moment in the development of the Ethereum blockchain. The Shanghai upgrade is named after the Chinese city’s major role in the early days of Ethereum. Its main target is to enable ETH token staking withdrawals for validators after the Ethereum Merge in September 2022. All eyes will be set on the Ethereum Shanghai upgrade, as another big step toward achieving higher scalability and decentralization.

 

 

 

 

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