Everything You Need to Know About Ethereum’s Shanghai Upgrade

The Ethereum Shanghai Upgrade is coming and will allow validators to withdraw staked ETH from the Beacon Chain. Here’s what else will happen.

Key Takeaways:

• The Ethereum Shanghai Upgrade is a hard fork scheduled to occur in March 2023. 
• Stakers and validators will be able to withdraw staked ETH from the Beacon Chain.
• Approximately 16 million staked ETH will be available for withdrawal.
• In addition to EIP-4895, there are several other EIPs in the Shanghai fork, most of which aim to lower gas costs for Ethereum developers. 
• The withdrawal of staked ETH has been successfully simulated on the Zhejiang testnet. 
• Crypto traders are keeping an eye on the Shanghai Upgrade’s potential impact on the market, with both bullish and bearish opinions adding to the conversation.

What Is the Shanghai Upgrade?

The Ethereum Shanghai Upgrade is a hard fork and the protocol’s first major upgrade since ‘The Merge’ in 2022. This network upgrade is scheduled for March 2023, and its main purpose is to allow stakers and validators to withdraw staked ETH from the Beacon Chain.

How this will happen is described in the ‘Ethereum Improvement Proposal’ (EIP-4895), which will enable validators to withdraw ETH staked as far back as December 2020, when the Beacon Chain was first launched. 

In addition to EIP-4895, there are several other EIPs in the Shanghai fork, most of which aim to lower gas costs for Ethereum developers.

Changes included in the Shanghai Upgrade:

• EIP-3651: Warm COINBASE
• EIP-3855: PUSH0 instruction
• EIP-3860: Limit and meter initcode
• EIP-4895: Beacon Chain push withdrawals as operations
• EIP-6049: Deprecate SELFDESTRUCT

Those interested can find details on what the individual EIPs target on Ethereum’s GitHub.

Notably, however, the Shanghai Upgrade does not include EIP-4844, which would allow for the scaling of the Ethereum blockchain through ‘sharding’. For reference, sharding is a scalability solution that divides the whole network of a blockchain into multiple smaller networks, called shards. 

Why Is the Shanghai Upgrade Being Implemented Now?

Ethereum changed its consensus mechanism from Proof of Work (PoW) to Proof of Stake (PoS) — known as The Merge — in September 2022, entailing that the network rely on validators instead of miners to run it. To become an Ethereum validator, participants must stake 32 ETH. The Ethereum network informed potential validators that their stake would remain locked up until the next update to the chain.

Validators have been staking ETH and accruing rewards for validating blocks since the launch of Ethereum’s Beacon Chain. This was the first step in a long series of events that finally led to the PoW to PoS transition in September 2022.

Now, with the Shanghai Upgrade, validators will finally be able to cash out their rewards.

How Will the Withdrawal Work in Detail?

There is approximately 16 million staked ETH that will be available for withdrawal by validators once the Shanghai Upgrade goes live. However, there will be a waiting time for validators to access the ETH they wish to unstake, since there is only a single queue for both full and partial withdrawals on the blockchain. In each slot (which occurs every 12 seconds), only 16 partial withdrawals can take place.

Validators have two options for unstaking their ETH. First, they may create a ‘withdrawal credential’ to unstake their staking rewards accumulated over the past years. Second, validators may also exit the Beacon Chain completely by unstaking all of their 32 ETH, the maximum allowed per validator.

Zhejiang and Other Testnets Simulate ETH Withdrawal

The withdrawal of staked ETH has been successfully simulated on the Zhejiang testnet. Zhejiang is the first of three testnets, and will be followed by the Sepolia and Goerli testnets running the simulation in the coming weeks.

Does the Shanghai Upgrade Affect Users if They Staked ETH on a Crypto Exchange?

For those who haven’t staked ETH as a validator directly on the Beacon Chain as described above, the Shanghai update should not affect their ability to withdraw ETH staked on a crypto exchange. 

However, the Shanghai Upgrade may affect the price of ETH they have locked up.

Will the Shanghai Upgrade Impact ETH Price?

As a new era of unlocked ETH begins, crypto traders are paying attention to how the market may move by keeping an eye on the Shanghai Upgrade’s potential impact on the market, with both bullish and bearish voices chiming in on the discussion. Some traders say that Shanghai could trigger a selling wave, with many taking profit once staked ETH is unlocked, while others believe that the upgrade will encourage more staking.

At the moment, about 1 million ETH of rewards are available for withdrawal once Shanghai goes live. While it’s not clear yet which way the pendulum will swing, it is certain that traders will be watching how much of the available ETH will be cashed out — which could push the price of ETH down.

Final Words

While it is unclear of the coming update’s effects on Ethereum’s price in the short term and how the withdrawal process will work once available, the Shanghai Upgrade is another big step into full functionality of Ethereum’s PoS network — and highly anticipated by the crypto space.

Next up, developers are expecting Ethereum to implement sharding, as mentioned above, and other upgrades that will scale the network. 

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