Ethereum Shanghai Update Explained

Ethereum Shanghai is an update to the Ethereum blockchain that is scheduled to be deployed in early April 2023.

The Shanghai update has been eagerly awaited by ETH holders due to its implications to open access to their staked ether funds for the first time. 

Additionally, as with other Ethereum updates in the past, it is also designed to bring a number of improvements and features to the network, including improved scalability, more secure smart contracts, and more.

Below is everything you need to know about the upcoming Shanghai update.

What is the Ethereum Shanghai Update?

The Shanghai update, also referred to by the dev team as Shanghai Shapella, is a significant upgrade to Ethereum’s network that will bring a number of updates to improve the overall performance, security, and efficiency.

The Shanghai update follows the Merge event in September, which was another instrumental update to Ethereum’s consensus layer changing it from proof of work (PoS), to proof of stake (PoS).

More importantly, this update is significant because it will enable Ethereum stakers and validators to withdraw their assets from the Beacon Chain. 

This is important because staked ETH accounts for about a seventh of the total supply of the token, or roughly 16 million coins.

Combined, the total value of staked ETH is estimated to be over $26 billion – which has significant implications for all users of ETH.

New to Ethereum? Learn the basics.

What is included in the Shanghai update?

The Shanghai Shapella will see the deployment of a number of EIPs (Ethereum Improvement Protocols) that will implement the changes on the network. 

EIP-4895

Perhaps the most important component of the Shanghai Shapella, EIP-4895 will enable validators to withdraw both their staked ETH tokens and earned rewards.

Validators were required to stake ETH tokens in order to participate in verifying and adding blocks to the blockchain. 

Additionally, validators have been staking ETH tokens since the launch of the Beacon Chain back in December of 2020. Fast forward to 2023, that would account for a few years worth of ETH tokens being locked for staking.

All these staked ETH tokens would remain locked until the Shanghai update goes live – an amount that roughly accounts for seventh of the total supply of tokens.

Hence the anticipation of the Shanghai update, which has implications not only on the network performance, but also potentially the price of ETH as well depending on the behavioral outcome of Ethereum users once the update goes live.

Other EIPs

While EIP-4895 is the key update that most are anticipating for, there are a number of other EIPs that are deployed with Shanghai Shapella that aims to improve the overall performance, reduction in gas fees, and others. 

The official documentation for these EIP updates may seem intimidating to digest as they are highly technical, below are some highlights that summarize what the EIPs are intended to take effect on the network:

• EIP-3855: lower gas fees generally for developers.
• EIP-3860: caps gas fees during periods of high network congestion to benefit Ethereum developers.
• EIP-3651: proposes lowering gas fees that are related payments accessing the COINBASE address (not related to the exchange, but refers to a software that the devs use).

For those who wish to learn more about the EIPs can visit the Ethereum Shanghai github page for detailed specifications.

What does this mean for ETH users and holders?

As mentioned above, Shanghai Shapella will enable validators to unstake their ETH tokens and rewards that have been locked up since the Beacon Chain. 

That means over $17 million in ETH will be liquid for those who wish to withdraw their tokens. This may potentially have significant implications for the price of ETH depending on the sentiment and behavior of the market.

However, there is an upper limit of around 43,200 ETH per day for those who wish to unstake and withdraw their ETH tokens.

Historically, the price of ETH has increased after each successful update to Ethereum’s network. So it won’t be surprising to see the same pattern occur this time around.

Takeaway

Ethereum has come a long way to be where it is today. The Merge and the upcoming Shanghai Shapella are just part of a series of updates in Ethereum’s roadmap. 

With each successive upgrade, Ethereum inches closer to improving its network performance, security, and scalability which opens up more innovations in the future of the blockchain and crypto space.

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