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Originally scheduled for early-March, the Ethereum Shanghai upgrade is finally here. EIP-4895, as it is otherwise known, is another important milestone in a number of scheduled updates that promise to improve the performance and scalability of the Ethereum network. There are many Ethereum Improvement Proposals scheduled for 2023 and beyond, but it’s likely that the Shanghai update will be the most important for this year at least.
EIP-4895 will help complete the shift to Proof-of-Stake and allow users to unlock ETH, giving them more flexibility and control over their investments. Four other EIPs will come into effect that will reduce gas fees for those building on the blockchain. The end goal is to make the user experience of the Ethereum network more efficient and more accessible, providing a solid foundation for the continued development and growth of decentralised applications and services.
The future of Ethereum staking
Shanghai is the first major upgrade for the Ethereum network since it moved to a Proof-of-Stake mechanism back in September of 2022. While lauded for its energy saving potential as an alternative to mining, 2022’s “The Merge” did draw some criticism; namely that a Proof-of-Stake system could lean more towards centralisation, as users who control and stake more ETH will wield more power over the network (as opposed to Proof-of-Work where those who contributed more mining power had a stronger vote).
Shanghai promises to bring more balance to the Ethereum network; anyone staking will have more flexible access to their staking rewards as well as their staked ETH, and this shift should increase both the number of users of Ethereum as well as the number of users actively staking their tokens, increasing the decentralised nature of the ecosystem. Currently less than 14% of the ETH supply is staked, meaning there is big potential to increase the number of participants in Ethereum staking. More participation means more of a community voice and this, along with potential for solo staking, should result in a less centralised ecosystem.
The impact on liquid staking protocols
While the Shanghai Upgrade promises to democratise staking for the masses, liquid staking will still have its place in the Ethereum ecosystem. The withdrawal of ETH from validators will be queued and still take some time as withdrawal transactions per block are limited, and those users who hold less than 32 ETH - equivalent to 53,500 USD at current market prices - will still not meet the minimum requirements set to stake. Through liquid staking, users will be able to participate.
Those staking are also still trusting a single validator for each 32 ETH; exposing them to risks in the event of slashing or missing rewards. While Distributed Validator Technology (DVT) tries to tackle this issue, there is nothing in the Shanghai Update to solve this potential problem. Liquid staking offers something of a safety net; the platforms are not trusting a single entity to run all validator nodes; instead any risk is spread between nodes from different entities.
The outlook for Ethereum
The Shanghai Upgrade is a very important step in Ethereum using a fully-functional Proof of Stake consensus mechanism, but there have been some concerns that the immediate liquidity made available by unstaking may result in selling pressure. Additionally, there is almost $1.5 billion in ETH rewards ready to be claimed once this update comes into effect. On the flip side, this update does unlock the potential for more staking on the network, which should conversely attract more investors, particularly at an institutional level. Hopefully this should continue to strengthen the positive sentiment in a technology that remained relatively stable during some of the turbulence felt in the wider crypto ecosystem.
Looking beyond the Shanghai Update, next on the horizon for Ethereum could be proto-danksharding (EIP-4844) in late-2023. Designed to improve the performance and scalability of the Ethereum blockchain, this involves dividing the network into smaller, more manageable pieces called "shards". Shards can process transactions independently of each other. This can help improve the speed and capacity of the network, allowing more people to use Ethereum at the same time without slowing it down by congestion. Again, this points to an ecosystem that encourages, and can facilitate, a growing user base; good for both sentiment (critical to price) as well as the underlying notion that this is a technology that should remain decentralised.
About the Author
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<img align="left" alt="Henrik Gebbing Headshot" src="https://images.ctfassets.net/sdlntm3tthp6/2orZcJXgd2qh0wMYPIUSab/ac86d9ca5bd463c83972351b21ceb21e/Dr_Andreas_Dittrich.jpg?w=120" >
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Dr. Andreas Dittrich is the CTO of <a href="https://www.finoa.io/" alt="Finoa">https://www.finoa.io/ </a>, a FinTech focusing on Banking Services for Blockchain-based Digital Assets. He is a computer scientist with 25 years of experience in the IT industry. Dr Dittrich has worked in a variety of roles including as an engineer, architect, consultant and in management. His focus has always been the security of service and cloud infrastructures. After several years in academia he joined Deutsche Telekom (DT) in 2015 and since 2018 led the transformation of DT’s enterprise blockchain business to focus on supporting and promoting public blockchains. Prior to his CTO role, Dr Dittrich served as managing director of Finoa Consensus Services (FCS), a subsidiary of Finoa focusing on delivering core infrastructure for blockchain ecosystems.</td>
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