Exploring the Ethereum Shanghai Upgrade

by Heybit
Exploring the Ethereum Shanghai Upgrade

Ethereum Staking

Ethereum is a representative Proof of Stake (PoS) blockchain that offers staking. To participate in staking, you need to 1) prepare hardware and software, 2) set up a server and security, and 3) deposit 32 ETH.

For those who are not familiar with setting up software or servers, participating in Ethereum staking can be challenging. Various staking methods are available for such individuals, including 1) solo staking, 2) staking through a service, 3) pool staking, and 4) staking via an exchange. These four methods are described below:

  1. Solo Staking: An individual operates their own node and manages their keys directly, making it a decentralized approach, though more difficult to operate.
  1. Staking through a Service: You manage your own key but register it with a company that provides node services.
  1. Pool Staking: You send cryptocurrency to a pool and stake it, eliminating the need to create a key or require hardware.
  1. Staking via an Exchange: A centralized method where the exchange provides a service that pools multiple customers' assets for staking.

It may seem complicated due to unfamiliar terminology, but it can be distinguished depending on whether you do it yourself or have someone else do it for you. Ethereum staking, which began in December 2020, is still ongoing even after the Merge update. As of April 2023, the APR (annual percentage rate) that can be earned through Ethereum staking is around 4-5%.

Blockchain Trilemma and Ethereum 2.0

Ethereum is the blockchain network that has best addressed the blockchain trilemma since Bitcoin. The trilemma refers to a dilemma in which three problems cannot be resolved together. It is a term coined by combining the Greek word 'Tri,' which means the number three, and the word 'Lemma,' which means proposition.

In the context of blockchain, the trilemma refers to the idea that Scalability, Decentralization, and Security cannot all be resolved simultaneously. It is possible to solve two of the three problems, but not all at once.

  • Scalability: The ability to process more transactions quickly, even as the number of users and transactions increases.
  • Decentralization: Refers to a system that is not controlled by a specific entity, with distribution meaning that the entities responsible for computation and processing are scattered.
  • Security: Preventing data tampering or malicious attacks within the blockchain.

To solve this trilemma, Ethereum has proposed the "Ethereum 2.0 Roadmap" and is working towards implementing it. It is composed of six stages: The Merge, The Surge, The Scourge, The Verge, The Purge, and The Splurge.

The Merge, which is the transition from Proof of Work (PoW) to Proof of Stake (PoS), was completed last year and is known to have achieved over 55% of the roadmap. The Ethereum Shapella upgrade scheduled for April 13, 2023, is an intermediate stage event taking place before The Surge.

Ethereum Shapella (Shanghai+Capella) Upgrade

Although it is known as the Ethereum Shanghai upgrade, the accurate name is the Ethereum Shapella upgrade. Shapella is a portmanteau of Shanghai and Capella, as the two network upgrades occur simultaneously. In short, Shanghai refers to the consensus layer, and Capella refers to the execution layer.

There are several updates, but the most critical one is the ability to withdraw staked Ethereum. Ethereum staking, which began in December 2020, allowed deposits but not withdrawals. With this update, previously locked Ethereum can now be withdrawn.

If we compare this to stock investing, when a specific stock is listed, some of the stocks allocated to institutional investors among employee stock ownership or public offering shareholders are subject to mandatory holding commitments. In other words, they cannot sell their stocks for a certain period. Ethereum staking was in a similar situation, with a lock-up that made it impossible to sell after withdrawal.

As of April 2023, the current amount of staked Ethereum is around 16.7 million. With a total issuance of 122 million Ethereum, this is about 15%. There is a concern that sales may increase as the withdrawal of previously locked Ethereum becomes possible. Just like in stock investing, when the locked-up volume enters the market, the price drops as more people sell.

However, after the upgrade, the number and amount of withdrawal requests received daily are limited, and more than 50% of the staked amount is currently in a loss. Therefore, the possibility of a large volume of short-term sales is not very high.

Moreover, there are expectations in the market that the introduction of the withdrawal feature for previously staked ETH through the Merge upgrade will act as a new catalyst. In other words, the market size will grow due to the increased liquidity of assets. While the market size may increase with the emergence of new derivatives as the liquidity market expands, there are also concerns that risks may increase accordingly.