What is the Ethereum Shanghai Upgrade?: ETH Analysis

The Ethereum cryptocurrency network has a massive update due in April 2023 called the Shanghai upgrade. The Shanghai upgrade is a hard fork. It will radically change the blockchain’s protocol - hopefully for the better.  

Ethereum is no stranger to huge updates like this, seen by their switch to proof-of-stake. All signs point to The Shanghai upgrade significantly benefiting the blockchain and it comes as a result of ETH’s liquid staking consensus mechanism. 

But how will this affect your crypto wallet exactly? 

What is the Ethereum Shanghai Upgrade?

The Ethereum Shanghai upgrade is a series of upgrades. The Ethereum developers will implement them at once. To understand this upgrade's significance, it's important to know Etherem's history. This upgrade is the result of several past changes to Ethereum’s network. 

The proof-of-works(PoW) period

Ethereum started in 2015 as a proof-of-work (PoW) cryptocurrency, just like Bitcoin. This method involves spending time and energy to solve complex math formulas. Using sophisticated technology, miners who solve the formulas receive crypto rewards. This type of consensus mechanism has some downsides, though. 

PoW is energy-intensive and made scaling hard for the blockchain. 

Suggested reading: Proof-of-Work vs. Proof-of-Stake: The Ultimate Guide

Ethereum migrates to Proof-of-stake (PoS)

After many test runs, ETH switched to the proof-of-stake (PoS) mechanism in 2020. This hard fork change is now called "the Ethereum Merge." This made the blockchain more secure, and eco-friendly and improved scalability. 

Primary benefits of "The Merge"

The Merge allowed Ethereum validators to stake their crypto in the blockchain for passive income. At the time, they could not withdraw their ETH from the blockchain. The funds were locked to support the network. This method is similar to a high-yield savings account in a traditional bank. Holders with stakes in ETH could also vote on future blockchain changes. 

Primary challenges of Ethereum's PoS mechanism

The PoS system still had one big negative, though - cost. To join the Beacon Chain, which coordinates staking, users had to give a minimum of 32 ETH. At the time the PoS system was rolled in, one ETH cost about $4,000. At the time of writing, it is around $1,550. This high entry point made it difficult for many to join. 

The solution: The Shanghai Upgrade

Crypto teams improved this issue somewhat using liquid staking. With this technique, users can stake a smaller amount of ETH in return for tokens that represent their crypto. They can then use their tokens for other transactions. The Shanghai upgrade seeks to address this issue even further and make it more accessible to join ETH.

In 2022, Ethereum tested a draft version of the Shanghai upgrade, the Shangdong test network. It tried out the practicality of the upgrade proposals. The Shanghai upgrade has five proposals, with one more 

proposal (EIP-4844) postponed to 2024. EIP stands for Ethereum Improvement Proposal.

What improvements will Ethereum’s Shanghai Upgrade bring?

The five proposed changes in the current Shanghai upgrade are:

EIP-3651: Warm COINBASE

Coinbase payments are becoming more popular. To improve transaction execution, Coinbase addresses will be warm at their start. This will increase transaction speed but maintain security.

EIP-3855: PUSH0 instruction

This introduces the PUSH0 instruction to contracts. It keeps the stack at a constant 0 value. This change will reduce contract code size and reduce the need for the DIP instruction (which solves duplicating zeroes). It also reduces the risk of contracts misusing instructions for optimization.

EIP-3860: Limit and meter initcode

This EIP extends EIP-170 with a maximum size limit for the initialization code. This ensures the code is fairly charged to minimize future risk. It also provides an extendable cost system for the future.

EIP-4895: Beacon Chain push withdrawals 

This improvement introduces a system-level operation to support validator withdrawals. It provides a separate way for withdrawals to enter the EVM (Ethereum virtual machine). The EVM executes smart contracts on the blockchain network.

This is the most important change. It gives validators the option to withdraw their staking rewards. Since the Ethereum Merge, validators have staked over $17 million in Ether. This works out to over 22 billion USD.

While some validators are sure to withdraw stakes, there’ll be a cap of 43,200 ETH per day. The cap, and ETH’s other improvements, will prevent a mass exit of validators. More people will likely become validators. 

EIP-6049: Deprecate SELFDESTRUCT

This warns against the use of the self-destruct instruction, which terminates a smart contract. However, ETH users are still discussing how best to use self-destruct. A change to this EIP is likely to come in the future.

ETH Analysis: Will the upgrade affect the price?

Analysts have theories about whether the Shanghai upgrade will affect Ethereum's price. Some users fear the upgrade will cause a crash, but there are some arguments against that. 

• ‍Withdrawal process: Validators queue up to withdraw stakes and go through a two-tier system. At maximum, only 10% of the staked ETH can leave the pool per month. 
  ‍‍
• Staking popularity will increase: Staking popularity is likely to rise after the upgrade. JPMorgan says Ethereum’s staking ratio will increase post-upgrade. The number of validators could rise from half a million to 2.2 million. This will result in a massive net positive. The increased investment will appreciate the value of ETH.

Conclusion

The Shanghai upgrade will improve the security and effectiveness of Ethereum’s PoS system. It’s not likely to cause any major negatives, and will probably improve prices in the long term. You can expect to see the upgrade launch in early April 2023 - but delays are expected. 

For traders, expect volatility in both directions. Ethereum - and the blockchain industry on the whole - is still young and experiencing growing pains. Bullish and bearish volatility is normal. However, this volatility presents plenty of good opportunities for those prepared. 

Disclaimer: “The content should not be construed as investment advice and does not constitute any offer or solicitation to offer or recommendation of any investment product. It is made available to you for information and/or education purposes only.

You should take independent investment advice from a professional in connection with, or independently research and verify any information that you find in the article and wish to rely upon.”