Ethereum Shanghai Upgrade: Unlocking Staked ETH – Will it Crash the Market?

The Ethereum network recently underwent a significant transformation with the Shanghai upgrade, also known as the Shapella upgrade (Shanghai + Capella). A key aspect of this upgrade is unlocking staked Ether (ETH) that has been locked on the Beacon Chain since the shift to Proof-of-Stake (PoS). Naturally, the big question on everyone’s mind is: Will this unlock trigger a massive sell-off and send ETH prices plummeting?

What’s the Buzz About the Shanghai Upgrade and ETH Unlocking?

For a while now, participants in Ethereum’s PoS mechanism have been staking their ETH to secure the network and earn rewards. However, until the Shanghai upgrade, this staked ETH was essentially locked up. Think of it like depositing money in a fixed deposit – you earn interest, but you can’t access the principal until maturity. Shanghai changes that, finally allowing stakers to withdraw their staked ETH and accumulated rewards.

According to a recent report by on-chain analytics firm Glassnode, a substantial amount of ETH is poised to be unlocked. Let’s break down the numbers:

• Estimated Unlocked ETH: Around 170,000 ETH out of a total of 18.1 million ETH staked on the Beacon Chain are expected to be freed in the first week post-Shanghai.
• Breakdown: This 170,000 ETH comprises approximately 100,000 ETH in staking incentives and 70,000 ETH in the initially staked Ether.
• Value at Current Prices (Approximate): At an ETH price of $1,870 (as per the report), this translates to roughly $320 million worth of ETH potentially entering the market.

Sounds like a lot, right? But before you panic sell your ETH, let’s delve deeper into why experts, like those at Glassnode, believe the impact on ETH’s price might be less dramatic than you might think.

Will the Shanghai Upgrade Trigger an ETH Price Crash?

The short answer, according to Glassnode and other analysts, is likely no, or at least, not a significant crash. Here’s why:

Controlled Release Mechanisms

Ethereum developers have implemented procedures to prevent a sudden flood of ETH into the market. Think of it as a controlled release valve rather than a dam breaking.

• Limited Exiting Validators: Glassnode highlights that only around 253 depositors were initially waiting to exit their staked positions. This relatively small number suggests a measured approach to withdrawals.
• Validator Exit Queues: Ethereum’s withdrawal mechanism is designed with queues, limiting the number of validators that can exit at any given time. This naturally throttles the outflow of ETH.
• Slashing Validators: Around 214 validators were expected to be forcibly exited due to slashing (penalties for misbehavior). While this adds to the unlocked ETH, it’s still a limited number compared to the total staked amount.

Context is Key: Exchange Inflows

Glassnode makes a crucial comparison: the projected sell-side volume from Shanghai withdrawals is likely to be within the range of the average weekly exchange inflow volume. In simpler terms, the amount of ETH potentially being sold due to Shanghai is not unusually high compared to the regular flow of ETH into exchanges.

Quote from Glassnode:

“Even in the extreme case where the maximum amount of rewards and stake are withdrawn and sold, the sell-side volume still falls within the range of the average weekly exchange inflow volume… As a result, even the most extreme case will have an acceptable impact on the price of ETH.”

Who are the Stakers Potentially Unlocking ETH?

Understanding who is withdrawing ETH provides further context. Glassnode points to a few key players:

• Early Depositors with Unrealized Losses: Interestingly, Glassnode data suggests that only about 22% of the 253 existing depositors are currently in profit. The average deposit price across all staked ETH is around $2,136, which is higher than the ETH price at the time of the report ($1,865). This means many stakers are sitting on unrealized losses.
• Whale-Sized Depositors: A significant portion of these unrealized losses (around 76%) are held by large “whale” depositors. This suggests that a large chunk of staked ETH is held by long-term believers who might be less inclined to panic sell.
• Entities with Specific Circumstances:
  • Kraken: The crypto exchange Kraken was expected to withdraw a substantial amount of ETH after facing scrutiny from the US Securities and Exchange Commission (SEC) regarding its staking services.
  • Celsius: The bankrupt cryptocurrency lending platform Celsius was also predicted to withdraw ETH as part of its bankruptcy proceedings to liquidate assets.

However, it’s important to note that Glassnode also mentioned that Kraken and Celsius were unlikely to initiate these withdrawals immediately upon the Shanghai upgrade. This further moderates the immediate selling pressure.

Fidelity’s Perspective: Muted Price Impact

Adding to the sentiment of limited price impact, global financial giant Fidelity Investments also released a study on April 5th, anticipating a muted selling pressure. Their reasoning aligns with Glassnode’s:

• Partial Withdrawals & Re-staking: Fidelity suggests that many stakers might opt for partial withdrawals or even re-stake their unlocked ETH, reducing the immediate sell-off.
• Withdrawal Timeline: The gradual nature of the withdrawal process itself contributes to a less volatile market reaction.

Shanghai Upgrade: More Than Just Unlocking ETH

While the ETH unlocking aspect of Shanghai is grabbing headlines, it’s crucial to remember that this upgrade is part of Ethereum’s ongoing evolution towards a more robust and scalable Proof-of-Stake system. As blockchain infrastructure startup Blocknative pointed out, the Shanghai upgrade went live on April 12th, implementing Ethereum Improvement Proposal-4895 (EIP-4895) to enable these withdrawals.

Shanghai includes a total of five EIPs, but EIP-4895 is undoubtedly the most anticipated. It marks a significant milestone in Ethereum’s journey, solidifying its PoS transition and paving the way for future improvements.

Key Takeaways: Shanghai Upgrade and ETH Price

Let’s summarize the key points regarding the Shanghai upgrade and its potential impact on ETH price:

• Shanghai Unlocks Staked ETH: The upgrade allows stakers to finally withdraw their staked ETH and rewards, a crucial step in Ethereum’s PoS model.
• Limited Immediate Price Crash Expected: Analysts, including Glassnode and Fidelity, predict a muted price impact due to controlled release mechanisms, existing unrealized losses for many stakers, and potential re-staking.
• Controlled Release is Key: Ethereum’s withdrawal queues and the gradual nature of validator exits prevent a sudden market flood.
• Context Matters: Projected sell-side volume is within normal exchange inflow ranges.
• Long-Term Positive for Ethereum: Shanghai is a significant step forward for Ethereum’s PoS transition, enhancing its functionality and long-term viability.

Looking Ahead

The Shanghai upgrade is a landmark moment for Ethereum. While the unlocking of staked ETH naturally raises questions about price volatility, current analysis suggests a measured and controlled impact. Instead of focusing solely on potential short-term price fluctuations, it’s important to recognize Shanghai’s significance in solidifying Ethereum’s Proof-of-Stake future and unlocking new possibilities within the ecosystem. Keep an eye on the market, but remember that this upgrade is ultimately a positive step for the long-term health and evolution of Ethereum and the broader cryptomarket.