Six months after the successful Merge, Ethereum core developers have just confirmed the activation date for the network’s next major overhaul, Shanghai, which is now scheduled to take place on April 12. This announcement came only a couple days after the activation of Shanghai in Ethereum’s testnet Görli, following previous successful trials in the other two network’s testing environments, Zhejiang and Sepolia, which together comprised the usual set of dry-runs preceding an important upgrade on Ethereum.
What is the Shanghai upgrade?
The Shanghai (or Shanghai/Capela) upgrade will activate ether (ETH) withdrawals, allowing current validators in the network to unstake the ETH they’ve locked in the Beacon Chain, Ethereum’s consensus layer after its move to Proof-of-Stake (PoS) last September. This will be possible via either a partial withdrawal, which releases the issuance rewards a validator has collected over time, or a full withdrawal, that unlocks both their principal deposit and the aforementioned issuance rewards. Shanghai will also enable functionalities that, all else equal, may lower gas fees for Ethereum users, making it cheaper to transact on the network. While the Merge activation was contingent on the Ethereum network to reach a total terminal difficulty, which depended on the mining hash rate of Ethereum under Proof-of-Work, the complete predictability of PoS validation slot times—which occur every 12 seconds—guarantees that the mainnet Shanghai activation will take place on April 12, 2023, at 10:27:35 PM UTC.
Why does it matter to investors?
Shanghai will provide more predictability to validators and remove the illiquidity aspect of ETH staking that has been present on Ethereum since the Beacon Chain started its operation in December 2020. More importantly, Shanghai is a major milestone for ETH staking by institutions. Crypto asset managers, for example, whose structured products demand minimum liquidity thresholds in order for clients’ redemptions to be honored, will start being able to engage with staking, allowing them to potentially increase the returns of products that include ETH as an investable asset, while directly participating in the security provision of the network they are invested in. And although the activation of withdrawals can bring some ETH selling pressure in the short term following the upgrade, the increase in investor interest for ETH staking post-Shanghai—in search for the emerging “risk-free rate” in crypto—can significantly reduce the liquid supply of ETH on the market in the mid-to-long term, strengthening the security of the Ethereum network and eventually pushing the price of ETH higher over the long haul. Shanghai is the final step in Ethereum’s transition to PoS, which is yet another demonstration of the continued commitment of developers to the long-term security and decentralization of the network, and shows that the overall investment case for the largest smart contracts platform in crypto continues to grow stronger.
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