---

 

TL;DR:

• Ethereum's Shanghai+Capella upgrade was successfully activated two weeks ago.

• Partial withdrawals and full validators exits have distributed over ~$3.3B (with ETH at around $1,940¹) to stakers so far. 

• Despite concerns of a potential selloff, ETH has been outperforming most of the digital asset space since April 12, with its market dominance going from 19.0% pre-Shanghai to just above 20.4% one week later, currently hovering around 19.8%.

• After 14 days, it’s fair to say that the operational and liquidity risks surrounding Shanghai are already behind us, unlocking a new era for ETH staking in which investors, specifically institutions, can finally stake ETH in exchange for an annual yield, while having the certainty that their deposited capital is no longer locked for an indefinite period of time.

• We expect this to reduce the liquid circulating supply of ETH in the coming months and generate much more demand for staking, which potentially leads to an appreciation of ETH over the long run.

 

---

 

 

Ethereum’s Shanghai+Capella hard fork was activated two weeks ago without any hiccups, enabling ether (ETH) withdrawals and incorporating improvements that lower gas costs and make it cheaper to use the Ethereum blockchain. Fourteen days later, it’s instructive to assess what happened to the validation set on Ethereum and how ETH has behaved in the wake of the network’s most recent overhaul.

 

The “sawtooth” pattern of partial withdrawals in the first week post-Shanghai

 

As ETH withdrawals became possible, partial withdrawals² started being automatically paid, with a total of ~947,500 ETH (~$1.8B at current prices³) being released so far. These payments follow a predefined schedule of 16 validators per block (every 12 seconds), ordered by the index each validator has assigned to its node (older validators with a lower index, younger validators with a higher index). 

For the current number of active validators on the network (~560,000), all validators should receive their issuance rewards every ~5 days. As shown in Figure 1, not all active validators received their partial withdrawals in the first batch of automatic payments post-Shanghai. This is because more than 50% of them didn’t have proper withdrawal credentials prior to the upgrade, meaning that they were skipped in the first run through the validation set.

As a consequence, we’ve seen a gray sawtooth pattern starting on April 12, consisting of the first batch of reward distribution that paid rewards to older validators having correct withdrawal credentials, and then to younger validators also with proper withdrawal credentials. When the scan over validator indices went back to the beginning of the list (at the end of April 14th), validators that weren’t paid in the first batch had then updated their withdrawal credentials, and a new “tooth” of issuance rewards was formed. This pattern should repeat until all validators that were active prior to Shanghai have updated their withdrawal credentials and received their rewards gathered before the hard fork. From then onwards, issuance rewards should be roughly flat for every payment batch. As of writing, there’s been ~247,900 changes in withdrawal credentials, with ~75,800 still waiting for an address update, which will be ready to earn issuance rewards after going through a similar schedule of 16 changes of withdrawal credentials per block.

 

_{FIGURE 1: DISTRIBUTION OF ISSUANCE REWARDS (HOURLY CHART)⁴}

 

Full exits and new deposits

 

As important as the number of partial withdrawals is the total number of full withdrawals (or full exits, represented in red in Figure 2), by which an active validator can ask to leave Ethereum’s validation set and redeem back their accumulated issuance rewards and principal deposit (32 ETH). As Figure 2 shows, during the first couple of days following the upgrade, full exits were fairly tamed, with new deposits actually surpassing the number of ETH that was leaving the staking network due to full exits. 

This picture changed around late April 14, when the number of full exits spiked down similar to what happened with issuance rewards in Figure 1. This means old validators had successfully changed their withdrawal credentials and now could finally initiate a full exit. As shown in a public dashboard by Nansen, these exits are mostly concentrated in centralized exchanges (CEXs) Kraken, Binance, and Coinbase, which have become an important share of staking providers on the network. These allow their customers to delegate basically any fraction of ETH so that the CEXs can run validation nodes, earn staking rewards and pay back an yield to customers (taking a commission for providing the service).

In the case of Kraken specifically, it’s worth reminding that the CEX had its staking service targeted by the SEC as the offering of an unregistered security. Kraken had paid $30M in penalties in February and stopped activating new validators on the Ethereum network, stating that it would shut down their ETH staking service as soon as Shanghai was activated. 

 

_{FIGURE 2: NEW DEPOSITS AND FULL EXITS (HOURLY CHART)⁵}

 

 

And while we have seen an increase in full exits as of late April 19 and April 24 (again, in line with a renewed batch of payments of issuance rewards), it’s worth stressing that new ETH deposits (represented in green in Figure 2) have been happening since the activation of the upgrade, with more than 1.2M ETH ($2.4B at current prices⁶) being released post-Shanghai. The reason why this is important is that ETH staking consists of two queues, one for ETH holders that want to activate a new validator node, and one for active validators that want to leave the validation set. 

These queues are governed by the number of active validators on the network, which today impose a daily churn limit of a maximum of 1,800 validators either joining or leaving. As Figure 3 shows, the initiation of full exits and new activations has created a backlog of validators joining and leaving, in such a way that, as of writing, we currently have a daily net flow of zero validators (1,800 validators in, 1,800 validators out), with an entry queue that should only clear in ~7.8 days, and an exit queue that will take ~7.6 days to empty, meaning that the number of active validators one week from now should be bigger (all else equal).

 

_{FIGURE 3: STAKING QUEUES ON ETHEREUM AS OF APRIL 26TH}

 

These numbers show that, while there has been a net trigger of exits on ETH staking in the first two weeks following Shanghai, there has also been enough entry resistance counterbalancing the potential outflow of capital that could lead to more ETH circulating in the market. Furthermore, as again illustrated by Figure 2, full exits have been more concentrated in time, while new deposits have been more evenly distributed in the past fourteen days. Once forced exiters (such as Kraken) have their full withdrawals completed, it’s fairly likely that inflows will start consistently surpassing outflows, meaning more ETH will be removed from the circulating supply to be staked and start paying the new “risk-free rate” in the crypto ecosystem.

 

Fears of a major selloff didn’t materialize

 

As of writing, partial withdrawals and full exits have distributed a total of 1,697,100 ETH (~$3.3B at current prices⁷) to stakers. In the weeks prior to Shanghai, there was much speculation on what would be the impact of withdrawals on ETH’s price, with some market participants calling for a potential major selloff as more than one million ETH would (almost) instantly come to the market. In actuality, we’ve seen quite the opposite happening in the past couple of weeks. ETH has been outperforming most of the digital asset space since April 12, with the ETH dominance (its market capitalization divided by the total market capitalization of the asset class) rising from 19.0% to above 20.4%, currently hovering around 19.8%.

 

_{FIGURE 4: ETH DOMINANCE SINCE THE ACTIVATION OF SHANGHAI ⁸}

 

 

Why should investors care?

 

The past two weeks have already provided us with a relevant set of data pointing to where the Ethereum network is headed post-Shanghai. Thus far, the market has comprehended that the success of Shanghai was in fact bullish for Ethereum, completing its successful transition to Proof-of-Stake (PoS) and giving a lot more predictability to ETH stakers. 

Now, investors, institutional ones included, can stake ETH in exchange for validation rewards with the certainty that their deposited capital is no longer locked for an indefinite period of time. As a consequence, it’s fair to expect that the number of ETH staked is potentially going higher in the coming months, in exchange for the current annual percentage yield of ~4.5%, which can potentially go higher as we enter a new bull phase of higher activity and increased transaction fees on the network. 

Long story short, Shanghai, which we expected to be great for Ethereum’s fundamentals, has also been positively reflected in prices, showing that Ethereum is increasingly gaining its own protagonism in the crypto landscape. We believe this will continue to play out.

^{[1] Source: https://coinmarketcap.com/currencies/ethereum/, accessed April 20th, 2023.}

^{[2] Which consist of cumulative issuance rewards that a validator has accrued over the period they’ve been actively proposing new blocks and attesting to the correct state of the blockchain.}

^{[3] Source: https://coinmarketcap.com/currencies/ethereum/, accessed April 20th, 2023.}

^{[4] Adapted from https://dune.com/hildobby/eth2-staking with data as of early April 26th, 2023.}

^{[5] Adapted from https://dune.com/hildobby/eth2-staking with data as of early April 26th, 2023.}

^{[6] Source: https://coinmarketcap.com/currencies/ethereum/, accessed April 20th, 2023.}

^{[7] Source: https://coinmarketcap.com/currencies/ethereum/, accessed April 26th, 2023.}

^{[8] Source: TradingView, accessed April 26th, 2023.}

 

______________________________

_{This material expresses Hashdex Asset Management Ltd. and its subsidiaries and affiliates (“Hashdex”)'s opinion for informational purposes only and does not consider the investment objectives, financial situation or individual needs of one or a particular group of investors. We recommend consulting specialized professionals for investment decisions. Investors are advised to carefully read the prospectus or regulations before investing their funds. The information and conclusions contained in this material may be changed at any time, without prior notice. Nothing contained herein constitutes an offer, solicitation or recommendation regarding any investment management product or service. This information is not directed at or intended for distribution to or use by any person or entity located in any jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation or which would subject Hashdex to any registration or licensing requirements within such jurisdiction. No part of this material may be (i) copied, photocopied or duplicated in any form by any means or (ii) redistributed without the prior written consent of Hashdex. By receiving or reviewing this material, you agree that this material is confidential intellectual property of Hashdex and that you will not directly or indirectly copy, modify, recast, publish or redistribute this material and the information therein, in whole or in part, or otherwise make any commercial use of this material without Hashdex’s prior written consent.} 

_{Investment in any investment vehicle and cryptoassets is highly speculative and is not intended as a complete investment program. It is designed only for sophisticated persons who can bear the economic risk of the loss of their entire investment and who have limited need for liquidity in their investment. There can be no assurance that the investment vehicles will achieve its investment objective or return any capital. No guarantee or representation is made that Hashdex’s investment strategy, including, without limitation, its business and investment objectives, diversification strategies or risk monitoring goals, will be successful, and investment results may vary substantially over time. Nothing herein is intended to imply that the Hashdex s investment methodology or that investing any of the protocols or tokens listed in the Information may be considered “conservative,” “safe,” “risk free,” or “risk averse.”}

_{Certain information contained herein (including financial information) has been obtained from published and non-published sources. Such information has not been independently verified by Hashdex, and Hashdex does not assume responsibility for the accuracy of such information. Hashdex does not provide tax, accounting or legal advice. Certain information contained herein constitutes forward-looking statements, which can be identified by the use of terms such as “may,” “will,” “should,” “expect,” “anticipate,” “project,” “estimate,” “intend,” “continue”  “believe” (or the negatives thereof) or other variations thereof. Due to various risks and uncertainties, including those discussed above, actual events or results, the ultimate business or activities of Hashdex and its investment vehicles or the actual performance of Hashdex, its investment vehicles, or digital tokens may differ materially from those reflected or contemplated in such forward-looking statements. As a result, investors should not rely on such forward- looking statements in making their investment decisions. None of the information contained herein has been filed with the U.S. Securities and Exchange Commission or any other governmental or self-regulatory authority. No governmental authority has opined on the merits of Hashdex’s investment vehicles or the adequacy of the information contained herein.}