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To understand the Shanghai upgrade, it’s important to first revisit September 2022, when Ethereum underwent The Merge. But what exactly was this merge and why was it so significant?
The Merge was a software update that transitioned Ethereum from a proof-of-work (PoW) system to a proof-of-stake (PoS) consensus mechanism. Instead of relying on mining to validate transactions, Ethereum shifted its focus to staking. Why was this such a major shift?
Mining, including the Bitcoin mining process, is one of the oldest methods of crypto validation. However, due to its high energy consumption, PoW has faced criticism for being outdated. The adoption of PoS with The Merge was designed to address these concerns by reducing energy usage while making the network more accessible to a wider range of investors.
However, staking has its own set of challenges, such as:
– Lock-up periods
– Validation costs
– Centralization trends, since there are no clear limits on how much a single validator can stake.
For a deeper dive into Proof of Work and Proof of Stake, check out our detailed article.
Shanghai or Shapella? Understanding the Difference
Now that we have some background, why are there two names for this Ethereum upgrade? “Shanghai” refers to the city where the Devcon 2 conference was recently held, while “Shapella” is a blend of Shanghai and Capella, the bright northern star. In Ethereum’s architecture, Shanghai represents the execution layer, while Capella refers to the consensus layer (the Beacon Chain).
As both layers are undergoing changes, it’s clear why some may use the term Shapella. Either way, both names refer to the same upgrade—different terms, same result.
What the Shanghai Upgrade Brings
With The Merge behind us, let’s now explore what Shanghai brings to the table. One of the key goals of this upgrade is to address several Ethereum Improvement Proposals (EIPs), particularly EIP 4895, which is the most relevant in this context.
Do you remember the Beacon Chain? EIP 4895 will modify this protocol to allow greater flexibility. The Beacon Chain requires smart contracts and validators to ensure its integrity, a concept that extends beyond Ethereum to other non-miner-based blockchains.
To participate in Ethereum 2.0, validators previously needed to stake 32 ETH through a “Beacon Deposit” contract, leading to the accumulation of over 18.1 million ETH. However, this staked ETH has been locked in, with no indication of when it could be withdrawn. EIP 4895 will now enable these 18.1 million ETH to be unstaked, allowing for liquidity. This represents roughly 15% of Ethereum’s total network supply.
How the Shanghai Upgrade Will Facilitate Withdrawals
Given the substantial amount of ETH staked within the Beacon Chain, it’s important to consider withdrawal options. There are two methods for withdrawals:
– Full withdrawals allow users to access both their 32 ETH deposit and any additional ETH staked.
– Partial withdrawals enable users to access excess ETH, while their original 32 ETH remains in the Beacon Chain to maintain a validator node.
Given the size of the Beacon Chain, around 1,800 validators will be able to unstake their holdings. This could inject an additional 57,600 ETH tokens into the ecosystem daily.
Effects on the Entire Ethereum Blockchain
How will the Shanghai upgrade affect the average ETH holder? The major impact here is liquidity. If many validators choose to withdraw their ETH, the market will be flooded with more ETH, increasing the daily supply.
If fewer coins are staked at any given time, Ethereum’s blockchain could become more attractive to new investors, especially institutional traders. Given the increasing scrutiny on crypto staking by governments, especially in the United States, there could be a shift back toward Ethereum mining, which offers a more decentralized alternative.
Upcoming Changes to Look Out For
Besides EIP 4895, the Shanghai upgrade will bring additional modifications to several other EIPs. Here are some other important changes:
– EIP 3651: Reduced gas costs for EV (extractable value) payments.
– EIP 3855: Limiting fees for Ethereum developers.
– EIP 3860: Introducing gas fees for Initcodes of 32 bytes, leading to more proportional and stable fees.
CryptoChipy is also watching another event known as “The Purge,” which will clear historical Ethereum data and reduce network congestion.
All in all, the Shanghai upgrade looks promising for Ethereum, particularly in terms of liquidity and investor access. We’ll be watching closely to see how Ethereum and its community fare moving forward.
