Ethereum has just had its first major upgrade, or “hard fork,” since transitioning to a proof-of-stake system. The Shanghai upgrade allows validators to withdraw the staked ether (ETH) that has been locked in the network.
While the primary objective of the upgrade is to implement Ethereum Improvement Proposal-4895, which unlocks validator withdrawals, the changes include other significant upgrades that will impact Ethereum app developers and many of the chain’s users.
The evolution of the ethereum blockchain
The Ethereum blockchain network has undergone a number of upgrades and changes since its initial launch in July 2015. Some of the most significant:
- Frontier (2015): This was the initial release of the Ethereum network, allowing users to create and deploy their own smart contracts and decentralized applications.
- Homestead (2016): This introduced several improvements, including security enhancements, gas optimizations and network stability improvements.
- Metropolis (2017-2019): This was a two-part upgrade consisting of Byzantium and Constantinople. Byzantium introduced key improvements, such as a new mining algorithm, enhanced privacy features and a reduction in block rewards. Constantinople included updates to reduce transaction fees, increase efficiency and introduce new features like off-chain transactions.
- Istanbul (2019): This introduced several new features, including the integration of zk-SNARKs (a form of zero-knowledge cryptography), a new mining algorithm and various protocol upgrades to improve efficiency and network security.
- Beacon Chain (2020): To ensure secure functioning, the Beacon Chain required 16,384 deposits of 32 staked ETH, which was successfully made in November 2020. As a result, the Beacon Chain started generating blocks on December 1, 2020, marking a crucial milestone toward realizing the Ethereum vision.
- Berlin (2021): This was a protocol upgrade that introduced several new features, including gas fee optimizations, enhanced security measures and a reduction in transaction costs for certain types of transactions.
- London (2021): This introduced EIP-1559, which changed the way transaction fees are calculated on the Ethereum network. This upgrade included a fee burn mechanism, which helps to reduce the overall supply of ETH and introduces a more predictable fee model for users.
- Paris (The Merge — 2022): The Paris upgrade was initiated when the proof-of-work blockchain achieved a terminal total difficulty of 58750000000000000000000, which occurred at block 15,537,393 on September 15, 2022. The upgrade was triggered on the next block and marked a major milestone for Ethereum as it transitioned from proof-of-work to proof-of-stake. Along with this shift, the upgrade included improvements to the execution clients, similar to Bellatrix on the consensus layer, enabling the execution clients to receive instructions from their connected consensus clients through the activation of a new set of internal API methods known as the Engine API.
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These upgrades have brought numerous improvements to the Ethereum network across security, efficiency and scalability and have enhanced the functionality of the network.
Why is the upgrade important?
The upgrade is set to change the way the blockchain functions. One of the key changes is a reduction in gas fees for layer-2 solutions like Polygon and Optimism. This update aims to enhance the overall functionality of the blockchain while reducing transaction costs.
Another significant change is the ability for users to access and unstake their Ethereum tokens, which were previously locked in a smart contract when they became validators on the proof-of-stake-based Ethereum blockchain known as the Beacon Chain. This update provides users with more flexibility when managing their staked ETH tokens.
The Shanghai update brings technical improvements to the smart contract feature, which will help to position Ethereum as a major player, reflecting Ethereum’s ongoing efforts to improve its technology and enhance value to users.
Institutions preparing for upgrades
The Shanghai upgrade is expected to have a positive effect on the institutional adoption of cryptocurrencies as it addresses concerns about security and reliability. It is likely that this increased level of trust will lead to further investment in this space.
As Ethereum continues to evolve, institutions need to be aware of potential impacts on investments and understand how to prepare for upgrades.
Upgrades can impact assets in a variety of ways:
- Upgrades are not always successful. The network may experience downtime or technical issues, temporarily impacting investment value.
- Upgrades may change the way the network operates, directly impacting assets (e.g., reducing the cost of transactions or increasing the efficiency of dApps).
- Upgrades may include new features and functionality, attracting new users and developers to the network—potentially increasing asset value.
Institutions preparing for an upgrade should review available documentation, including timelines for rollouts of updates, code commits and network changes. They should also ensure wallet and service compatibility.
How could the upgrade impact investors and ETH prices?
The option for full withdrawal may lead to a reduction in the number of validators on the network, but the extent of its impact will depend entirely on the number of validators who actually choose to withdraw. It is possible that the Total Value Locked on the Beacon Chain could decrease as stakers claim their rewards and unstake their assets, which could lead to a drop in ETH prices.
On the other hand, allowing the unstaking of ETH will attract more investors to staking, resulting in an increase in the amount of ETH staked. This is due to the rising popularity of liquid staking derivatives that provide stakers with liquidity flexibility while earning rewards on their staked ETH, without worrying about when they can withdraw assets.
This may increase the price of ETH, or at least help it recover further from the loss in value that occurred with the recent bank failures. The impact of these changes ultimately depends on the actions of the majority of validators regarding their rewards and unstaked assets.
However, the daily withdrawal limit prevents a run on ETH withdrawals and will hopefully mitigate the effect of the upgrade on the market price of Ethereum. The market is notoriously hard to predict, and popular assumptions may prove to be inaccurate.
The Shanghai upgrade brings significant changes to Ethereum, marking an important moment for the crypto industry, reshaping the way Ethereum functions and granting stakers newfound accessibility to their ETH holdings.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
Tammy Paola is a financial services, blockchain and crypto markets executive and thought leader.
This article was published through Cointelegraph Innovation Circle, a vetted organization of senior executives and experts in the blockchain technology industry who are building the future through the power of connections, collaboration and thought leadership. Opinions expressed do not necessarily reflect those of Cointelegraph.