Ethereum’s Shanghai Upgrade: Everything You Need to Know

Following directly on the heels of The Merge, Ethereum has just completed anothermajor upgrade. Known both as the Shanghai and Shapella upgrade, crypto investors should be made aware of what’s in store.

It can be tricky to stay on top of blockchain tech and the various changes that occur on networks. And, when you’re invested in the native coins of these networks, it makes sense to keep your finger on the pulse of the fundementals.

As always, the Crypto Lists website has put together this handy guide so that you can remain ahead of the game.

A Bit of Background

In order to understand the new Shanghai upgrade, we should first roll the clocks back to September 2022. This was when the famous Ethereum Merge took place. So, what exactly was this merge and why was it important?

The main takeaway point here is that The Merge refers to a software upgrade. This upgrade replaced the existing proof-of-work (PoW) consensus framework with a proof-of-stake (POS) system. In other words, Ethereum was modified to focus around staking as opposed to mining. Why was this such a radical change?

Let’s first point out that mining (such as the processes associated with Bitcoin) is one of the most traditional forms of crypto validation. Pressure has been applied because it uses a lot of energy compared to PoS and has been seen as a little outdated. Proof-of-stake (and therefore The Merge) served to address these concerns and more.

Not only did it reduce energy consumption, but it enabled a greater variety of investors to become involved in the Ethereum network.

It must also be pointed out that staking has several downsides such as:

• Lock-up periods
• Validation costs
• A trend towards centralization (as there aren’t any real limits in terms of how much a single validator can stake)

You can read an in-depth exploration of Proof of Work and Proof of Stake in our in-depth piece.

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Shanghai or Shapella? What’s the Deal?

Now that we’ve obtained a bit of background, why the two different terms for the new Ethereum upgrade? Shanghai refers to the city where the Devcon 2 conference was recently held. “Shapella” is nothing more than a combination of Shanghai and a bright northern star known as Capella.

Also, the execution layer within the Ethereum blockchain is referred to as Shanghai while Capella represents the consensus layer (also known as the Beacon Chain).

As changes are taking place within both of these platforms, it’s clear to see why some choose to refer to the upgrade as Shapella. You say tomato and I say tomato; you are right either way (this expression really doesn’t work in written form, but you get the point).

What Does the Shanghai Upgrade Have in Store?

Now that we’ve examined The Merge as well as why it was implemented, we can move on to discuss what Shanghai has in store. One of the main intentions involves changes to a series of EIPs (Ethereum Improvement Proposals). While a handful EIPs are actually being overhauled, we’ll focus on EIP 4895; arguably the most relevant.

Do you remember the consensus layer (Beacon Chain) mentioned in the previous section? EIP 4895 is set to modify this protocol. To ensure its integrity, the Beacon Chain required smart contracts and therefore, validators. This is actually relevant to other blockchains that are not comprised of miners.

So, proof-of-stake transactions were necessary. Those who wanted to place a stake in the future of Ethereum (Ethereum 2.0) had the option of staking 32 ETH. This was known as a “Beacon Deposit” contract and long-term crypto fans become quite interested. Indeed, more than 18.1 million ETH currently exist within the Beacon Chain.

The only issue was that these very same 32 ETH were “locked” into the Beacon Chain and no date was provided in terms of when they could be liquidated. EIP 4895 will essentially enable these 18.1 million ETH to be un-staked from the Beacon Chain. You read that correctly; 18.1 million ETH will become liquid. It’s thought that this number equates to (roughly) 15 percent of the entire ETH network.

How Will the Shanghai Upgrade Implement Withdrawals?

Considering the sheer amount of ETH contained within the Beacon Chain, it stands to reason that we quickly look at withdrawal options. Two possibilities exist:

• Full withdrawals
• Partial withdrawals

As you might’ve guessed, full withdrawals will allow users to access their total balance as well as the original 32 ETH that were staked. Partial withdrawals enable holders to remove any excess ETH, but their 32 ETH will remain within the Beacon Chain (needed to maintain a validator node).

To put it all together and considering the size of the Beacon Chain, a staggering 1,800 validators will have the option to completely un-stake their claims. In terms of real-world implications this, (theoretically) signifies that an additional 57,600 ETH tokens will be infused into the ecosystem on a daily basis.

Impacts on the Entire Ethereum Blockchain

How will the Shanghai upgrade affect the average ETH holder? The name of the game is liquidity in this sense. If many stakeholders choose to withdraw their ETH from the Beacon Chain, the market will become saturated with more ETH each and every day.

Assuming that fewer coins are staked at any given time, the ETH blockchain could likewise become extremely attractive to new investors; especially institutional-level traders. When we also remember that governmental organizations (particularly the United States) have become increasingly critical of crypto staking, a shift towards ETH mining is actually a logical step.

What Other Changes are on the Horizon?

We mentioned that this update will also impact several other EIPs. For the sake of brevity, here are some additional modifications to expect:

• EIP 3651: The reduction of gas costs attributed to EV (extractable value) payments.
• EIP 3855: Limiting fees for ETH developers
• EIP 3860: Introducing gas charges for Initcodes of 32 bytes (establishing proportional fees to the length of the code itself and therefore, more stability)

Crypto Lists is also keeping a close eye on another event known as “The Purge”. This will clear out historical ETH data and therefore, decrease network congestion.

All in all, the Shanghai upgrade seems to be a step in the right direction for ETH in terms of liquidity and user access. We’ll therefore be keen to see how Ethereum and its investors fare in the near future.