Yahoo Finance Ethereum's Shanghai upgrade: What you need to know
The Ethereum blockchain's Shanghai upgrade is about to be launched, unlocking more than 18 million ether, worth around $34bn (£27.3bn).
Yahoo Finance UK spoke to industry experts about the effect that the increase could have on the crypto market.
The value of ether (ETH-USD) has been rising since November 2022, after the collapse of the FTX cryptocurrency exchange.
On Tuesday, ether rose 6.1% to $1,920. Bitcoin (BTC-USD) breached the $30,000 mark, rising to $30,129.
Ethereum's Shanghai upgrade
Ethereum's Shanghai upgrade is set to launch on 12 April, and will conclude Ethereum's transition to a 'proof of stake' blockchain, making it over 99% less energy intensive than the 'proof of work' blockchain which powers the Bitcoin network.
The new upgrade will make over 18 million ether, worth about $34bn, available for withdrawal. This has led to fears of a sudden dump of supply on the market, causing a short term haemorrhaging in price.
Jim McDonald, CTO of London staking firm Attestant, told Fortune: "The price of Ethereum is expected to dip sharply right after Shanghai as about 50% to 70% of early withdrawers cash out as the price of ETH has more than quadrupled since December, and there are profits to be had,"
However, some analysts forecast that the short-term price impact may be more muted as withdrawal queue restrictions and 'stakers' holding their ether could prevent a sharp price dip.
Ethereum 'stakers', those who currently have their ether locked in the blockchain's validation process, will need to wait for a period ranging from days to months to access their ether. This depends on whether they staked individually or through pools and service providers.
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CEO of P2P.org Alex Esin told Yahoo Finance UK: "We don’t think it’s likely many ether 'stakers' will rush and are not expecting to see a massive withdrawal spike.
"This is because many who have already staked on the Beacon Chain have a high-risk tolerance and are not holding out for the withdrawal date, those who may need to withdraw for other reasons will need to weigh this up against the growth expected from the Ethereum ecosystem and ETH strength expected over the next year.
"From a price perspective, we expect to see upward pressure as more people who previously were not comfortable locking away their ETH begin to participate in staking. As the ETH staking ratio increases, more ETH will be removed from the market pushing the price higher.”
Other analysts say that Shanghai could make Ethereum more attractive for long-term investors and increase competition in crypto custody, as major banks show growing interest in the sector.
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Guilhem Chaumont, co-founder of Flowdesk, said that the Ethereum Shanghai upgrade is a key de-risking event that may attract more institutional players to participate in staking or offer related services to clients.
He said: “Given the recent turmoil in the banking sector, there may be demand from institutional and retail investors looking for alternative assets to invest in and we may see a greater volume and engagement with the ecosystem post-Shanghai upgrade.
"For institutions in particular, Shanghai presents a key de-risking event. Prior to the upgrade, financial institutions looking to offer staking services may have been hindered due to the fact that they were locking up funds for a potentially indefinite period of time. Now that withdrawals are being enabled we may see more of these institutional players participating in staking or offering services to their clients."
Potential risks of the Shanghai upgrade
Valerie Tetu, head of go-to-market strategy at Lido Finance, emphasised the need for strict security due diligence and testing to mitigate potential smart contract risks during and after the Shanghai upgrade.
She said: "Staking withdrawals enabled by the Shanghai upgrade represent a significant milestone in the development of the Ethereum blockchain. Withdrawals will allow stakers to participate in securing the network with more confidence while increasing the capital efficiency of the tokens they decide to allocate.
"While the upgrade is well-positioned to drive more staking activity and participation, potential smart contract risks need to be considered and mitigated. All ecosystem stakeholders have the responsibility to commit to strict security due diligence standards and testing."
What is Ethereum's Shanghai Upgrade?
The upcoming Shanghai upgrade follows Ethereum's previous 'merge' upgrade in September and will mark its complete transition to a proof of stake network.
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The upgrade will reduce Ethereum's energy consumption by 99.9%.
The Shanghai upgrade will allow ether 'stakers' to withdraw their staked ETH for the first time.
Staking involves earning financial rewards for contributing to the blockchain's network and supporting its functionality.
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