The Ethereum Shanghai update is scheduled to go online later today. This is the impact it can have on the market, according to Glassnode.
How will the Ethereum Shanghai upgrade affect the market?
Last September, Eethereum successfully transitioned to a Proof-of-Stake (PoS) consensus mechanism, meaning that stakeholders replaced miners as validators on the network. To become a participant, a user must lock 32 ETH in a deposit contract.
While the mainnet only transitioned last year, this participation contract has been in place since November 2020, previously operating as part of the PoS testnet. However, anyone who has locked coins in this contract has not been able to withdraw them so far, as only deposits have been allowed.
This will eventually change with the “Shanghai Update”, which is an ETH hard fork that will give investors the ability to withdraw their coins from the Ethereum staking contract.
Now, naturally, there are concerns in the market about how the sudden unlocking of these coins may affect the economics of ETH. In its latest weekly report, onchain analytics firm glass node has broken down the possible scenarios that may follow after the ETH Shanghai upgrade goes live later today.
Shanghai will allow two types of withdrawals to investors: partial and full. The first type refers to automatic withdrawals of staking rewards that have been accumulated by validators, while the second involves a full withdrawal of the amount locked by the staker.
While users have not been able to withdraw their coins thus far, they have still been able to sign a voluntary exit message in advance. After the hard fork is activated, the network will scan all validators to see who has signed these output messages.
There will be a total withdrawal for those who have signed them, while partial withdrawal for those who have not. However, the scanning process referred to here is not an instant process. With the current number of validators, it will take up to 4.5 days for the network to complete the process. Currently, there are many validators who have not yet updated their withdrawal credentials.
“Currently around 300,000 validators need to update their withdrawal credentials, which is only possible after the Shanghai/Capella update,” notes Glassnode. Based on this, the analysis firm thinks that the automatic scanning process will take a maximum of two days.
Right now, the locked contracts have staking rewards of around 1.137 million ETH ($2.1 billion). Ideally, these rewards would be withdrawn automatically as soon as the update went live, but as already mentioned, not all investors have updated their withdrawal credentials.
It turns out that Ethereum validators with the correct credentials own only 25% of the accumulated rewards, which means that only around 276,000 ETH should be automatically withdrawn within two days of the hard fork.
If all validators update their credentials as soon as the update goes live, 1.137 million will be withdrawn over the course of 4.5 days. Below are the different scenarios in which this can develop:
ETH staking rewards unlock scenarios | Source: Glassnode
Glassnode believes that the medium scenario in the image above might be the closest to what will actually follow when the Ethereum Shanghai update goes live.
Regarding the scenarios regarding full withdrawals, the firm notes that only 1,800 validators can participate in these departures per day. This means that right after the hard fork, only a maximum of 57,600 ETH ($109.4 million) will be unstaked.
However, based on the number of validators who have signed the voluntary exit message so far, the actual amount that would not be invested comes down to approximately 45,000 ETH ($84 million).
Now, here are the simulations run by Glassnode, taking partial and full withdrawals into account, as to what the selling pressure will look like in the first week after the Shanghai update:
The various estimates regarding the staking withdrawals | Source: Glassnode
After taking into account various market factors (such as the fact that not all withdrawals will end up being sold), Glassnode’s best estimate is that around 170,000 ETH ($323 million) will be sold in this event. This amount is actually not that significant at all.
Even the most extreme case with 1.54 million ETH being sold is only at the level of the average weekly exchange inflows, which means inflows would double if this scenario occurred. Similar entries were observed a short time ago and the price responded with a correction of around 8.7%.
While this may be a notable decline, it’s still nowhere near the level similar to the FTX crash seen in November of last year, where the price was down around 30.2%.
“Since the Shanghai update is widely expected and understood, based on this analysis, the unlock event is similar in scale to daily trading of the ETH markets and is therefore unlikely to be as severe as many speculate. Glassnode concludes.
ETH price
As of this writing, Ethereum is trading around $1,800, up 5% in the past week.
ETH moves sideways | Source: ETHUSD on TradingView
Featured Image by DrawKit Illustrations on Unsplash.com, Charts by TradingView.com, Glassnode.com