The next Ethereum Shanghai hard fork is scheduled for March 2023, and the upgrade will cap off the network’s move to proof-of-stake (PoS), which began during the merger on September 15, 2022. Once Shanghai is implemented , previously locked Ether (ETH) will gradually become liquid for the first time since December 2020.
According to on-chain Etherscan data, more than 16.6 million ETH is currently locked in the PoS staking protocol, which was valued at $28 billion on February 16, 2023. Ethereum’s proof-of-work step (PoW) to PoS has started to achieve the original goal, which was to make the supply of Ether deflationary. In the 154 days since the Merger, more than 24,800 ETH have been burned to cause the token to deflate by 0.05% per year.
In. On February 16, the total supply of Ether sits at 120 million, meaning just over 10% of the supply will be unlocked, with performance rewards starting with the Shanghai update.
Let’s explore what on-chain metrics can help identify what may happen during the Shanghai update.
A portion of locked ETH is liquid thanks to liquid staking derivatives
In order to benefit from performance rewards prior to the Shanghai update, investors had to lock up their ETH and run a trusted node. The minimum participation requirement of 32 ETH locked is fully illiquid, meaning traders had limited utility options for these coins.
Liquid Stake Derivatives (LSD) allow users to profit from staked Ether while retaining the ability to sell the received derivative token on the secondary market. The LSD protocols took a fee and locked up the native Ether, giving users another token that represents a stake in the pool.
Liquid staking derivatives did not gain prominence until Lido and other protocols began to see a rush of cash flow after the Merger. Since Ether staking began, liquid staking has overtaken illiquid staking. As of February 13, 57% of staked Ether is liquid versus 43% illiquid.
Since most of the Ether locked up is via LSD, investors currently have access to liquidity, which could reduce selling pressure after Shanghai.
Very few participants make a profit
In December 2020, when Ether staking opened, the price of Ether was between $400 and $700. Rather, many investors started betting when Ether was near its all-time high of $4,200. According to Binance:
“We note that a considerable amount of ETH (around 2 million) was staked at prices in the range of US$400-700, this represents the first entrants in December 2020, a group that is likely to be illiquid given that the liquid stake she was much less well known at the time. .”
Due to Ether’s 69% correction since hitting an all-time high, many of the investors who staked their Ether are currently at an unrealized loss.
The minority of the participants making profits are likely to be strong believers in the Ethereum network, as the liquidity date is still unknown at this time. With a large number of losing participants and those who are profitable are likely to be long-term investors, the price of Ether may not see a massive dump when the tokens can stop participating.
Lido outperforms solo punters
On January 2, 2023, Lido officially surpassed MakerDAO as the highest total value locked in decentralized finance. As of February 13, Lido is also the largest staking entity in Ether. With over 5 billion ETH staked on Lido, the protocol represents 29.2% of all entities. Notably, almost 30% of all participants have the option of current liquidity through Lido.
Solo participants running nodes took the risk of running nodes from home or with a small group. Solo takers are likely to believe that Ether is a long-term currency, as nodes come with costs and risks. Solo participants currently represent 24.9% of all participants.
Since almost 55% of all Ether staked is held by individual players or Lido, the risk of an Ether price crash can be reduced.
While the on-chain data surrounding the Shanghai hard fork may be bullish for the Ethereum network, some analysts are still predicting the possibility of a sharp drop in the price of Ether.
The views, thoughts and opinions expressed here are those of the authors alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should do their own research when making a decision.
