The next big Ethereum upgrade, Shanghai, is on the horizon for March. The Shanghai hard fork will implement further improvement proposals for the Ethereum network and allow Ether (ETH) stakeholders and validators to withdraw their assets from the Beacon Chain.
At the time of writing, ETH staked It represents about 14% of the total supply, or 16 million coins. It equates to more than $25 billion at the current price of ETH, a substantial sum that will gradually become liquid after the fork.
Some ETH participants have waited more than three years to withdraw their rewards. Does that mean that most of them will line up to withdraw and sell their ETH as quickly as possible? This scenario is unlikely. There are numerous reasons why investors should not worry about the impending upgrade, and even more so why most Ethereum stakeholders will increase their staking after Shanghai.
Ethereum will remain the leading PoS network
Although ETH is the second largest cryptocurrency by market capitalization, Ethereum is the leading proof-of-stake (PoS) network. At the time of writing, it represents approximately 65% of the total value locked in decentralized finance (DeFi) protocols, with a value of around $48.7 billion.
Despite the current market, the amount of ETH deposited over time has continued to increase at a steady and stable rate, reaching over 500,000 validators by January 2023.
Betting performance remains strong
Betting returns are holding steady and currently sit around 5.45% APR. Therefore, new entrants should familiarize themselves with the general performance compensation structure consisting of staking rewards, tips, and maximum withdrawable value (MEV).
With MEV-Boost, stakeholders can increase their rewards by 2 to 3.5 times over standard blocks. However, when the demand for ETH is on the rise, it is the tips and MEVs that ultimately improve the returns on ETH staking. Since going Proof of Stake, MEV Relays have transmitted approximately 85,000 ETH and facilitated an increase of 32,500 ETH in additional rewards.
Liquidity attracts interested parties
As with any market, liquidity is king. Most investors were originally reluctant to stake ETH when it became available because doing so would require locking up their funds for an indeterminate period of time. Staking ETH required a minimum of 32 ETH, which means that when Eth2 launched in December 2020, the entry price was around $19,000. At its peak in November 2021, the price was almost $ 150,000.
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That staking cost gave validators pause, with many refraining from securing the net. However, the Shanghai update will remove this uncertainty and chip holders will be able to withdraw their staked assets. The obvious reaction is to assume that people will simply withdraw their funds and “withdraw”, but we are likely to see the exact opposite. Because such a large percentage of investors were initially reluctant to stake ETH (remember, only 14% of the supply is currently staked), the percentage of ETH staked is likely to rise with the risk of withdrawal uncertainty gone.
Also, many ETH participants bought the token during the bull run when prices peaked at $4,500. But with the current price hovering around $1,600, current takers are unlikely to sell at a loss. With rewards driven by MEV close to 7% and a positive outlook for a market price increase due to deflationary tokenomics, we expect to see a significant entry into ETH staking.
The rise of liquid staking
Participants can stake ETH directly with Ethereum, which requires a hefty sum of 32 ETH, or through liquid stake protocols like Lido and Rocket Pool. Liquid staking is a concept that democratizes Ethereum staking for investors who can stake as little as 0.01 ETH. Small amounts of Ether can be staked when investors exchange their ETH for derivative tokens, which are backed one-for-one and represent the amount of Ether staked in the pool.
The capital efficiency of liquid equity is one of its main advantages for investors. Sometimes called liquid equity derivatives (LSD), it gives you the freedom to enter and exit the market at will. Because it is a derivative, it gives investors access to additional markets, and the LSD industry is just getting off the ground.
Improvement proposals and their impact
The next Shanghai update (EIP-4895) will focus on enabling withdrawals at the execution layer, Shanghai, and the consensus layer, called the Capella update. The Capella update is especially beneficial for ETH participants interested in understanding how withdrawals will work, since interactions are necessary to complete a full withdrawal at the consensus layer.
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The Ethereum roadmap has several post-Shanghai updates, sometimes referred to as “Surge”, “Verge”, “Purge”, and “Splurge”, which demonstrate the dedication and long-term vision of the community, which is essential to the future evolution of the protocol. For the foreseeable future, EIP-4844 (proto-danksharding) can scale Ethereum with new accumulated transactions that reduce gas fees, and EIP-3540 will aim to reduce the resource requirements of the Ethereum Virtual Machine.
In 2022, Ethereum saw a 178% increase in programming library developer activity, reaching 1.5 million downloads. Despite the down market, developers have ramped up real-world solutions and continue to build smart contracts on Ethereum at a breakneck pace, reaching 4.6 million deployments by Q4 2022.
The success of turning Ethereum from proof of work to proof of stake should not be underestimated as an incredible achievement. Now that this move has been a resounding success, updates will roll out faster, thanks to a community that’s unmatched in terms of creativity, values, and long-term vision. The foundation of cryptocurrency and proof of stake has been built on top of Ethereum, and it has a very promising future.
Investors and stakeholders would be wise to keep their ETH staked, allowing it to continue to secure and decentralize the network. And generating some additional passive income from staking rewards doesn’t hurt the decision to stick around either.
Konstantin Boyko-Romanovsky is the CEO of Allnodes. He has a master’s degree in architecture from the Moscow Architectural Institute and spent more than a decade in the video game industry, with a focus on the Russian and Eurasian markets.
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. The views, thoughts and opinions expressed herein are those of the author alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
