What Is Staking?
To help better understand the Shanghai Update, here's a quick overview on what staking on Ethereum means. With Ethereum's switch to PoS, users can stake their ETH as part of the network's consensus mechanism. This offers an alternative to the energy-intensive PoW mining system seen on networks like Bitcoin.
Each validator receives new blocks created by other validators on the Ethereum network. Once the transactions and block signature have been checked, the validator attests to the validity of that block. The Shanghai upgrade is set to launch in March 2023, and it will allow stakers to withdraw their locked ETH. Prior to this update, this feature wasn't available after the Beacon Chain's launch in December 2020.
What Is The Shanghai Upgrade?
In September 2022, Ethereum switched to a Proof of Stake (PoS) consensus mechanism. Prior to this, Ethereum used Proof of Work (PoW) and a mining mechanism to process and validate transactions. Under the new PoS system, users can now stake 32 ether (ETH) to take part in validating on the network instead of using specialized mining equipment to solve computational puzzles.
Since it was only the first step in the switch to PoS, users could not remove their staked funds. To address this, Ethereum developers proposed the Shanghai update (EIP-4895), which adds withdrawal functionality for staked funds. On January 5, 2023, the Ethereum development community agreed to a March 2023 launch date for implementing the upgrade as a network hard fork. In preparation for the launch, users will be able to test the update with a Shanghai-implemented public test network towards the end of February 2023.
The Shanghai update is a significant step forward in Ethereum's transition to a more efficient and sustainable consensus mechanism. By allowing users to withdraw their staked funds, it will increase the flexibility of the PoS system and help to attract more users to the network. The upcoming test network will also allow developers to identify and address any issues before the update is implemented on the mainnet.
How Does This Affect The Market?
To understand the effects of the Shanghai update, it's important to note that the update will allow users to withdraw their staked ETH. This means that stakers will now have the option to sell their staked holdings, which unlocks a significant amount of liquidity. This could have an impact on the trading and investment strategies of those who monitor the percentage of coins staked out of the total supply.
On the other hand, the improved liquidity could also make staking on ETH more attractive to users. With the ability to withdraw staked ETH, users may be more inclined to stake their ETH directly with Ethereum instead of using liquid staking protocols. This could lead to increased demand for ETH.
For users holding native tokens of liquid staking platforms, the Shanghai update may also have an effect on the price of these tokens. The opening of withdrawals on Ethereum could remove the unique functionality that liquid ETH staking platforms offer. Overall, the Shanghai update brings the full staking market into effect, where it becomes possible for ETH holders to react to staking demand and supply in order to achieve market equilibrium, which is seen as a positive thing as it reduces artificial control effects on the price and circulation of ETH.
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