The Shanghai Upgrade of Ethereum is Coming, Can You Seize the New Investment Opportunities?

06/03/2023·1years ago

What is the Ethereum Shanghai Upgrade?

The so-called Ethereum Shanghai Upgrade (EIP-4895) is a version name for a technical upgrade in the development and update of Ethereum. Regarding the background of Ethereum blockchain upgrades, since its launch in 2015, Ethereum blockchain has implemented several major upgrades: Byzantium (2017), Constantinople (2019), St. Petersburg (2019), Istanbul (2019), Berlin (2021), and London Upgrade (2021).

It is well known that in September 2022, Ethereum successfully completed the transition to the Proof of Stake (PoS) consensus mechanism. Prior to this, Ethereum used the Proof of Work (PoW) and mining mechanism to process and verify transactions. After the transition to the Proof of Stake (PoS) consensus mechanism, specialized mining equipment is no longer needed to solve computational problems, but users need to stake 32 Ether (ETH) to become a validator on the Ethereum network. Due to the merge of the Ethereum mainnet and the PoS beacon chain, in the current technical mechanism of Ethereum, users cannot withdraw staked Ether (ETH) or related token rewards at any time.

The focus of the Ethereum Shanghai Upgrade is to address this issue. After the upgrade, it will be technically possible for stakers to withdraw staked Ether (ETH) or related token rewards. Additionally, the Shanghai Upgrade aims to reduce the miner fees for Layer-2 solutions built on the Ethereum network (such as Polygon and Optimism). These Layer-2 solutions have optimized the transaction speed and cost-effectiveness on the Ethereum network to a certain extent, but this upgrade will further reduce the miner fees for transactions on the Ethereum network. Furthermore, Ethereum is currently the largest blockchain network supporting smart contracts, and the Shanghai Upgrade will maintain ETH's leading position in this aspect by introducing EOF (EVM Object Format). This is another important impact that the Shanghai Upgrade will bring to the Ethereum ecosystem.

In October 2022, in preparation for the Ethereum Shanghai Upgrade, Ethereum developers launched the test network with the codename "Shandong" to identify errors and potential issues. In December, Ethereum developers tentatively scheduled the Shanghai Upgrade to be implemented on the Ethereum mainnet in March 2023. On January 5, 2023, Ethereum developers agreed to launch this upgrade in March 2023 as a network hard fork. Users will be able to test this update through the public test network implemented by Shanghai at the end of February 2023.

Impact on the Market

As the first major upgrade of Ethereum since the completion of the merge last year, the Ethereum Shanghai Upgrade has attracted significant attention in the crypto space, as it could have a significant impact on the price of ETH. According to data from Chainalysis, the price of ETH has risen from around $1200 at the beginning of the year to around $1600, an increase of about 33%.

However, many investors are concerned that the Ethereum Shanghai Upgrade may also lead to a large number of users withdrawing their staked Ether from the Ethereum beacon chain, potentially causing significant market volatility. The answer is unlikely, as the Shanghai Upgrade includes withdrawal limits and queuing mechanisms.

Ethereum will implement a withdrawal limit mechanism for staked Ether on the Ethereum beacon chain, allowing only 6 validator nodes to withdraw staked Ether every epoch, approximately every 6.4 minutes. A maximum of 1350 validators can withdraw their staked Ether per day. Based on this estimation, after the Shanghai Upgrade, Ethereum will only allow approximately 43,200 Ether to be withdrawn per day. According to estimates, if all beacon chain stakers withdraw their staked ETH tokens and there are no new stakers, the process will take about 300 days. Additionally, according to the Ethereum Foundation, the withdrawal rate limit will be adjusted based on the total amount of staked ETH.

In addition to the mechanisms included in the upgrade, major ETH2.0 protocols offer a minimum staking APY of nearly 4.8% and have significant upside potential. If stakers withdraw, it is likely that more people will enter staking. In fact, according to Dune, only about 16% of stakers have been in a profitable state since staking began, indicating that most stakers are unlikely to immediately withdraw their staked assets for sale. Therefore, it is highly unlikely that a significant market crash event will occur.

Investment Opportunities and Participation Methods

The most important focus for us is what positive impacts the Ethereum Shanghai Upgrade will bring and whether there are more investment opportunities to make money?

First, as an investor, it is important to understand the most likely positive narrative logic for the ETH market after this upgrade:

The Shanghai Upgrade supports the withdrawal of staked ETH, opening the staked asset withdrawal channel, which will increase users' willingness to stake ETH. Considering the current staking rate of 15%, there is still significant upside potential. It is expected that users will also have an increased willingness to deposit assets into liquidity staking protocols, and the influx of more user usage and assets into the protocol is positive. About 10% of the stable profit in the staking service will be given to the corresponding service provider, and the expected returns and staking APY will continue to rise. In a stable and good operational state, the price of the protocol's corresponding token will also continue to rise.

Here are a few participation methods worth considering:

1. Staking

The simplest way is to stake on centralized exchanges (CEX), such as Coinbase. For users who do not prefer CEX, they can also choose protocols such as Lido, RocketPool, Stakewise, Ankr, Frax, Stafi, etc., to participate in staking. The pooling mode is also friendly to investors who cannot accumulate 32 ETH, but it requires a certain service fee to be provided to the service provider.

2. Circular Staking in Liquidity Staking Protocols

After participating in a liquidity staking protocol, the protocol will stake on Ethereum on behalf of the user and mint derivative token staking tokens (liquid staking tokens) for the user in a 1:1 ratio. For example, if a user deposits ETH into the liquidity staking protocol Lido Finance, they will receive an equivalent amount of stETH liquid staking tokens, which can then be used for further investments (liquidity mining, borrowing, etc.). For example, stETH can be used to borrow more ETH on Aave and then stake the borrowed ETH in Lido for repeated operations. In addition to earning staked ETH rewards, this circular staking operation can unlock additional sources of income. However, this approach carries a high level of risk, as significant ETH price fluctuations could lead to liquidation of the leverage.

3. Investment in Token Tokens

In a well-operating staking protocol, the expected returns will continue to rise with more user usage and asset inflows, and the corresponding token price of the protocol will also continue to rise. Investors interested in token prices should closely monitor the opportunities to invest in the corresponding tokens of the protocol. However, the precise impact of the Shanghai Upgrade on the price of ETH tokens cannot be accurately estimated, and how this domino effect will affect the price trends of other token tokens in the short term needs to be carefully considered before entering the investment.

Conclusion

The Ethereum Shanghai Upgrade, scheduled for implementation in March 2023, will be an important moment in the development of the Ethereum blockchain. The Ethereum Shanghai Upgrade is another major step in improving the scalability and decentralization of the Ethereum blockchain. Although its potential impact on the market is uncertain, it is expected to be a significant event in the development of Ethereum.

veDAO is a decentralized investment and financing platform driven by DAO, committed to discovering the most valuable information in the industry and enthusiastic about exploring the underlying logic and cutting-edge tracks of the digital encryption field, allowing every role within the organization to fulfill their responsibilities and receive rewards.

Website: http://www.vedao.com/
Twitter: https://twitter.com/vedao_official
Facebook: bit.ly/3jmSJwN
Telegram: t.me/veDAO_zh
Discord: https://discord.gg/NEmEyrWfjV

🔴Investment carries risks, the project is for reference only, please bear the risks on your own🔴