Ethereum’s long-awaited Shapella upgrades are now live, allowing those who staked ETH in the blockchain network to withdraw their cryptocurrency for the first time.
On April 12, Ethereum Shanghai and Capella forks, colloquially called “Shapella,” upgraded the network’s execution and consensus layers respectively at epoch 194,048 to support Beacon Chain withdrawals.
Shapella is a major step in Ethereum development, introducing vital functionality to the network. ETH stakers, responsible for securing the Ethereum blockchain, are now able to withdraw their crypto from the Beacon Chain for the first time, 28 months after staking first went live, as part of Ethereum’s transition to the Proof of Stake consensus algorithm from Proof of Work.
“The Shapella Upgrade represents a game-changing development that positions Ethereum for sustained growth and success,” Chen Zhuling, Founder and CEO of RockX, a Proof of Stake node collective.
Shapella was Ethereum’s first upgrade since The Merge transitioned the network to Proof of Stake consensus from Proof of Work, which reduced Ethereum’s energy consumption by 99.9% and new ETH issuance by more than 90%. Proof of Stake requires participants in the network to deposit the blockchain’s native cryptocurrency, while Proof of Work requires node operators to contribute energy.
Stakers in the Ethereum network get rewarded in ETH in exchange for their deposits. Ethereum stakers now must decide what to do with their accumulated rewards and initial position — a bond of 32 Ether.
Will Stakers Exit Ethereum en Masse?
The implications of Shapella were fiercely debated by the crypto community as April 12 approached, with many pundits tipping that the upgrade could lead to a flood of ETH getting dumped on the open market.
“There are a significant amount of accumulated rewards since the genesis of Ethereum, and node operators will now have access to them,” Darren Langley, general manager of decentralized staking provider, Rocket Pool, told The Defiant, adding that stakers will have “several options available to them.”
But Langley thinks a post-Shapella staker exodus is unlikely, predicting that the majority of validators will choose to re-stake their to accumulate more rewards.
“There is no evidence to suggest that operators will withdraw from staking in any great numbers,” Langley continued. “Node operators can exit now and be first in the queue to withdraw but we are not seeing exits build-up, which suggests most will continue to stake.
Superphiz, an organizer for the EthStaker community, told The Defiant that staking is bound to increase after Shapella. “The current participants took a huge risk that withdrawals would eventually be enabled,” he said. “Now that staking is de-risked, institutional investors are sure to experiment in the process.”
Ethereum’s devs also placed a limit on the number of validators that can withdraw each day. The limit is 1,800, equating to 57,600 ETH or less than 0.05% of Ether’s supply, according to Glassnode.
Ethereum is currently the largest PoS network by staked capitalization with $35.8B, despite the figure only representing 15.6% of ETH’s supply, according to Staking Rewards.
For comparison, more than 60% of the circulating tokens for Cardano, Solana, and Avalanche, the second, third, and fifth-ranked PoS networks, are currently staked.
Daniel Bar, the founder of Bitfwd Capital, told The Defiant that enabling validators to withdraw at any time will lead to greater rates of staking participation.
“While some believe it’ll lead to an increase in sell pressure, I see it the other way around: [Shapella] will strengthen the confidence market participants have in staking ETH to generate yield,” Bar said.
Mike Silagadze, the CEO of Ether.fi, a liquid staking platform, said there is “no question” that Ethereum staking participation will increase post-Shapella.
“I think there are a huge number of folks who have been interested in staking, but have stayed on the sidelines because they were worried that ETH staking withdrawals might never be enabled,” Silagadze said. “With that FUD addressed, I think we’re going to see a steady influx of newly staked ETH in the coming weeks that far outstrips withdrawals.”
Will the Price of Ether Hold Up?
While the price of ETH was up 20% in 30 days, some analysts fear Shapella will result in the market falling as some validators move to sell off their stake.
The latest Digital Asset Fund Flows report from CoinShares suggests institutional investors are waiting to see how Shapella will impact the markets before betting on the markets. According to the report, only $600,000 flowed into institutional ETH products over the week of April 11.
“Despite the Shapella upgrade occurring on the Ethereum network on April 12, [ETH] inflows have been relatively minor,” CoinShares told The Defiant.
But Evans said Shapella will have a comparatively small impact compared to macroeconomic forces.
Arthur Hayes, the co-founder and former CEO of BitMEX, told The Defiant that fears that Shapella will drive violent short-term price volatility are “greatly exaggerated.”
“There is a cap on the amount of withdrawal actions that can be executed per block, which greatly limits the overall speed at which staked ETH can be withdrawn,” Hayes said. “Folks will also be staking additional ETH now that withdrawals are enabled and they know they can get it back. Combined, these flows paint a murky picture as to what the magnitude of the sell pressure will actually be.”
Evans said Shapella will have a comparatively small impact compared to macroeconomic forces.
“We’ll likely see some volatility over the next few days and weeks as the market adjusts to the new functions that allow for withdrawals, but this will pale in comparison to broader market movements that remain sensitive to macroeconomic news,” Evans said.
Mark Monfort, the director of web3 venture firm, NotCentralised, said that many stakers may have locked up their Ether at higher prices and be unwilling to realize a loss. “With the current price of Ether lower than when many users staked their funds, it’s also possible that these holders may not want to sell at a loss, which could limit the impact on the market,” Montfort told The Defiant.
Hsuan Lee, co-founder and CEO of Blocto, said the long-term benefits Shapella will deliver to stakers and other staking service providers will significantly outweigh any short-term volatility caused by Ether withdrawals.
“Expectations of short-term price volatility… will give way to major market gains in intermediaries such as staking pools and crypto exchanges, notwithstanding incremental institutional interest in the asset class,” he said.
What Does Shapella Mean for LSDs?
Liquid Staking Derivatives (LSDs), which allow users to access liquid tokens representing underlying staked Ether while earning staking rewards, posted impressive growth amid the absence of staked Ether withdrawals.
The TVL of Lido, the largest LSD protocol, surged 92% to $11.3B since the start of the year, while its decentralization-focused rival, Rocket Pool, is up 112% at $1.2B, according to DeFi Llama. Their respective tokens, LDO and RPL, also rallied 138% and 120% since the start of January, according to CoinGecko.
However, whether LSD protocols can sustain their impressive growth in a post-Shapella world is unclear, as the activation of staked Ether withdrawals solves one of the core problems underpinning the value proposition of LSDs.
“[Shapella] could have both positive and negative implications [for LSDs],’ Monfort said. “On the one hand, the ability to withdraw staked Ether could make liquid staking less attractive for some users, as they no longer need to rely on a third-party provider to access their funds. On the other hand, liquid staking providers may still offer benefits such as liquidity and convenience, which could continue to attract users.”
The LSD tokens offered by leading providers like Lido and Rocket Pool enjoy numerous integrations with leading DeFi protocols, such as Aave, MakerDAO, and Curve, providing yield opportunities that are not available to regular Ethereum stakers.
“Many stakers who withdraw will re-stake the bulk of their ETH rewards back to liquid staking providers like Lido and Frax,” said Lee. “These players are in the best position to capture these flows, as they provide potential for immediate liquidity through on-chain pools, expansive utility of liquid staking tokens as collateral across DeFi, and convenient accessibility to innovative restaking primitives like EigenLayer.”
What’s next for Ethereum?
Ethereum’s next major upgrade is expected to focus on EIP-4844, also known as proto-dank sharding. The fork is expected to take place around the start of 2024.
Researchers anticipate that EIP-4844 will reduce the costs associated with transacting on Ethereum Layer 2. The upgrade will replace the blockspace-intensive “calldata” currently tied to transaction data with “blobs.” Unlike calldata, Blobs do not compete with Ethereum transactions for gas usage, significantly reducing the blockspace needed to process transactions on L2.
In a recent appearance on The Defiant Podcast, Carl Beekhuizen of the Ethereum Foundation said the cost of storing data on-chain is the primary bottleneck restricting the scalability gains available at Layer 2.
“If you scale to thousands and thousands of transactions, then all of a sudden it costs a lot just to [store the data] on-chain,” Beekhuizen said. “The idea behind Danksharding and EIP-4844 is to provide really cheap data storage… so the L2s can provide cheap transactions to their users.”
Once the upgrade takes effect, the Ethereum network will begin deleting historic transaction data that is older than 30 days, with infrastructure providers like the Etherscan block explorer expected to take on the responsibility of storing older data.
“The purpose of the Ethereum consensus protocol is not to guarantee storage of all historical data forever,” Buterin said. “Rather, the purpose is to provide a highly secure real-time bulletin board, and leave room for other decentralized protocols to do longer-term storage.”
EIP-4844 will also pave the way for Ethereum to become sharded, where Ethereum’s computational load is split across its L2 ecosystem and processed in parallel to deliver further scalability gains.