What is Ethereum's 'Shanghai' upgrade and its significance
Ethereum's Shanghai upgrade is set to happen on April 12, 2023. This will be the protocol's first major upgrade since 'The Merge' in September 2022. Dubbed Shapella, also called Shanghai-Capella upgrade, it is set to allow validators to withdraw staked Ether (ETH) from the Beacon chain. The upgrade is significant for the cryptocurrency world. Let's see why.
Why does this story matter?
The Shanghai upgrade dwarfs in front of the previous major upgrade. It is, however, significant in terms of its impact. Some believe unlocking staked ETH could trigger a selling wave, which would affect the coin's price. Others think that the upgrade could lead to more staking. Either way, the Shanghai upgrade has the potential to have large-scale impacts.
First simultaneous upgrade of Ethereum's consensus and execution layers
Shapella is a hard fork. A hard fork is a radical change to the protocol, which effectively results in the separation of the blockchain. This portmanteau word for 'Shanghai' and 'Capella' is the first simultaneous upgrade of the consensus and execution layers of Ethereum. The highly-anticipated upgrade will enable the withdrawal of staked Ether, which alligns with Ethereum Improvement Proposal-4895 (EIP-4895).
Validators were required to stake ETH and lock it up
The Merge upgrade in September 2022 changed Ethereum's consensus mechanism from proof-of-work to proof-of-stake. This made the network rely on validators to run it instead of miners. Per the new rule, to become an Ethereum validator, the participants had to stake 32 ETH. Staked ETH upped their chances of receiving block rewards. The Merge, however, required validators to lock up their ETH and rewards.
$26bn worth of ETH is currently staked
Validators have been staking ETH and receiving rewards since the launch of the Beacon chain in 2020. Now, the Shanghai upgrade will give the first opportunity to cash out their rewards. Around 14% of ETH is currently staked. This accounts for 16 million tokens, which are currently valued at $26 billion. Validators can theoretically recover entire stake coins and withdraw from the system.
The upgrade aims to reduce gas fees
The improvements the Shanghai upgrade will bring to the protocol are not limited to allowing validators to withdraw their staked ETH. Other changes aim to reduce gas fees (transaction fees) during periods of high activity. This will help Ethereum developers. The related EIPs include EIP-3860, which caps gas costs in some instances, and EIP-3855, which aims to lower gas fees for developers.
