[Feature] The What’s What for Ethereum’s Shanghai Upgrade

The Ethereum (ETH) Merge that took place last September was one of the monumental events in crypto history; ETH successfully switched from a proof-of-work (PoW) to an environmentally friendly proof-of-stake (PoS) consensus mechanism (the Merge cut ETH’s power consumption by about 99%). The need for energy-intensive mining equipment was removed almost overnight, and replaced with a leaner staking mechanism: the network was allowed to use staked coins instead of power-hungry computers to order transactions.

However, once those funds are staked, they are locked till the next upgrade, which means they cannot be removed. That is why ETH’s Shanghai upgrade is highly anticipated because once executed, this change will allow users to withdraw their staked Ethereum.

Source: Staking Rewards

At present, ETH has the lowest staking ratio: at the time of writing, Staked Ether (stETH) is only 13.8% of Ether’s total supply on the Beacon Chain.

The upcoming Shanghai upgrade, slated in March, will include a code known as Ethereum Improvement Proposals (EIP) 4895 which will allow Beacon Chain stETH withdrawals, enabling a 1:1 exchange of stETH for Ether. This will likely result in ETH’s staking ratio reaching somewhat of a balance with other leading PoS networks.

The confirmation that withdrawal of stETH is part of the Shanghai upgrade is a huge welcome and relief for stakers and vested parties over the indefinite token lock-in.

“As the only major code change in Shanghai, staked ETH withdrawals are currently being tested on a developer-focused test network. Developers aim to launch public testnets for the Shanghai/Capella upgrade next month and tentatively schedule a mainnet launch for the upgrade sometime in March 2023.”

A fun fact as to how the Shanghai upgrade was coined: in 2017, the Ethereum Devcon (Ethereum Developers Conference) was held in Shanghai and the talk about Ethereum transitioning from PoW to PoS started around the same time, thus the community decided that each key node would be named after a city where a DEVCON had been held.

Will the Shanghai upgrade be bullish for ETH? Well, one thing is for sure, it is expected to draw more people to stake their coins to support the ETH network and earn yield.