The highly anticipated Shapella upgrade of the Ethereum (ETH) blockchain was successfully activated on the Goerli network on March 15, en route to its mainnet upgrade, slated for next month. The Shapella upgrade which combines the “Shanghai upgrade” and “Capella” will allow unstaking of ETH along with several other improvements. In this article, let us take a look at how Shapella aims to boost the Ethereum network.
Over the past couple of years, Ethereum (ETH) has been taking several measures in order to upgrade its network to “Ethereum 2.0”. In September, the Ethereum network launched its Merge upgrade after seven years of hard work. The Merge which was perhaps the most significant event in the crypto industry last year shifted the blockchain network’s consensus from Proof-of-Work (PoW) to Proof-of-Stake (PoS).
A Complete Transition to Ethereum 2.0
The Ethereum merge ushered in a new era for the network deploying numerous features enabling a seamless platform for developers to build decentralized applications (dApps). This could eventually pave the way for new decentralized ecosystem in the coming future. The merge has also reduced Ethereum’s energy consumption by more than 90%, making it more Environmental, Social, and Governance (ESG) compliant. However, it did not allow users to unstake their Ether tokens.
And we finalized!
Happy merge all. This is a big moment for the Ethereum ecosystem. Everyone who helped make the merge happen should feel very proud today.
— vitalik.eth (@VitalikButerin) September 15, 2022
Last month, Ethereum (ETH) developers implemented the Shanghai-Capella upgrade on the Sepolia testnet. It successfully replicated withdrawals of staked ether (ETH), just before the Goerli testnet, bringing the Ethereum blockchain closer to its upcoming Shanghai Upgrade. The upcoming Shanghai overhaul will mark Ethereum’s complete transition to a fully functional Proof-of-Stake (PoS) network, enabling validators to withdraw rewards earned from adding or approving blocks to the blockchain.
Sepolia testnet has successfully upgraded to Shapella! 🌃
Some of the Prsym validators are offline due to the old geth version. They will come online in the next 10 mins!
Next stop: Goerli pic.twitter.com/pb43Gq7w9C
— terence.eth (@terencechain) February 28, 2023
Testnet Successful Despite Some Network Issues
According to Ethereum developer Tim Beiko, the mainnet upgrade will happen next month following the Goerli forking which enabled users to fully or partially withdraw staked Ether from the testnet’s Beacon Chain. Although, 17583 withdrawals were successfully processed on the test network, there were some issues that hindered the network.
Deposits are being processed (https://t.co/CxYtPcGMCp), but it seems like several validators haven't upgraded. Looking into it 👀
One challenge with testnet validators is that given the ETH is worthless, there's less incentive to run a validator/monitor it.
— timbeiko.eth (@TimBeiko) March 14, 2023
Beiko announced that deposits underwent processing, though he stated that several validators have not upgraded. He further explained regarding a possible challenge in the form of a lack of incentives as the testnet uses ETH that doesn’t have actual value and may not attract testnet validators enough. At the same time, he continued to remain optimistic about the mainnet due to the plausibility of increased user engagement. As per the Ethereum developer, users are more likely to run such nodes using fewer resources than on the mainnet.
Benefits of Shapella
Shapella is the consensus side upgrade of the Shanghai upgrade, where Shanghai is the execution side upgrade where smart contracts exist and Capella focuses on the consensus layer where validator actions are performed. It will enable unstaking for the first time since ETH staking was introduced in December 2020.
The landmark Ethereum hard fork will give validators access and control over their staked funds, alongside many other improvements. It will also give users the flexibility to stake more without their ETH being indefinitely locked up. Users can continue staking their ETH and earn up to 6.0% APY with no action required. As per the official website, all user assets will be safe and secure during the upgrade.
The activation of withdrawals will drive a sharp increase in staking adoption as users become free to enter and exit staking positions at any time. This will further benefit liquid staking solutions like Lido. It is expected that liquid staking solutions will see a surge as the withdrawal of ETH becomes possible.
Meanwhile, those who wish to unstake ETH after the upgrade can do so in different ways. One way is to make partial withdrawals which involve unstaking only the rewards accrued over these past two years and a few months. These rewards are withdrawn to an Ethereum address and spent, but the validator continues to be a part of the beacon chain and validates as usual.
The second and more consequential option is completely withdrawing and exiting the Beacon Chain. In this, the validator can unstake all 32 ETH plus any rewards. Full withdrawals are made via an exit, which places the validator into the exit queue depending on the size of the validator set in the network.
Potential Drawbacks
Despite the upgrade holds an array of possibilities for the Ethereum network, many experts believe the upgrade will likely lead to a massive release of ETH tokens into the market, as validators can access tokens they have locked for a long time trigerring a liquidity crunch along with a strong ETH price correction.
Another factor is Ethereum’s exit protocols. Included in Shapella are codes that limit full withdrawals based on the total ETH staked and the number of validators looking to exit the network. This exit limit prevents a massive outflow of staked ETH that can eventually increase the annual percentage reward (APR), incentivizing and inviting validators and stakers.
In a nutshell the more people staking, the fewer ETH holders selling, pointing to a possible bear run of the ETH token. In a statement, Yang Zhiming, co-founder of Orbits Market specified that this development would cause “large selling pressures on the ETH price.” He explained,
“Some $25 billion worth of ETH will become available for withdrawals and sale. With the staking yields expected to decrease following the upgrade, investors who previously staked may un-stake and move to other assets offering better yields.”
