Zhitong Financial APP learned that the Ethereum network will undergo technical transformation on April 12, allowing users to withdraw tens of billions of dollars of native token Ethereum. This is called "Shanghai" upgrade, and it is a necessary step for the consensus mechanism of Ethereum, the world's most commercially important cryptocurrency platform, to change from proof-of-work to PoS
Zhitong Financial APP learned that the Ethereum network will undergo technical transformation on April 12, allowing users to withdraw tens of billions of dollars of native token Ethereum. This is called "Shanghai" upgrade, and it is a necessary step for the consensus mechanism of Ethereum, the world's most commercially important cryptocurrency platform, to change from proof-of-work to PoS.
This upgrade has also sparked market attention: will investors troubled by the recent turmoil in the cryptocurrency market think that if there is a chance to withdraw tokens for the first time, some Ethereum coin holders will choose to withdraw from the market.
What is Ethereum?
This is a computer network carrying so-called smart contracts - automatically executed software protocols, in which a series of actions can be generated from defined conditions and unexpected events. Since the launch of cryptocurrency entrepreneur VitalikButerin in 2014, it has become a popular platform for developing various applications from trading to gaming. The transactions on Ethereum and many other cryptocurrency platforms known as blockchain are publicly visible and built on open source software, so developers can intervene and try to improve. During the "cryptocurrency winter" of 2022, the value of Ethereum plummeted and investors withdrew from digital assets. But the appeal of Ethereum's underlying technology has always existed.
2. What is the upgrade in Shanghai?
Until September 2022, Ethereum relied on a costly and energy intensive process called PoW for bookkeeping. But when a technological reform called 'merger' adopted another method - PoS, the situation changed. Holders of Ethereum coins can become "validators" of transactions on the Ethereum blockchain and receive rewards in return - just like bank deposits. Since 2020, users can pledge Ethereum, but cannot withdraw it. But this upgrade in Shanghai will allow users to withdraw pledged Ethereum. As of early April, approximately 16% of the total supply of Ethereum (worth approximately $37 billion) was locked in the agreement.
Why is this a sensitive moment?
It is currently unclear how many users will want to cash out once the Ethereum pledge is released. Since the first use of the pledge, the value of the token has been fluctuating sharply - as its popularity among institutional and retail investors continues to rise, its value continues to soar, but then plummets in 2022. At least in the initial stage, the demand for withdrawals is expected to exceed the new pledged deposits on Ethereum. However, in the long run, the opportunity to extract pledged tokens may make Ethereum pledging more attractive as it will reduce participants' risk. Investors also expect fluctuations in so-called liquid holding tokens, which represent pledged Ethereum and can be used in decentralized financial applications to allow people to borrow and trade tokens. In recent months, the prices of some of these tokens have increased, but there is a possibility that they may decline along with Ethereum before and after the upgrade in Shanghai.
Can people immediately withdraw pledged Ethereum?
If users want to extract Ethereum, they need to queue first, whether the queue is long or short, depending on their pledge node. For mobile pledge platforms such as Lido, this process may be more complex. This platform, which has about one-third of the pledged Ethereum, is expected to provide extraction services starting in May. In addition, Ethereum has set restrictions to ensure that too many people are not extracting at the same time, making it vulnerable to attacks, so Ethereum coin holders may need several months to extract.
May there be any technical issues?
There is a possibility of this. In a recent code test, transaction confirmation took much longer than expected, as many computers processing the process did not undergo software upgrades. Nevertheless, Ethereum developers have a good record in seamless software changes. Another risk is that in the broader Ethereum blockchain, some nodes holding pledged Ethereum coins may lose access keys to the tokens, leading to users being rejected.
6. Do you have any other questions?
Since the merger, Ethereum has been subject to scrutiny by regulatory agencies including the United States Securities and Exchange Commission (SEC), which stated that certain services that provide cryptocurrency pledge proceeds are equivalent to illegal securities issuance. This upgrade in Shanghai may lead to increased scrutiny by allowing the pledge of Ethereum to be lifted.
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