Disclaimer: This article aims to convey more market information and does not constitute any investment advice. The article only represents the author's viewpoint and does not represent the official stance of MarsBit
Disclaimer: This article aims to convey more market information and does not constitute any investment advice. The article only represents the author's viewpoint and does not represent the official stance of MarsBit.
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Source: veDAO Research Institute
What is the upgrade of Ethereum Shanghai?
The so-called Ethereum Shanghai Upgrade (EIP-4895) is the naming of a technical upgrade version of Ethereum during development and update. Regarding the background of the Ethereum blockchain upgrade, since its launch in 2015, the Ethereum blockchain has implemented several major upgrades: Byzantium (2017), Constantinople (2019), St. Petersburg (2019), Istanbul (2019), Berlin (2021), and London upgrade (2021).
As is well known, in September 2022, Ethereum successfully completed the transition to the Proof of Rights (PoS) consensus mechanism. Previously, Ethereum used the proof-of-work and mining mechanism to process and verify transactions. After being converted into the PoS consensus mechanism, it no longer needs to use special mining equipment to solve computing problems, but users need to pledge 32 ETH to become Ethereum's verification node. Due to the merger combining the Ethereum main network with the PoS BeaconChain, users are unable to withdraw pledged ETH or related token rewards at any time in the current Ethereum technology mechanism.
The focus of this Ethereum Shanghai upgrade is to address this issue. After the upgrade, it can technically allow the pledgor to withdraw pledged Ethereum (ETH) or related token rewards. Secondly, the Shanghai upgrade aims to reduce the miner's fees for Layer-2 solutions built on Ethereum networks, such as Polygon and Optimism. These Layer-2 solutions have to some extent optimized the transaction speed and cost-effectiveness of Ethereum, but this upgrade will further reduce the miner's fees for transactions conducted on the Ethereum network. Furthermore, currently Ethereum is the largest blockchain network that supports smart contracts, and the Shanghai upgrade will maintain ETH's leading position in this area by introducing EOF (EVM Object Format). This is another significant impact that Shanghai's upgrade will bring to the Ethereum ecosystem.
In October 2022, in preparation for the Ethereum Shanghai upgrade, Ethereum developers launched a testing network codenamed "Shandong" (Shandong) to identify errors and potential issues. In December, Ethereum developers are tentatively scheduled to implement a Shanghai upgrade on the Ethereum main network in March 2023. On January 5, 2023, Ethereum developers agreed to initiate this upgrade in March 2023 as a network hard fork implementation. Users will be able to test this update through the public testing network implemented in Shanghai by the end of February 2023.
Impact on the market
Due to the fact that the Ethereum Shanghai upgrade is Ethereum's first major upgrade since the merger was completed last year, this event has received significant attention in the encryption field as it may have a significant impact on ETH prices. From the beginning of the year to the present, according to statistics from LinkedIn, the ETH price has risen from around $1200 to around $1600, an increase of approximately 33%.
However, many investors are concerned that the upgrade of Ethereum Shanghai may also lead to a large number of users extracting Ethereum pledged in the Ethereum beacon chain, which will directly cause large-scale market fluctuations? The answer is unlikely. Because the Ethereum Shanghai upgrade includes coin withdrawal restrictions and queuing mechanisms.
Ethereum will establish a withdrawal limit mechanism for the pledged Ethereum in the Ethereum beacon chain. At each epoch, approximately every 6.4 minutes, only 6 verification nodes can extract the pledged Ethereum. A maximum of 1350 validators withdraw from the pledge per day, based on this estimate, after the upgrade in Shanghai, Ethereum will only allow approximately 43200 Ethereum coins to be withdrawn per day. According to estimates, if all beacon chain pledgers extract their pledged ETH tokens and the number of new pledgers is zero, the process will take about 300 days. And according to the Ethereum Foundation, the withdrawal rate limit will be adjusted based on the total amount of ETH pledged.
In addition to the mechanisms included in the upgrade itself, major ETH2.0 protocols provide APY with a minimum pledge of nearly 4.8% and there is still a lot of room for improvement. If a pledger exits, it is likely that more people will flock to the pledge. In fact, according to Dune's statement, if calculated in US dollars, only about 16% of the pledgers have made profits since the pledge was launched, so it can be inferred that most of the pledgers will not take out the pledged assets for selling immediately. So, in summary, it is unlikely that the market crash that caused major market volatility will occur.
Investment opportunities and participation methods
Our main concern is what benefits will the Ethereum Shanghai upgrade bring and whether there are more investment and profit opportunities?
Firstly, as an investor, it is necessary to understand the most likely positive narrative logic of the upgraded ETH market:
The Shanghai upgrade supports retrieving the ETH previously pledged by the pledgor. At this time, the access channel for the pledge will also be opened, which will increase users' willingness to pledge ETH. Based on the current pledge rate of 15%, it is still very low, so there is expected to be a lot of room for improvement. So obviously, the willingness of users to deposit assets into liquidity pledge agreements will also increase. More users will use more assets to flow in, which is good for the agreement itself. 10% of the stable profit from pledge services will be given to the corresponding service providers, and their expected income and pledge APY will also continue to rise. In a stable and good operating state, the price of token tokens corresponding to the agreement itself will continue to be hyped up.
There are several ways to participate that are worth considering:
1. Pledge
The simplest way is to pledge to the centralized exchange CEX, such as Coinbase. For users who do not like CEX, they can also choose agreements such as Lido. RocketPooL, Stackwise, Ankr, Frax, Stafi, etc. in the market to participate in the pledge. The pooling mode is also very friendly for investors who cannot gather 32 ETHs, but a certain service fee is required to provide the service provider.
2. Liquidity Pledge Agreement Revolving Pledge
After a user participates in a liquidity pledge agreement, the agreement will replace the user in participating in Ethereum's pledge and cast ETH derivative tokens, also known as liquid tokens, in a 1:1 ratio for the user. For example, if users deposit ETH into the liquidity pledge agreement LidoFinance, they can obtain an equal amount of stETH liquidity pledge tokens, and then use stETH to make more investments (liquidity mining, borrowing, etc.). For example, stETH can be used to borrow more ETH on Aave, and the borrowed ETH can be deposited into Lido as collateral, and this practice can be repeated. This type of circular pledge operation can not only earn ETH rewards from the pledge, but also unlock additional sources of income. Of course, this is a unique leverage mechanism introduced by some DeFi projects, but this approach clearly carries high risks. If the ETH price fluctuates significantly, the possibility of leverage being liquidated is very high.
3. Token investment
Under the good operation of major pledge agreements, with more users using and more assets flowing in, the expected returns of the agreements will continue to rise, and the prices of their corresponding token tokens will also continue to be hyped up. Investors who are interested in and closely monitor token prices can also consider the opportunity to invest in the corresponding tokens in the investment agreement. However, the impact of the Shanghai upgrade on ETH token prices cannot be accurately estimated, and how this domino will affect the trend of other token prices in the short term still needs to be carefully considered and cautious when entering the market for investment.
epilogue
The upcoming upgrade of Ethereum Shanghai, which aims to be implemented in March 2023, will be an important moment for the development of Ethereum blockchain. The upgrade of Ethereum Shanghai is another major step in improving the scalability and decentralized construction of Ethereum blockchain. Although its potential impact on the market is still uncertain, it is bound to become a major event in the development process of Ethereum.
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