Reported by Zhao Yi, Hu Jinhua, a reporter from China Times (www.chinatimes
Reported by Zhao Yi, Hu Jinhua, a reporter from China Times (www.chinatimes. net. cn) in Shanghai
As the last link in the transition from proof-of-work to proof of equity, Ethereum successfully completed the Shapella upgrade (hereinafter referred to as "Shanghai upgrade") at 6:30 on April 13, Beijing time. This upgrade is the first significant upgrade after the merger of Ethereum. After the upgrade, Ethereum will activate the pledge withdrawal function.
With the arrival of Shanghai's upgrade, Ethereum did not experience a sharp drop in market prices as expected by the industry. As of press release, ETH's latest price is $1973.13, with a growth rate of 5.66% within 24 hours. Since the beginning of the year, ETH prices have risen from around $1200 to around $1900, an increase of approximately 50%.
Bi Lianghuan, a researcher at Ouke Cloud Chain Research Institute, told reporters from China Times: With the continuous upgrading of Ethereum, the performance of the entire public chain infrastructure will also be improved, sparking attention to the future development of DeFi. However, with the continuous expansion of the DeFi industry, technological bottlenecks are gradually becoming prominent. Therefore, building better infrastructure to meet users' needs for digital asset management has become the focus of attention. In addition, Ethereum upgrading is also expected to promote DeFi and other fields Deeply integrating (such as NFT and cross chain solutions) to expand the application scenarios and market scale of DeFi
Will it trigger a sell-off trend?
The name 'Shanghai Upgrade' comes from the Ethereum community's belief that Shanghai is a modern, diverse, and rapidly developing city, with characteristics that are exactly similar to Ethereum.
As early as 2020, Ethereum began seeking a shift towards proof of equity in order to achieve higher efficiency. After the Beacon Chain was launched, users could become a node validator on the Beacon Chain by pledging 32 ETHs and receiving additional rewards. After the upgrade in Shanghai is completed, users will be allowed to unlock their previously pledged ETH, which will not only earn profits but also provide liquidity.
Data shows that as of April 12, 2023, there were over 560000 validators and 18 million ETH pledges, equivalent to 16% of the total ETH supply and $37 billion. At present, the largest mortgage entity on Ethereum is LidoFinance, and as of April 12, the ETH pledged by it accounts for 31.2% of the total pledged amount. Next are Coinbase, which accounts for 12.6%, Kraken, which accounts for 6.8%, and Binance, which accounts for 5.7%.
After the completion of the "Shanghai Upgrade", these pledged ETHs will be extracted by the pledging institution on different dates. Coinbase stated in March that it will process withdrawal requests 24 hours after the upgrade is completed in Shanghai. All requests to withdraw the pledge are processed on the chain. Once the pledged ETH is released through the Ethereum protocol, Coinbase will immediately distribute the principal and rewards. Lido stated that users need to wait until the Lido protocol is upgraded in mid May to retrieve the pledged ETH, as the protocol requires appropriate security checks.
Some pledgers have been waiting for more than two years, does this mean that most of them will queue up to withdraw and sell ETH as soon as possible? An analysis by Arcana Research estimates that due to partial and full withdrawals, approximately 1.3 million ETHs will be sold within 10 days after the upgrade. The ETH selling pressure will peak in the first three days after the upgrade. The daily selling pressure is about 527 million dollars (calculated at the ETH price of 1800 dollars), accounting for 6.4% of the current daily trading volume.
The latest data shows that as of press release, there have been 112000 ETH unlocked and extracted after the upgrade of Ethereum Shanghai, with a value of approximately $218 million. Among them, the Lido protocol extracted a total of 63600 ETHs, accounting for 57.2%.
The most concerning issue for investors is how much impact will this upgrade have on the price of ETH? Investment institutions have expressed different views on this.
JPMorgan analysts stated in a recent report that they expect Ethereum to face "some selling pressure" as upgraded validators can receive Ethereum pledge rewards worth over 1 million. Analysts said, "If there is potential additional selling pressure on the mortgaged Ethereum balance belonging to troubled entities, then the selling pressure in the coming weeks may be even greater. They added that they expect Ethereum to perform worse than Bitcoin in the coming weeks
Researchers from Fidelity Investment's digital asset management department say that the impact of Shanghai's upgrade will be minimal. First, compared with the energy intensive proof-of-work system, the operating costs of the verifier under the proof of equity are much lower. Before the recent rebound allowed about half of the funds to be invested, most of the mortgaged Ethereum positions were in a loss making state.
Another issue is liquidity pledge tokens and pledge service providers. These tokens allow people to participate in the pledge, while also being able to use or sell them. "Fidelity analysts point out that one-third of the mortgaged Ethereum has already become liquid through these liquidity pledge tokens, which means holders are able to exit before upgrading.
In response, Wang Juan, Secretary General of the Digital Economy Special Committee of the Beijing Computer Society, told reporters from the China Times that the liquidity of Ethereum pledges has greatly increased after the upgrade of Shanghai, which will further enhance the financial market characteristics of the Ethereum ecosystem. The corresponding short-term supply of ETH has increased, and the recent period coincides with the rising range of Bitcoin. It is expected that the Shanghai upgrade of ETH will not bring about a decrease in prices.
Regarding the investment in cryptocurrencies, Meng Bo, Executive Director of the Digital Economy Legal Affairs Department of Beijing Jingshi Law Firm, emphasized to a reporter from China Times that in recent years, there have been frequent occurrences of lightning incidents in the cryptocurrency field, which not only bring huge losses to investors, but also disrupt the normal economic order, and may even lead to other problems. For new things, investors should remain rational and not be misled by so-called windfall profits. They should not blindly pursue high returns while ignoring high risks, in order to avoid falling into various traps set by criminals using information asymmetry.
Regulation has also targeted Ethereum
It is worth noting that the pledge of Ethereum has raised the alarm of regulatory authorities.
Since the collapse of FTX in November 2022, US regulatory agencies have been relentlessly pursuing encryption companies, including those that provide pledge services. In February of this year, the US SEC imposed a fine of $30 million on Kraken Exchange, accusing the company of engaging in illegal securities issuance through intermediary pledge services.
The Coinbase exchange took this opportunity to clarify that their pledge services do not promise returns like Kraken and therefore will not be considered as revenue products. Nevertheless, the US SEC issued an informal notice to Coinbase stating that the company's pledge services also constitute unregistered securities.
On the day of the successful merger of Ethereum last year, Gary Gensler, Chairman of the US Securities and Exchange Commission, named Ethereum and stated that the proof of equity mechanism should be regarded as a securities product and regulated. In the SEC's view, Ethereum can be seen as an "investment contract" because users who pledge funds to a third party to obtain interest expect to receive interest through the operation of others, which is essentially a type of security.
In this regard, Wang Juan believes that the main target of cryptocurrency regulation in the United States is systemic risk in the financial market. Recently, California's investment bank risks are mostly related to the collateral and derivative risk transmission of cryptocurrencies. Ethereum's release of pledge ETH has enlarged the amount of liquid assets in the cryptocurrency market, and changes in underlying assets will have an impact on market investors and institutional behavior. It is not ruled out that the regulatory focus on pledged assets will be upgraded.
Chen Jia, an independent international strategy researcher, told China Times that the direction of regulation depends on the market trend of the entire encryption industry in the next stage and the business closeness between the US banking industry's thunderstorm institutions and the encryption industry. On the one hand, if ETH maintains a relatively stable price in the short term and does not cause excessive liquidity escape, then US regulatory authorities may not excessively accelerate its increasingly tightening "pockets".
On the other hand, the United States has embarked on a comprehensive process of sorting out operational risks in the banking industry since the lightning strikes of three regional small and medium-sized banks, including SVB, and has closely monitored risk points such as bank executives suspected of manipulating stock prices and speculating in currency circles, to prevent excessive indulgence in the banking industry from causing secondary transmission and amplification of currency circle risks, "Chen Jia said, At the same time as raising interest rates this time, the Federal Reserve has also admitted for the first time that the economic impact caused by this thunderstorm in the US banking industry may exceed expectations, which does not rule out the possibility of dragging the US economy into a recession.
"Even without the recent upgrade of Ethereum in Shanghai, the Federal Reserve, the Ministry of Finance and the Ministry of Justice, as well as the SEC and the FDIC are likely to separately or jointly introduce new policies to further strengthen the governance of the currency circle. This will affect the long-term trading trend and market price of ETH after this unlocking, and the uncertainty of the future development of the global encryption industry has actually increased," said Chen Jia.
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