Ether (ETH), the native cryptocurrency of the Ethereum blockchain, has been gaining momentum in the past few days, outperforming bitcoin (BTC) by 14% this year. According to a research report by Bernstein, one of the main drivers of ether’s rally is the upcoming Shanghai upgrade of the Ethereum network, which is scheduled for April 12.
The Shanghai upgrade will allow users to withdraw their staked ether (stETH) from the beacon chain, the backbone of Ethereum’s transition from a proof-of-work (PoW) to a proof-of-stake (PoS) consensus mechanism. The upgrade will also introduce several improvements to the network’s performance and security.
Bernstein analysts Gautam Chhugani and Manas Agrawal wrote that ether’s breakout is similar to what happened last September, when ether surged ahead of the Merge, another major upgrade that marked the first phase of Ethereum’s PoS transition. They said that ether is showing early signs of relative strength versus bitcoin, which has been trading sideways in a narrow range.
The analysts noted that some investors are concerned that the Shanghai upgrade will create a supply overhang, as stakers will be able to withdraw their ETH deposits and rewards and potentially sell them in the market. However, they argued that this scenario is unlikely, as most of the staked ether is either locked in liquid staking protocols or held by long-term holders.
Liquid staking protocols, such as Lido, allow users to stake their ether and receive a tokenized representation of their stake, such as stETH, which can be traded or used in other applications. Bernstein said that nearly 70% of staked ether is via liquid staking protocols, and therefore they already have liquidity and do not need to wait for the Shanghai upgrade to sell their stETH.
The remaining staked ether has been directly deposited into the beacon chain, and therefore is likely to belong to long-term holders who committed their ETH in December 2020, when there was significant uncertainty about whether the PoS transition would succeed. Bernstein said that these holders are unlikely to sell their ETH after the Shanghai upgrade, as they have a strong conviction in Ethereum’s future.
The analysts added that the Shanghai upgrade will actually increase the demand for staking, as it will make it easier and safer for users to deposit and withdraw their ether. They said that this will reduce the circulating supply of ether and create a positive feedback loop for its price.
“Ethereum’s Shanghai upgrade could be a catalyst for ether’s outperformance versus bitcoin,” they wrote. “We expect ether to continue its upward trend as more users and developers adopt Ethereum’s network and its innovative applications.”