Ethereum, the second-largest cryptocurrency by market capitalization, is preparing for a major upgrade on April 12th 2023. The upgrade, dubbed Shanghai, will introduce several changes to the network, including unlocking billions of dollars worth of ether (ETH) that have been staked since late 2020.
Shanghai is the final phase of Ethereum’s transition from a proof-of-work (PoW) consensus mechanism to a proof-of-stake (PoS) one. PoW relies on miners who use computational power to validate transactions and secure the network, while PoS relies on validators who stake their ETH to do the same. PoS is expected to make Ethereum more scalable, secure and energy-efficient.
The transition began in December 2020 with the launch of the Beacon Chain, a parallel network that runs on PoS and coordinates the activity of validators. To become a validator, one had to deposit at least 32 ETH (worth about $57,000 at current prices) into a smart contract on the Beacon Chain. The staked ETH would earn rewards of up to 5% per year, but could not be withdrawn until Shanghai.
Since then, more than 18 million ETH (about 15% of the total supply) have been staked on the Beacon Chain, worth over $31 billion at current prices. The stakers have also earned about 1 million ETH in rewards, worth over $1.7 billion. However, they have not been able to access their funds or use them for other purposes.
Shanghai will change that by allowing validators to withdraw their staked ETH and rewards. This will create a huge influx of liquidity into the Ethereum ecosystem, which could have significant implications for the price and demand of ETH. Some analysts expect that many stakers will sell their ETH to take profits or diversify their portfolios, while others expect that most stakers will hold on to their ETH or reinvest them in other applications on Ethereum.
Shanghai will also implement several other improvements to the Ethereum protocol, known as Ethereum Improvement Proposals (EIPs). These include EIP-3651, which reduces gas costs for certain types of transactions; EIP-3860, which limits memory usage for smart contracts; and EIP-3855, which introduces new opcodes for efficient arithmetic operations. These EIPs are aimed at enhancing the performance and security of the network.
Shanghai is expected to be the last major upgrade for Ethereum before Serenity, which is the ultimate goal of the network’s development roadmap. Serenity will integrate the Beacon Chain with the main Ethereum network, creating a single PoS blockchain that can support thousands of transactions per second and enable a new era of decentralized applications.