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Brendon Lim
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What you need to know about the Shanghai Fork

What you need to know about the Shanghai Fork

By now you might have heard about Ethereum’s Shanghai upgrade, more commonly known as the Shanghai or “Shapella” fork. With the fork comes critical EIPs (Ethereum Improvement Proposals) — the more significant EIP-4895, which allows stakers and validators to withdraw assets from the Beacon Chain, and others like EIP-3651 and EIP-3855 that address lowering gas fees.

The Shanghai fork, while smaller in scale in comparison to the Merge, may have significant impact on those who have ETH staked on the chain. But before we get into all that, let’s get into the basics.

What is the Shanghai fork?

The Shanghai fork, which implemented EIP-4895, allows validators to withdraw ETH that has been staked since as long ago as December 2020. This feature is significant because about 14% of all ETH is currently staked, accounting for 16 million tokens and a current value of over $26 billion. The Shanghai fork also includes several other EIPs designed to reduce gas costs for Ethereum developers. However, it is worth noting that the fork does not include EIP-4844, which facilitates the “sharding” of the Ethereum blockchain into multiple chains to facilitate scalability.

The fork is the final step of Ethereum’s move from proof-of-work (PoW) to proof-of-stake (PoS) consensus mechanism. While PoS has less of an environmental impact due to its energy efficiency (as compared to PoW), some have criticized it for being less secure and more susceptible to centralization.

What’s happened since the fork?

Market reaction has largely been enthusiastic, with a total of 12,859 ETH, being unlocked in 4,333 withdrawals just within an hour of the Shanghai upgrade being activated. According to beaconcha.in, 868,927 ETH out of the total 19,092,069 ETH on Beacon Chain are awaiting full exits, and 24,232 out of the total 568,082 validators are awaiting full exits. The time to process partial withdrawals/rewards once per round is 3.12 days.

Glassnode, a crypto analytics platform, estimates in their report that less than 1% of that total would be released over the first week and the 12,859 Ether unlocked within the first hour only representing only 0.07% of the total Ether staked in the Beacon Chain. Apart from this, the Ethereum Foundation also mentioned that there are mechanisms in place to prevent an ETH dump.

Selling pressure is also expected to be absorbed quickly and not impact prices, with Glassnode’s report stating that “Even in the extreme case where the maximum amount of rewards and stake are withdrawn and sold, the sell-side volume still falls within the range of the average weekly exchange inflow volume

The price of ETH seemed to echo the Glassnode’s sentiment for now, with prices remaining unchanged during the activation of the Shanghai fork, but seeing an increase of 10% in the past 24 hours.

Why is this important for Ethereum?

A clear withdrawal option for those staked in the Ethereum network is seen by many in the industry to draw greater interest from larger institutional investors to participate in ETH staking opportunities; this upgrade has been a long awaited feature by the community.

On top of this, the Ethereum community can also look forward to the next major feature EIP-4844 which will aim to enhance the scalability of rollups on Ethereum – further improving the operational capabilities of the Ethereum network.

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