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  • Team Sygnum

ETH Withdrawals: Shanghai upgrade and beyond

Despite the doom and gloom in the mainstream media, the crypto market has been off to a strong start this year. Prices are climbing, regulatory frameworks are taking shape and even the Bank of International Settlements (BIS) has acknowledged that the risks of crypto are often exaggerated and similar to those in traditional finance (TradFi).



However, all eyes are currently on Ethereum and its upcoming Shanghai upgrade, which will enable the long-awaited staking withdrawals. As the upgrade approaches, with a projected launch in March, the crypto community is bracing for a potential shift in the value of Ether (ETH). While some anticipate a temporary dip in the price, others are optimistic that the upgrade will bring about a surge in demand for ETH staking, as new staking options and services become available post-upgrade.


But before we dive in, it is important to give merit where merit is due. Ethereum has had a successful 2022, despite the crypto downturn. The Merge - the industry’s biggest technological upgrade - resulted in a 99 percent reduction in the network’s energy consumption and led to deflationary swings in ETH’s net issuance. As encouragingly, investors of all sizes continue to stake their ETH, showing confidence in the blockchain’s future potential.


What is Shanghai and what has changed?


The Shanghai upgrade is the next major upgrade in Ethereum’s development roadmap. The upgrade will introduce the Ethereum Improvement Proposal (EIP) 4895 which will enable validators to withdraw staked ETH and staking rewards – this includes independent validators, staking services and staking pools.


Developers are focused on ensuring the upgrade is implemented on time, leading to some changes in the upgrade’s original plans. For instance, other proposed enhancements like ‘The Surge’ proposal (EIP-4844) and Ethereum Machine Object Format (EIP-3540) have been temporarily put on hold until the upgrade is complete.


How will ETH withdrawals work?


The Shanghai upgrade allows investors to withdraw their staked ETH for the first time since 2020, but a mass withdrawal is unlikely to happen. Here’s why.


Withdrawing ETH as a validator requires waiting in the ‘exit queue’ which is determined by the network’s churn limit.’ This limit ensures the network remains stable by controlling the number of validators that can exit at once. After all, validators are responsible for securing the Ethereum network.


Once a validator passes through the queue, they enter the ‘withdrawal period’ which varies depending on the number of validators attempting to withdraw at the same time. This could take several hours to several weeks, possibly even months.


Impact on ETH


It is unlikely that ETH will experience a significant price decrease because there are mechanisms in place to prevent it. Even so, it is impossible to predict a specific price with certainty. ETH may experience some short-term price fluctuations - this is normal before and after a major event - but there are a few factors that will influence its supply and demand to consider:


  • There will be a cap of 57,600 partial withdrawals per day (out of the current ~16 million staked) allowing validators to withdraw accumulated staking rewards. This will naturally reduce selling pressure.

  • The more validators that wish to opt for full withdrawals, the longer the withdrawal period will take. This will also reduce selling pressure.

  • Many stakers will choose to hold on to their ETH, especially those with long-term investment strategies. Others may not want to sell at a loss, and instead use their staking rewards to create new validators, more ETH and weather through the current market climate, as opposed to price gain.

  • The demand for liquid staking derivatives may increase, as they can be used across DeFi products and earn additional returns without giving up the staking yield.

  • Enabling staking withdrawals will improve liquidity, arbitrage opportunities and reduce risk for derivatives like stETH and rETH.

  • Liquid staking platforms may see the most withdrawal requests, but any mass exodus will be limited by the network’s daily withdrawal and validator cap. This will reduce selling pressure.

  • Ethereum has the lowest staking ratio (13.89 percent staked of ETH’s total liquid supply) compared to other Proof-of-Stake (PoS) blockchains (Solana at 71.49 percent, Cardano at 71.8 percent). This is expected to increase after the upgrade and through the introduction of new staking services.


As concerns around the centralisation of Ethereum grow, with a significant portion of staked ETH controlled by just a few validators, the activation of withdrawals may drive a surge in the demand for decentralised liquid staking pools, like Rocket Pool. Users who prioritise decentralisation are likely to prefer pools that are open to everyone and require less ETH per validator (i.e., 16 ETH for Rocket Pool validator entries).


After the upgrade, there will likely be more services that offer the ability to stake ETH, such as MetaMask’s recent launch of its ETH staking functionality. These providers will offer more user-friendly and affordable staking options, derivatives for instant liquidity and higher returns, or decentralised pools to address concerns about centralisation. Despite Ethereum’s staking ratio being the lowest among all PoS blockchains, this simply indicates a vast potential for growth.


As the Shanghai upgrade approaches, staked ETH continues to rise, with over 16 million ETH staked, a 25 percent increase in the last six months and a 77 percent increase in the last year. Now, over half a million unique validators are currently securing the network.


Left: ETH2 Deposit Contract: Total Value Staked. Right: Top ETH2 Depositors, Janaury 18, 2022, Nansen.


Timeline

  • January: Private developer network for testing withdrawals (active)

  • February: Shanghai public testnet launch

  • March: Shanghai mainnet launch

  • Post-upgrade: Resumption of temporarily halted EIPs

  • ~2023: Sharding upgrade

Timeline is based on the Ethereum All Core Developers Execution Call by Galaxy and may be subject to change.


Staking with Sygnum


As a Swiss-licenced bank, we have established ourselves as a trusted counterparty for institutional and professional clients. As the first bank to offer ETH staking, our offering is fully integrated into our e-banking platform, making it easy and secure for users to stake. This self-service product has proven to be a popular choice among long-term investors seeking to earn additional returns on their ETH investments while supporting the growth of the ecosystem.


The Shanghai upgrade represents a significant turning point for Ethereum, as it opens the doors to new opportunities for investors and the development of new DeFi products. This upgrade will also pave the way for scalability improvements, leading to increased transaction efficiency and reduced gas fees on the network.


As we await the upgrade, it is exciting to consider the potential for increased demand for ETH, liquid staking derivatives and improved staking services that provide user-friendly experiences. That being said, there are compelling reasons to believe ETH and its staking prospects may continue to grow after the upgrade, given the vast potential that lies ahead.


END


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Disclaimer

This document is purely for educational purposes and has been issued by Sygnum Group. It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful, nor is it aimed at any person or entity to whom it would be unlawful to address such a marketing communication. It does not constitute an offer or a recommendation to subscribe, purchase, sell or hold any security or financial instrument. It contains the opinions of Sygnum Group, as at the date of issue. These opinions and the information contained herein do not take into account an individual's specific circumstances, objectives, or needs. No representation is made that any investment or strategy is suitable or appropriate to individual circumstances or that any investment or strategy constitutes personalized investment advice to any investor. Therefore, you must verify the above and all other information provided in the document or otherwise review it with your external advisors. Some investment products and services, including custody, may be subject to legal restrictions or may not be available worldwide on an unrestricted basis. The information and analysis contained herein are based on sources considered as reliable. Sygnum Group uses its best efforts to ensure the timeliness, accuracy, and comprehensiveness of the information contained in this document. Nevertheless, all information indicated herein may change without notice.


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