Another Ethereum Upgrade; What does this mean for the price of ETH?
Ethereum is upgrading again. This time, it's a hard fork upgrade scheduled for March 2023. A hard fork splits one cryptocurrency into two and can cause previously validated blocks to be invalidated or invalidated blocks to be validated.
Staked Ether make up 19.2% (about 16 million) of the total Eth supply, which is currently at $120.51M. A significant part of this upgrade is that stakers and validators will be able to withdraw their assets from the Beacon Chain. The Beacon Chain was introduced during the first Ethereum upgrade and now acts as the coordinator for the new network, generating new blocks, verifying their validity, and compensating validators with ETH for maintaining network security.
What Does the Ethereum Shanghai Upgrade Imply for the Blockchain?
The upcoming Ethereum Shanghai upgrade will bring changes to the way the blockchain operates. These changes include:
Gas Fees: The upgrade will result in lower gas fees for layer-2 solutions such as Polygon and Optimism that operate on the Ethereum network. This update aims to improve functionality and reduce transaction costs on the blockchain.
Staked ETH Tokens: With this upgrade, users will have the ability to access and unstake their Ethereum tokens that were previously locked in a smart contract as part of becoming a validator on the POS-based Ethereum blockchain.
Smart Contract Upgrades: The Shanghai update will bring technical updates to the smart contract feature, positioning Ethereum as a leading player in the crypto world.
How Will The Shanghai Upgrade Affect the Price of Eth?
Ethereum underwent a significant change on September 15, 2022, when it shifted from the proof-of-work to the proof-of-stake consensus algorithm, known as "the merge." The network upgrade was executed smoothly, but it did not have the expected impact on ETH prices. Despite predictions of an upward trend, the overall negative sentiment in the cryptocurrency market last year overshadowed the change. To make matters worse, the collapse of FTX, a leading cryptocurrency exchange, in November added further difficulties for Ethereum.
Seeing as stakers would have access to withdraw their ETH after the upgrade, how would this affect the number 2 cryptocurrency in the world's price? It could cause market disruption by placing selling pressure on ETH, which is held mainly by traders and used for reasons such as collateral for loans in the crypto industry. It's logical to assume that once validators can withdraw their ETH tokens, they will sell them off.
According to Lucas Outumuro, the head of research at the cryptocurrency data and analysis firm IntoTheBlock, ETH withdrawals will be processed through a queue, with a daily limit of around 43,000 staked ETH being permitted to leave the platform. He said in a newsletter
"Based on this, it would take over a year for the 15.91 million ETH staked to be withdrawn, preventing mass withdrawals and mitigating selling pressure," he said. "The fact that people staking may now be able to withdraw, even if they have to form part of a queue, could, in turn, encourage more people to stake."
Over 16.4 million ETH is currently staked, with a total value of nearly $27 billion, and an additional 1 million ETH worth $1.6 billion has been earned in yield that will become available. This could result in a surge of selling on the market, potentially causing prices to decline.
In a note published by J.P Morgan economic analysts led by Kenneth B. Worthington, they said "Given holders of staked-Ether have been locked up for approximately two years; there are concerns that Ether holders will sell their Ether when given the opportunity, which could pressure Ether's token value." "Precautions are in place to prevent significant selling following the implementation of the Shanghai Fork," Worthington and his team wrote. "Once the upgrade is complete, staked-Ether will become eligible for withdrawal, but not all at once," they added, detailing how only a small number of withdrawal requests can be processed at a time.
Shanghai is a modest upgrade compared to the Merge, but it still holds the potential to have a notable impact on individuals who have staked ETH on the network and, of course, the overall crypto market.
Disclaimer: This article was written by the writer to provide guidance and understanding of cryptocurrency trading. It is not an exhaustive article and should not be taken as financial advice. Obiex will not be held liable for your investment decisions.