Welcome to Valid Points. In today’s issue, Margaux Nijkerk explains the Shanghai hard fork, which is to open a new era for Ethereum by enabling staked ether withdrawals and lowering gas costs.
In March, Ethereum will undergo its first big upgrade – also known as a “hard fork” – since its shift to a proof-of-stake system in September. Once Ethereum’s upcoming “Shanghai” upgrade is completed, 16 million staked ether (ETH) will become eligible for withdrawal by validators for the blockchain, subject to the network’s capacity.
Although the main focus of Shanghai will be implementing Ethereum Improvement Proposal-4895, the change that unlocks validator withdrawals, the update’s full roster of changes has just been finalized, and it includes additional upgrades that are sure to be noticed by Ethereum app developers and many of the chain’s users.
What is EIP-4895?
The star of Shanghai is EIP-4895, which will free up validators to withdraw the 16 million ETH they have thus far “staked” to help secure the network.
When Ethereum changed its consensus mechanism from proof-of-work (PoW) to proof-of-stake (PoS) in its last big upgrade, dubbed the Merge, the network began using validators instead of miners to add blocks to the blockchain. Validators must stake 32 ETH with the chain in order to participate in the block validation process. Each staked ETH acts like a kind of lottery ticket: The more ETH a validator stakes, the more likely they will be selected to “propose” the next block of Ethereum transactions and earn some network rewards.
Before validators agreed to participate on the PoS blockchain they were made aware that their staked ETH and any accrued rewards would remain locked up until a subsequent update to the chain. Validators have been staking ETH and accruing rewards since December 2020, when Ethereum released its PoS “Beacon Chain” in its first step towards the Merge. Now, those validators will finally be able to cash out their stake.
How can a validator unstake its ETH?
If you are running a validator, there are two options for unstaking your ETH once Shanghai goes live. The first is setting up a “withdrawal credential,” which will automatically unstake the accrued rewards you’ve earned from your validator. The second option is to fully exit the Beacon Chain and unstake all 32 ETH by having your validator voluntarily send a message that it is removing itself from the blockchain.
As for how soon you can access the ETH you want to unstake, “it depends on how many people will unstake at a time,” Marius Van Der Wijden, a developer at the Ethereum Foundation, told CoinDesk. Only 16 partial withdrawal requests can be put into a slot (which happens every 12 seconds), and there is a single queue for both full and partial withdrawals on the blockchain. But the likelihood of all validators choosing to exit the blockchain is slim, given that staking will enable a new chapter for Ethereum and those that trade on top of it.
Are crypto traders rushing to sell their ETH?
As a new era of unlocked ETH begins, crypto traders are paying attention to how the market may move. Some traders believe there will be some sell pressure once staked ETH is unlocked, while other traders say Shanghai will only encourage more staking.
Currently, there’s about 1 million ETH of accrued rewards that is available to be withdrawn immediately once Shanghai is live. Traders will be watching whether the unlocked ETH will be instantly cashed out and if it pushes the price of ETH down.
What else is in the Shanghai hard fork?
The four smaller EIPs included in Shanghai relate to gas fees – a kind of tax that users pay to transact on the Ethereum blockchain. Gas fees can be expensive during times of high activity, and Ethereum developers are aiming to add in mechanisms that will reduce high gas fees for those building on the blockchain.
EIP-3651 proposes to access the “COINBASE” address, a software used by validators and block builders, at a lower gas cost. (Aside: This is totally unrelated to the crypto exchange Coinbase.) The code change could improve Maximal Extractable Value (MEV) payments as well as other user-experiences according to Matt Nelson, a product manager at ConsenSys.
Other EIPs in the package are:
EIP-3855 – creates a code dubbed “Push0” that will lower gas costs for developers
EIP-3860 – puts a cap on the gas cost for developers when interacting with ‘initcode’ (a code used by developers for smart contracts)
EIP-6049 – will notify developers of the depreciation of a code known as “SELFDESTRUCT,” which also relates to reducing gas fees
Pulse Check
The following is an overview of network activity on the Ethereum Beacon Chain over the past week. For more information about the metrics featured in this section, check out our 101 explainer on ETH metrics.
Disclaimer: All profits made from CoinDesk’s Eth 2.0 staking venture will be donated to a charity of the company’s choosing once transfers are enabled on the network.
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Factoid of the Week
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Open Comms
Valid Points incorporates information and data about CoinDesk’s own Eth 2.0 validator. All profits made from this staking venture will be donated to a charity of our choosing once transfers are enabled on the network. For a full overview of the project, check out our announcement post.
You can verify the activity of the CoinDesk Eth 2.0 validator in real time through our public validator key, which is:
