Cryptocurrency watchers have turned their attention to ethereum this week as the currency undergoes an upgrade that some believe could negatively impact the coin's price, at least in the short term.
Shanghai is the Ethereum upgrade scheduled to activate on Wednesday. Most notably, this will allow those who previously staked ether (ETH) on the network to be able to withdraw for the first time, which some market commentators have said could negatively impact ETH prices going forward. The upgrade also includes the implementation of five different Ethereum Improvement Proposals (EIPs).
Finalizing the Shift to Proof-of-Stake
Shanghai is the final step in Ethereum's transition from Proof-of-Work (PoW) to Proof-of-Stake (PoS) consensus mechanism. Proof-of-stake is considered a more energy-efficient way of validating cryptocurrency transactions, where validators are randomly selected based on staked ETH, rather than all validators first competing to validate blocks in proof-of-work.
Ethereum was originally a PoW network, but its PoS-based Beacon Chain was first launched in December 2020, running along the live PoW blockchain, and the merger between the two chains took place in September 2022, called The Merge. Since the launch of the beacon chain, Ethereum users have been able to stake their ETH, but they have not been able to unstake their ETH. The Shanghai update changed this in the form of EIP-4895 and finally completed the transition to PoS.
Investors Worry About Collateralized ETH Entering the Market
The ability to unstake ETH, and the associated staking rewards it receives, has so far worried some investors, as it could enable many users who were previously unable to sell their staked ETH to dump their holdings onto the market. Currently, approximately 15% of the total ETH supply is staked on the network. Selling pressure worth as much as $2.4 billion could hit the ETH market due to Shanghai, according to a CoinDesk report.
That said, it should be noted that all of these staked ETHs cannot be unstaked all at once. There is a limit to the amount of stake that can be withdrawn per block, and a February estimate from Into The Block states that it would take around 60 days for 20% of validators (stakers on the network) to unstake their ETH .
Crypto's environmental impact debate takes center stage
The completion of Ethereum’s transition to PoS in Shanghai has also sparked ongoing debate over the cryptocurrency’s potential environmental impact. PoW requires miners to prove their reliability to the network by using computer hardware, while PoS opts for a method involving staking of cryptographic assets. Therefore, PoW uses more energy than PoS.
Proponents of PoS often refer to PoW as a waste, while proponents of PoW, which is used for Bitcoin and is unlikely to be removed from the crypto network, argue that PoS is less secure and prone to centralization.
Ethereum transaction technology upgrade
Of course, the ability to unstake ETH is not the only change included in the Shanghai hard fork. For example, there is EIP-3651, EIP-3855,, and EIP-3860, These are all aimed at improving the efficiency of transactions on the Ethereum network and reducing gas fees for various decentralized applications (dapps).
It should also be noted that Wednesday’s hard fork included a number of consensus layer changes in the form of an upgrade called Capella. For this reason, many Ethereum developers refer to the combination of these two upgrades as Shapella (a combination of Shanghai and Capella)
