Ethereum Shanghai

After the merge, there will be a further Ethereum upgrade known as “Shanghai”, and this is the opportunity for Ethereum stakers to finally withdraw from the staking contract.  Many of the Ethereum staked has been in the staking contract now for several years, and as such it will be of interest to a great many people to take profits, since some of their investments have multiplied by over 10x in value, in addition to earning staking rewards.

However, according to data from Nansen, it is quite likely that some of the concerns over large dumps happening when the Shanghai upgrade occurs could be overbl0wn, especially if the Ethereum price remains at the levels that it is at now during that time.

Over 70% of staked ETH is currently underwater

Despite the fact that some people have been staking in the ETH 2.0 deposit contract for years and have seen the value of ETH rise from a few hundred dollars to over $4,000 to back down again to where we are now, data from Nansen has shown that over 70% of the Ethereum that is currently deposited into the contract is underwater.

This doesn’t necessarily mean that the price can’t fall much further, but the overwhelming majority of people will not be inclined to sell and cut their losses, since that isn’t how people think – most people will prefer to hold the asset for the longer term (or longer than they had originally anticipated) rather than cut their losses and find something else to buy.

Only 18% of illiquid stakers are in profit

Rather than lock their Ethereum directly in the deposit contract, many users of the network decided to make use of illiquid staking service providers such as Lido. When one stakes Ethereum with Lido, they receive stETH in return, which can eventually be redeemed for ETH once more after the withdrawal queue has reached its end.

By holding stETH rather than ETH, users can own the yield-bearing version of the asset and use it in DeFi, which is very attractive for some users.

The report by Nansen shows that illiquid stakers are the most likely to sell Ethereum, since liquid stakers already have the opportunity to exit their positions if they want to.

However, only 18% of the Ethereum that has been deposited into the staking contract by liquid stakers is currently in profit – the other 82% is currently underwater or breaking even.

The Shanghai update: ETH can only be withdrawn in queue.

The ETH 2.0 deposit contract has been contentious for a variety of reasons, not least of which due to the concerns that once so much ETH starts to become unlocked, there could be a hugely aggressive amount of dumping on the market.

Currently, there is over 13m ETH staked in the contract, which is locked until the Shanghai update. The update is expected at some point in 2023, at which point the market ought to have recalibrated itself and become more acquainted with ETH on proof of stake.

However, the Ethereum Foundation made plans to reduce the potential sell off.

Rather than simply unlock everyone’s funds at once, which would most certainly cause a massive sell off and be hugely problematic for the price of Ethereum (and when on proof of stake, lower prices more directly mean lower security), there will be a withdrawal queue. With over 13m ETH staked, Nansen estimates that the withdrawal queue, in its current format, would take about 300 days before everyone is able to withdraw their ETH fully.

This is still a lot of supply that the market has to contend with and is still enough to cause significant sell over the course of the next year, but fortunately it will not all happen at once.

Once the Shanghai update is complete, and all of the ETH that were staked in the contract have been unlocked, the asset should be able to achieve price discovery with far less uncertainty than has hindered it up to now.

The merge is the main event in Ethereum’s short history and is of extreme significance. Assuming that everything goes according to plan, Ethereum will have a strong and sustainable foundation from which the developers and the Ethereum Foundation can focus more of their efforts on scaling.

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