What is the Ethereum Shanghai update?

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Ethereum Shanghai is an update of the network of the second largest cryptocurrency, released in April 2023. The most important point of the hard fork is that it will finally allow stakers and validators to withdraw tokens from the Beacon Chain.

Stacked ether currently accounts for about one-seventh of the total Ethereum supply, or about 16 million coins worth over $25 billion.

Shanghai update and EIP-4895

The most important point of the Shanghai update – enabling stakers to withdraw bet tokens – is a function called Ethereum-4895 or EIP-4895. There are currently over 16 million ETH locked, which help to secure the mechanism of the network. The involvement of validators has been particularly important for the Ethereum blockchain since September 2022, when Merge started the process of changing the Ethereum consensus mechanism from PoW (proof of work) to PoS (proof of stake). After Merge, stakers with 32 blocked ETH can participate in block validation. At the same time, each subsequent ETH put into staking increases the probability of receiving rewards for securing the network.

Merge took place in 2022, but staking itself started in December 2020. It was at that time that the Beacon Chain began to operate, enabling users to deposit ETH.

What does this mean for validators?

The most significant change introduced by Shanghai is the fact that stakers can finally withdraw all their ETH. So validators could theoretically line up to retrieve their locked tokens. Most analysts, however, consider this scenario unlikely, given Ethereum’s dominance in the DeFi space, as well as the high profitability of staking. What’s more, after the latest update, validators will always be able to freely withdraw bet assets. They will not have to worry about freezing a significant amount of money indefinitely. Shanghai should therefore not cause a wave of payouts and a drop in the exchange rate.

Validators who want to opt out of further ETH staking can do so in several ways. One of them is to generate a “withdrawal certificate”, which will allow you to withdraw any prizes accumulated in the last months. The second option is to remove both rewards and all previously blocked tokens from the Beacon Chain.

Other Shanghai related improvements

EIP-4895 is a key component of the Shanghai update. However, it contains several other, less important, but still important EIPs, i.e. Ethereum Improvement Proposals. Other improvements aim to reduce gas fees during periods of high activity, to the benefit of Ethereum developers. These include EIP-3651, which will allow you to reduce gas costs related to Maximal Extractable Value payments when accessing the COINBASE address. Importantly, the term COINBASE in this case is not related to the cryptocurrency exchange of the same name, but to the software that allows developers to receive new tokens. Other new improvements are EIP-3855, EIP-3860 and EIP-6049, which aim to reduce the overall gas fee for developers.

So Shanghai remains a relatively minor improvement, especially compared to Merge. Nevertheless, the introduction of this update will have a really significant impact on the situation of users who have decided or want to decide to ETH staking.

Further Ethereum updates are likely to appear in the following months of 2023. The developers announce, among other things, an improvement in the operation of Ethereum Virtual Machine. The next significant update will be Sharding, i.e. the introduction of shard chains. The update known as EIP-4844 was considered at one point as a component of Shanghai. Ultimately, however, the team working on Ethereum decided to delay this change to increase the likelihood of the March Shanghai update date.

Tests of the devnet and shadow fork that support the withdrawal of staked ETH started in January.

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