The Shanghai Hard fork is Coming: What to Expect?

Key Highlights

  • The Shanghai hard fork is set for March 2023, and the Ethereum community is buzzing;
  • The new upgrade will unlock staked tokens from 2020 and comes with some interesting EIPs,
  • There are uncertainties in the market.

Introduction

The Shanghai Hard fork is Coming: What to Expect? 1

Image Source: Ethereum | Ethereum Merge

In 2022, the Ethereum Merge was one of the most (if not the most) talked about and anticipated developments in the crypto space. The Merge, which switched Ethereum from a proof-of-work (PoW) system to a more scalable proof-of-stake (PoS) consensus mechanism, went on record as Ethereum’s most ambitious network upgrade. 

That said, the development train doesn’t end with the Merge, which went live on September 15, 2022. In fact, the Merge was only the start of a series of blockchain developments to attain the full potential of Ethereum 2.0. That said, more network developments are expected to occur in 2023, the first being the Shanghai hard fork. 

The Shanghai Hard fork is Coming: What to Expect? 2

Image Source: Google Images | Ethereum Shanghai Hard Fork

The announcement to roll out the Shanghai Hardfork in March was made in December last year. However, as you can imagine, the market was eclipsed by waning investor confidence following the historic collapse of FTX and a biting crypto winter. 

That said, the new year seems to have brought a lift to investor sentiment, with the price of most cryptocurrencies rallying dramatically. For example, ETH currently trades near $1,600, with a strong 28.35% rise since the start of the year (YTD). 

The Shanghai Hard fork is Coming: What to Expect? 3

Source: TradingView | ETH/USD Daily Chart

The improved investor sentiment has now brought attention to the upcoming hard fork, as crypto analysts begin making permutations about how the market will receive the upgrade and how the price will react to the milestone achievement once launched.

The Much-Talked-About the Shanghai Hard fork

The Shanghai Hard fork is Coming: What to Expect? 4

Image Source: Shutterstock | Ethereum Fork

The Ethereum Shanghai hard fork is a planned upgrade to the Ethereum blockchain that aims to improve the overall performance and efficiency of the network by implementing several changes to the Ethereum protocol, including adjustments to the Ethereum Virtual Machine (EVM) and changes to the network’s PoS consensus mechanism. The hard fork is also expected to introduce new features, such as better support for decentralized applications (dApps) and enhanced privacy features.

More specifically, the Shanghai upgrade will unlock the ETH in the deposit contract that has been locked since 2020, allowing stakers to withdraw their staked tokens. 

The Shanghai Hard fork is Coming: What to Expect? 5

Source: Glassnode | Ethereum Deposit Contract Chart

That said, the Ethereum development team has scheduled the update to occur in March this year. Like what we saw with the Merge, the network will first launch a Shanghai testnet to ensure that the update runs as expected without any hitches. 

Although the hard fork comes with a bundle of Ethereum Improvement Proposals (EIPs), the token unlock is what has the Ethereum community talking the most. According to core Ethereum developer Tim Beiko, the withdrawal of staked Ether tokens will be prioritized over most other EIP bundles.

The Shanghai Hard fork is Coming: What to Expect? 6

Image Source: Twitter

What to Expect After Shanghai Hard fork ?

Exit Mechanism for ETH Stakers

Shanghai Hard Fork - What to Expect ?

The Ethereum Shanghai hard fork will introduce a new mechanism for validators to withdraw their staked ETH from the network. This mechanism will be based on the number of active validators on the network as of January 13, which was over 500,000. According to this, a maximum of 16 withdrawals will be processed per block. It’s worth noting that there will be no gas cost associated with these withdrawals, making it more accessible for validators to unlock their staked ETH.

The Shanghai Hard fork is Coming: What to Expect? 7

Source: Beconscan | Total Ethereum Validators

Validators who wish to withdraw their staked ETH will go through two different queues: an exit queue and a withdrawals queue. The exit queue is for validators who want to completely withdraw their staked ETH (32 ETH), while the withdrawal queue is for validators who want to partially withdraw their staked ETH. Both full and partial withdrawals will be processed simultaneously.

The number of exited validators on Ethereum currently sits around 1,094, which suggests that there will likely be at least 1,094 complete withdrawals once the Shanghai hard fork goes live. This means that a minimum of 35,008 ETH will be un-staked from the Beacon Chain, which is responsible for consensus logic and the ETH protocol.

EIP Bundles Set for Launch

There are three main EIPs bundled in the upgrade that developers will be keeping their eyes on, including EIP-3651 (Warm Coinbase), EIP-3855 (PUSH0 statement), and EIP-3860 (Limit and counter init code).

The Shanghai Hard fork is Coming: What to Expect? 8

Image Source: Github | Shanghai Upgrade Specification

Of the three, the most interesting upgrade is EIP-3651: Warm Coinbase, which is regarded as a game changer considering it could slash network fees for network participants called “builders.” Before you get the wrong idea, this upgrade has nothing to do with the San Francisco-based crypto exchange. Instead, Coinbase is the name of the software used by the so-called builders to receive new tokens on the blockchain.

Typically, the first interaction is more expensive as the software needs to “warm up,” but subsequent interactions become cheaper. However, with the implementation of EIP-3651, the Coinbase software will remain warm and require a lower gas fee to access.

Additionally, the Shanghai hard fork will also include the implementation of the “EVM Object Format” (EOF), which is a collection of EIPs that upgrade the Ethereum Virtual Machine, the environment where Ethereum can execute smart contracts. The EOF includes EIP 3540, EIP 3670, EIP 4200, EIP 4570, and EIP 5450.

Conclusion

While the Shanghai hard fork comes with many promises, many are skeptical about the outcomes. Some traders have expressed concern about the current low staking ratio for Ethereum compared to other proof-of-stake blockchains. The question on many minds is whether ETH stakers will sell their tokens on the open market once they are unlocked or if they will instead choose to hold onto them in the hopes of a new era of widespread blockchain staking. Will they play it safe or double down on their investments? Only time will tell.

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