Shapella Is Done, And Ethereum Is Still Here (ETH-USD)

Overview

Ethereum’s (ETH-USD) most important transition, the Merge, followed by its much-anticipated upgrade, Shanghai, has been an enormous success. In this article, we will look at how the transition and upgrade could affect the Ethereum network, largely positively, in the long run.

The Ethereum Evolution is Beyond Layer-2 Solutions

Regardless of newly launched Layer-2 solutions to scale the Ethereum network and the success they’ve had, developers of the Ethereum network have not relented in upgrading the network to make it greener, faster, and more decentralized.

The move from proof-of-work (PoW) to proof-of-stake (PoS) has made Ethereum energy efficient. Validators in the new PoS network have replaced miners-validators on the ETH network stake ETH. Staking also removes some of the ETH supply from circulation, making ETH deflationary.

Shanghai is Upon Us

The Shanghai upgrade is also referred to as Shapella by the Ethereum developer community. Shapella is a portmanteau of the words Shanghai and Capella.

For clarity, the Shanghai upgrade takes effect on Ethereum’s execution layer, while the Capella upgrade will be on the consensus layer.

The Shanghai upgrade was completed on April 12, and the withdrawal of staked ETH and accrued rewards began. Over 18 million ETH ($34.5 billion worth of ETH) staked on the Ethereum Beacon Chain network is expected to be unlocked over time. The total stacked ETH is approximately 18% of ETH’s total circulating supply.

On completion of the Shanghai upgrade, the first 3,902 ETH were withdrawn successfully, data from blockchain data and research firm Nansen reveals. According to Nansen’s research, the withdrawal of staked ETH has been smooth since the Shanghai upgrade.

Fear of a Sell-Off

As the date for the Shanghai upgrade drew near, there was speculation of a sell-off of unlocked ETH that would create selling pressure and tank the price of ETH. However, since Shanghai, the price of ETH has steeply increased, crossing the $2,000 mark for the first time since August 2022.

Instead of the speculated sell-off, more Beacon Chain validators are being created, as observed in on-chain data. For example, a wallet that has been inactive for over 2,000 days suddenly made a series of 30 separate 32-ETH transactions, staking a total of 960 ETH and creating 32 validators on Beacon Chain.

The Shanghai upgrade and the smooth withdrawal process since the upgrade went live have increased the confidence of stakers in staking ETH and creating validators.

A Boost for Liquid Staking

The Shanghai upgrade has sparked lots of interest in crypto liquid staking – an advanced crypto staking service and a growing trend in decentralized finance (DeFi), in which stakers receive a liquid derivative of their staked token. In liquid staking, stakers stake tokens with a liquid staking provider. The staker then receives a derivative or a “receipt,” representing the staked token. The derivative token can be used on DeFi lending platforms as collateral for crypto loans and to leverage several yield opportunities in DeFi. These staking providers also allow users to stake as little as 0.01 ETH instead of the 32 ETH needed to become a validator. Liquid staking provides immediate liquidity for staked tokens.

Liquid staking providers have seen growth in liquid staking since the Shanghai upgrade was completed. As the second-largest cryptocurrency by market cap, ETH’s influence on the volume of liquid staking has been massive.

Lido Finance (LDO-USD), a liquid staking solution for Ethereum and other top PoS cryptocurrencies, and Rocket Finance (RPL-USD), a decentralized Ethereum staking pool, experienced significant growth in January. From early 2021 to January 2023, the amount of ETH staked on these liquid staking platforms grew by 2,470% – an influence of Ethereum’s move to PoS. Today, liquid staking providers account for over 30% of the total ETH staked.

Technical Analysis

Looking at the technical chart for Ethereum, I think that we are near the bottom of a sell-off, which should set us up for a rally into at least $2337.

This is where I’d expect the larger circle wave 3 to top. Before that, though, I’d expect ETH to fall in a wave C and test the 61.8% retracement of the latest move, which is at $1710.

For some time, BTC has been outperforming the market, but if we enter altseason, we could see ETH perform much better in the coming weeks.

Risk

So far, the Shanghai upgrade and withdrawal of ETH have been smooth; the speculated unlock selling pressure has not negatively affected ETH’s price since the upgrade. Instead of a mass withdrawal and sell-off of unlocked ETH, an additional 94,800 ETH (worth $198.7 million) were deposited for staking on the Ethereum network just days after the upgrade, according to data from Nansen. Nansen’s data also show that ETH deposits have outpaced withdrawals. The net withdrawal of ETH after the Shanghai upgrade is about 66,000 ETH, while the net deposit sits at 100,000 ETH. This is very bullish for ETH.

If deposits keep outpacing withdrawals in the coming weeks and months, we can say it’s the dawn of a new era for the world’s second-most-valued cryptocurrency and blockchain network.

On the flip side, one criticism the Ethereum transition to PoS has drawn is the control of large staking pools by single entities like Coinbase (COIN), Binance (BNB-USD), Kraken, and Lido. The “big four” entities control over 50% of ETH’s staking pools, hence over half of Ethereum network validators. This has raised concerns about the security and decentralization of the Ethereum network since it transitioned to PoS.

Final Thoughts

When all is said and done, the latest upgrade is a net positive for Ethereum. Users now have the flexibility to unstake/stake their holdings, and this will help regulate the supply, which should ultimately become slightly deflationary, which will help ETH appreciate.