How will the Shanghai upgrade impact ETH’s price?

The next major Ethereum upgrade, Shanghai, is just a few days away. This hard fork will allow Ethereum validators to withdraw assets that have been staked to secure the network. That means almost 18 million eth, or about 15% of the total supply, will be available for withdrawal. Shanghai will likely make ETH staking more attractive and draw additional capital into the ecosystem. But in the short term, the sudden unlocking of such a large amount of ETH will could send markets into turmoil. To understand the implications of the Shanghai upgrade and how better prepare for it, I talked to Ethereum researcher Vivek Raman. I'm Giovanni. On this show we challenge the ideas that shape the world of crypto. In each episode we assess a crypto narrative, a macroeconomic outlook or a potentially disruptive technology. Only the most solid ideas will make it to the other side. This video is sponsored by Swell. Swell is a non custodial ETH liquid stake protocol designed to optimize yield in defi. First of all, Vivek, could you tell us briefly what is the Shanghai upgrade and why is it so significant?

So the Shanghai upgrade is. I almost view it as part two of the merge or like the part of the merge that's easier from an engineering standpoint, but very, very necessary in order for staking withdrawals to be unlocked. Ethereum merge was one of the biggest and most important events I think in crypto history. It made Ethereum into a sustainable blockchain, both from an economic standpoint, environmental standpoint. It switched the engine to proof of stake and it's been working phenomenally. But the issue is because the Ethereum merge was so complicated, it was sort of split into two phases, if you want to call it that. Where the switch to proof of stake was, that was the main event. But there are still right now about 16 and a half million eth that were staked in basically one way and those need to be enabled for withdrawals. And that was the second part of the upgrade.

In total, around 14% of the overall supply of ETH is being staked. So we are talking about a quite significant amount of ETH that will be available for withdrawal. So a lot of people are concerned that once this ETH will be withdrawn there will be people dumping it on the market and that will cause price negative price action. What do you think about those concerns?

It's, I understand the concern, it's very valid and especially in a bear market, people want to look for reasons for, for ETH price to potentially go down. I think eat staking becoming enabled actually is Counter, it's a counterbalancing effect because it also de risks the ETH investment in a tremendous way. I think a lot of institutions that previously could have looked at ETH staking, especially tradfi institutions, institutions that aren't crypto native, that don't know or aren't as close to Ethereum community, they'd say well if staking is a one way transaction and we want to access ETH staking yield but we can't withdraw, they would not actually have the mandate to or capacity to do that, which I think makes a lot of sense. So yes, there's going to be ETH for sale because some people that staked will probably want to unstake, some people that earn staking rewards will want to sell their staking rewards to the pay taxes or we've had a bear market, etc. But there's also going to be, and it's impossible to tell how much is going to be a counterbalance of new people coming in to stake eth because now it's stakeable, it's unstable and that's, that's very good, right? I mean that, that's good for blockchain security. The more, the more ETH or the more native proof stake asset that's staked, the higher the cost to attack the chains.

So what do you think is this event going to be priced in or what sort of price action do you expect from it? Do you think it's going to be like a buy the rumor, sell the news type of event?

So short term uncertain, maybe some volatility, maybe some downside Long term I think that having ETH be stakeable and unstate and then being able to withdrawn opens the door for a lot more ETH to be staked. Instead of 14%, I would say maybe 25, 30% which means a lot more ETH being locked up which is good for ETH price. So from a flows perspective, I actually do think this is going to end up being a long term positive.

Just to remind our audience, you would normally require 32 ETH in order to participate in staking. Fortunately there are liquidity pools which allow users to do liquid staking. So you can stake any amount of ETH and participate in the network paying a fee to the platform. So a lot of people are concerned about the growing influence of a few of these liquidity pools. For example Lido, the largest one, controls around 75% of the whole Ethereum liquid staking market. So some people are concerned that this centralization could create some vulnerabilities for the Ethereum network. So are you concerned about this and how is the Shanghai upgrade going to impact on this specific aspect?

Lido does control a lot of staked eth and, and people worry about Lido becoming a centralization factor I actually think, and I'll back it up by just the amount of projects that are launching. Since withdrawals are going live with Shanghai, a numerous amount of new staking protocols have all emerged or are emerging and a lot of them have been waiting for withdrawals because Lido did the hard part. Rockpool did the hard part of saying okay, let's, let's do liquid staking but not have withdrawals and sort of just have a secondary market for liquid stake tokens. So instead of going through that complexity, I think a lot of protocols are waiting and I think we're going to see a flourishing ecosystem of liquid staking protocols that are all competing each other, which is a very good thing I think. A we'll see more competition, competition breeds decentralization and B, I think Lido's share will in liquid staking will fall as a percentage.

There's so much excitement around the Shanghai upgrade. Here is a quick video from our sponsor and don't forget to join us next Wednesday for our swell AMA on how to maximize your E yield. Post Shanghai.

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After the merge, a number of community members were complaining about the fact that the staking process was actually too difficult for the average user. So what is the state of the basically user experience of staking and do you think that the Shanghai upgrade will bring some improvements on that aspect?

Ultimately, I think everything in the crypto ecosystem needs to be one click accessible. If crypto's not easier to use and easier to access than the traditional financial system, then why would anyone ever switch? We're not supposed to add technical complexity, we're supposed to abstract that away. So the answer is going to be for liquid staking. The closer it is to one click staking the more users will get and I think a lot of people are working on that. There's wrappers around Lido, there's different routers, there's different diversified liquid staking pools that are all liquid staking token pools that are starting so that will improve accessibility and then exchanges are a huge on ramp. So yeah, I mean Coinbase is, has honestly Coinbase is one of the most, has been one of the most crypto native Defi champions, biggest cheerleaders of Defi. Despite Defi could cannibalize their business, they view it as a positive Sum game. So the fact they're creating CVE making it easy to stake and unstake with one click, that's all very positive for the retail user. For users that want to create full nodes, that want to create full validating nodes with 32 ETH, the process still is complicated, but there's tooling coming out. There's sort of like router boxes you can buy that are one click to set up. So the tooling is getting easier and easier to the point where at the end of the day, how it should be is either click a button and your laptop can turn into a validated node, or install like one small box the size of a router and just plug it in. That can be a validated node. We're going that direction.

As you mentioned. It's very interesting, this new narrative that is getting a lot of traction lately, which is the narrative of liquid staking derivatives. So when you stake your eth, you get in exchange this other token which represents the stake that you put on the liquidity pool and you can use it in order to get more yield somewhere else, or use it as a collateral or somewhere else in defi so that basically you can put it to work and not just having your ETH stake there without any chance to use it besides earning yields on it. So this is one of the biggest narrative probably we're going to see this year, especially after the Shanghai upgrade. What do you think?

And that's the magic of Defi. I mean the whole point of Defi is to give financial tools to normal people that only banks and institutions have. So the fact that I as an individual can stake my eth, but get a liquid representative, which is that liquid staking token, and take it into defi and use it as collateral and borrow stablecoins for example, or, or lend it on a platform like aave, or trade it to get liquidity. The fact that all that's possible through a self custodial wallet and through permissionless apps, that's the real innovation. So I mean, yeah, liquid stake token is just the one of the best representations of why crypto creates all these like Legos and building blocks that give more financial options to users.

As we know, one of the main issues affecting the Ethereum blockchain are high fees. The Ethereum merge didn't have any impact on the transaction fees for the average user. As far as I understand. The Shanghai upgrade is also not going to fix this issue. Right.

The next hard fork after the merge is supposed to have two major things. One was called eof, it's Ethereum object format that, that's for solidity developers to sort of change the solidity code code base rather that is important but wasn't critical to include in this current fork. The second, which was also being developed in parallel was called EIP4844. And what that does is makes the costs that roll ups have to pay to Ethan much, much lower. So it would, it would reduce transaction fees for rollups tremendously, which would reduce transaction fees for end users. That's the next frontier for Ethereum. We need to lower fees and onboard more users. But both The EOF and the 4844 implementation were actually removed from Shanghai for the exact reason that we don't want to keep delaying withdrawals. I mean a lot of users have, I mean 16 and a half million ETH, which is about 26, a little over $26 billion of ETH were locked one way in the staking contract. The people that want to withdraw should be able to withdraw and I mean people have been waiting patiently since like you said, December 2020. That is first priority. So it just sort of shows a community alignment, community governance process to prioritize withdrawals. I think that after withdrawals are done and after the merge is pretty much consummated, the entire narrative needs to shift fully to scaling and reducing fees and onboarding users. So it's a different conversation. But adding more apps, adding more users, especially during this bear market and creating real use cases is the way Ethereum will win and that's hugely important. So that's coming up next, but it's not part of Shanghai to not delay the process.

Vivek, thanks a lot for coming on our show and yeah, let's talk again after Shanghai and yeah, let's keep in touch for the next milestones of the Ethereum roadmap.

Absolutely. Thanks again for having me. It's going to be again another huge year for Ethereum and I'm glad you guys are focused on it.