The Ethereum Shapella upgrade is right around the corner, promising to enable withdrawals of staked ether on the network for the first time.
The upgrade comes seven months after Ethereum’s core developers activated The Merge and kicked off the network’s transition away from proof of work, with the main goal of reducing the network’s energy consumption and a side effect of switching up its tokenomics. Since The Merge took place, Ethereum’s environmental impact has been massively reduced. At the same time, it has seen a significantly lower emissions rate — resulting in a net decrease in circulating supply due to a transaction-fee-burning mechanism.
Both goals have gone to plan, with withdrawals the only remaining issue at hand. If successful, direct ether withdrawals will be available immediately and all major platforms — from decentralized protocols like Lido Finance to exchanges like Coinbase — will have added support for withdrawals within a few weeks. Once this has been done, the network will have finally completed its transition to proof of stake.
What is Shapella?
Shapella is a portmanteau of Shanghai and Capella, referring to two network upgrades that will happen simultaneously. These will upgrade the code on Ethereum’s two mainnet layers: the consensus layer (the beacon chain) and the execution layer.
Since The Merge, ether staking has been a one-way system. You can stake ether, but you can’t withdraw it. Shapella aims to fix this and enable validators and users to unstake their ether on the network.
This crucial upgrade will enable users to access and potentially unstake over 18 million ETH staked on the beacon chain, Ethereum’s consensus layer network.
The main feature of the upgrade is called Ethereum Improvement Proposal (EIP) 4895, which enables validator staking withdrawals on the network. Developers have also planned additional specifications within Shapella to optimize transaction fees for certain activities on the network.
Ethereum developers have successfully tested the Shapella upgrade on public test networks for many months. It is set to occur on mainnet epoch 620,9536, expected at 6:27 p.m. EDT on April 12.
How will withdrawals work?
Shapella will activate two types of withdrawals: partial and full withdrawals. Partial withdrawals will allow validators to access their balance over the 32 ETH needed to establish a validator node. In every Ethereum block, 16 validators can make partial withdrawals, and users collect their rewards at the end of each week.
Full withdrawals will be a more significant event to track, as they enable validators to completely exit their stake on the beacon chain, taking their entire ETH balance, including their original 32 ETH and any accrued rewards or penalties each epoch.
Once withdrawals go live, users will not be able to unstake or exit all at once, as there will be a limit on the number of validators that can withdraw each day in a queue.
“In a period where liquidity is at the forefront of our minds, it is important to note that users can withdraw their rewards without removing their stake. Ethereum’s stability is further insulated by the fact that removals are processed in a queue, only happening gradually if there is large withdrawal demand,” said Ken Timsit, managing director of Cronos Labs, the developer of Cronos blockchain.
How much ether will get unstaked?
A maximum of 1,800 validators per day will be allowed to fully unstake, which equates to 57,600 ETH ($109 million) per day that can be withdrawn, in addition to partial withdrawals, according to estimates by Pooja Ranjan, founder of EtherWorld.co and project manager at Ethereum Cat Herders.
“Ethereum imposes a churn limit on how many validators can withdraw each epoch. This limit increases with more validators on the beacon chain. Currently, the churn limit is between 7-8 validators per epoch by the time of the upgrade. So when the upgrade occurs, 1,800 validators can fully exit every day, which is over 57,600 ETH per day,” said Ranjan.
Validators don’t need to wait for Shapella to get into the unstaking queue; they can already tell the network they intend to unstake their ether. But it seems that not many have chosen to do so. Aave Chan initiative founder Marc Zeller noted that 1,622 validators had exited the network as of April 9, meaning that when Shanghai is implemented, they will be the first to withdraw their cumulative 51,000 ether. That said, some validators may be waiting for Shapella to take place before getting in the queue to withdraw.
Why open up withdrawals months after the Merge?
There were several reasons why ether unstaking wasn’t enabled when The Merge took place. The initial upgrade was a complex process that required careful planning and execution. It combined the Ethereum mainnet with the Beacon Chain, which was running in parallel.
If it had allowed users to unstake their ether during the transition, this could have introduced additional complications and risks to an already challenging endeavor. By splitting the changes into two, this allowed for more time to be spent testing each upgrade and checking it will work properly.
Moreover, the Ethereum network depends on a sufficient amount of staked ether to ensure its security and maintain the proof-of-stake consensus mechanism. By delaying withdrawals, developers created a more controlled environment, enabling a smoother transition.
The Ethereum ecosystem may be impacted by the Shapella upgrade in several ways. The ability to withdraw staked ether will allow users to access previously locked funds, giving them more flexibility to allocate their assets.
In the short term, the ability to access these previously locked funds could lead to price fluctuations. Yet with ether at a lower price now than when many users staked their funds, it’s possible that these holders wouldn’t want to sell at a loss.
“ETH stakers will likely monitor withdrawals and may overreact in the short term if there is significant demand or signals pointing to large ETH liquidations,” stated Ken Timsit of Cronos Labs. “Once short-term volatility has been smoothed out, however, the outcome is likely to be neutral, as this upgrade has been priced into ETH value for some time now.”
Beyond this, it’s possible that the gap between the price of staked ether derivatives, like stETH, and their notional value (the value of ether each derivative represents) could close as arbitrage opportunities open up.
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