The Ethereum Shapella upgrade - a combination of the Shanghai and Capella network updates - is coming. The next Ethereum blockchain milestone will allow stakers to withdraw their protocol-deposited Ether, including network distributions, starting in the middle of this week.
Since the successful "Merge", a Proof of Stake (PoS) consensus algorithm secures the largest smart contract network Ethereum. Consensus algorithms play a central role in the security and stability of decentralized systems. They enable decentralization and ensure that all participants in the network act on a common information base. The best-known algorithms include Proof of Work (PoW), Proof of Stake (PoS) and Delegated Proof of Stake (DPoS).
How does Ethereum Staking work?
The Proof of Work (PoW) consensus algorithm is used by some of the largest blockchain networks, such as Bitcoin. The mechanism allows transactions to be validated through complex mathematical calculations that require high computing power. In a Proof of Stake (PoS) algorithm, validators provide pledged cryptocurrencies (= stakes) instead of computing power. In return, "stakers" receive native token distributions as well as the network's transaction fees.
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In the case of Ethereum, each validator requires a minimum of 32 ETH; currently over 50,000 USD. However, post-merge rules required validators to lock their ETH and rewards until a later chain update. Some stakers deposited their Ether as early as the December 2020 launch of the beacon chain - so far without the ability to withdraw. Currently, nearly 15 percent of all Ether (ETH) - about 34 billion USD - is tied up in such stakes. The Ethereum Shapella upgrade is intended to enable flexible withdrawals of stakes in the future.
Liquidity for Ethereum stakers thanks to Shapella upgrade
The upcoming upgrades will result in various improvements to the network, including some technical innovations to the Ethereum Virtual Machine (EVM). However, the main focus of most investors is on the withdrawal function of the pledged Ether, which will be processed via a queue.
For many investors, a successful network update removes the last concerns about staking, as locking up thousands of dollars in Ether for an uncertain amount of time is no longer a chore. On the other hand, holders of just under 15% of the total Ether supply (34 billion USD) will gain access to liquidity over the next few weeks. This circumstance could result in increased selling pressure for the second largest cryptocurrency by market capitalization in case of increased withdrawals.
In the medium term, it can be assumed that the number of deposited ETH will increase significantly over the coming months. For reference: On other proof of stake blockchains such as Polygon, Cardano and Polkadot, up to 60% of all circulating tokens are tied up in stakes.
A new reference interest rate for crypto assets
After the Shapella upgrade, any network participant can earn a passive return as a staker via validator software or freely tradable staking derivatives (LSDs). Ether thus becomes a digital asset including regular distributions, which are estimated to be in the range of 4-10%. Mind you, the distribution takes place in Ether, but this means that an investment in the fastest growing Web3 network has a passive return.
The additional yield option is a big shot in the arm for the second-largest cryptocurrency by market capitalization and should make the investment more attractive to institutional investors as well. Moreover, the Ethereum stake rate could establish itself as a benchmark for crypto returns against which the rest of the space is measured - similar to the risk premium of corporate bonds over government bonds.