What is the Ethereum Shanghai Upgrade?: ETH Analysis
The Ethereum cryptocurrency network has a massive update coming in April 2023 called the Shanghai Upgrade. The Shanghai upgrade is a hard fork. It will radically change the blockchain protocol – hopefully for the better.
Ethereum is no stranger to big updates like this, as seen by the switch to proof-of-stake. All signs point to the Shanghai upgrade being of great benefit to the blockchain, and it comes as a result of ETH’s floating stake consensus mechanism.
But how exactly will this affect your crypto wallet?
What is the Ethereum Shanghai Upgrade?
The Ethereum Shanghai upgrade is a series of upgrades. The Ethereum developers will implement them at once. To understand the significance of this upgrade, it is important to know Ethereum’s history. This upgrade is the result of several previous changes to Ethereum’s network.
The proof-of-works (PoW) period
Ethereum started in 2015 as a proof-of-work (PoW) cryptocurrency, just like Bitcoin. This method involves spending time and energy solving complex mathematical formulas. Using sophisticated technology, miners who solve the formulas receive crypto rewards. However, this type of consensus mechanism has some drawbacks.
PoW is energy intensive and made scaling difficult for the blockchain.
Suggested Reading: Proof-of-Work vs. Proof-of-Stake: The Ultimate Guide
Ethereum Migrates to Proof-of-stake (PoS)
After many test runs, ETH switched to the proof-of-stake (PoS) mechanism in 2020. This hard fork change is now called “The Ethereum Merger.“ This made the blockchain more secure, and environmentally friendly and improved scalability.
Primary Benefits of “The Merge”
The merger allowed Ethereum validators to stake their crypto in the blockchain for passive income. At that time they could not withdraw their ETH from the blockchain. Funds were frozen to support the network. This method is similar to a high-interest savings account at a traditional bank. Holders with stakes in ETH can also vote on future blockchain changes.
Primary challenges of Ethereum’s PoS mechanism
The PoS system nevertheless had a large negative cost. To join the Beacon Chain, which coordinates staking, users had to give a minimum of 32 ETH. At the time the PoS system was rolled out, one ETH cost around $4,000. At the time of writing it is around 1550 dollars. This high entry point made it difficult for many to join.
The solution: the Shanghai upgrade
Krypto team improved this problem somewhat by using liquid staking. With this technique, users can stake a smaller amount of ETH in return for tokens that represent their crypto. They can then use their tokens for other transactions. The Shanghai upgrade attempts to solve this problem even more and make it more accessible to join ETH.
In 2022, Ethereum tested a draft version of the Shanghai upgrade, the Shangdong test network. It tested the practicality of the upgrade proposals. The Shanghai upgrade has five proposals, with one more
proposal (EIP-4844) postponed until 2024. EIP stands for Ethereum Improvement Proposal.
What improvements will Ethereum’s Shanghai upgrade bring?
The five proposed changes to the current Shanghai upgrade are:
EIP-3651: Warm COINBASE
Coin-based payments are becoming increasingly popular. To improve transaction execution, Coinbase addresses will be hot at launch. This will increase transaction speed but maintain security.
EIP-3855: PUSH0 instruction
This introduces the PUSH0 instruction to contracts. It keeps the stack at a constant 0 value. This change will reduce the contract code size and reduce the need for the DIP instruction (which resolves duplicate zeros). It also reduces the risk of contracts abusing optimization instructions.
EIP-3860: Limit and meter start code
This EIP extends EIP-170 with a maximum initialization code size limit. This ensures that the code is reasonably charged to minimize future risk. It also provides an extensible costing system for the future.
EIP-4895: Beacon Chain push withdrawal
This enhancement introduces a system-level operation to support validator withdrawal. It provides a separate way for withdrawals to enter EVM (Ethereum Virtual Machine). EVM executes smart contracts on the blockchain network.
This is the most important change. It gives validators the ability to withdraw their stake rewards. Since the Ethereum merger, validators have staked over $17 million in Ether. This amounts to over USD 22 billion.
While some validators are sure to withdraw stakes, there will be a cap of 43,200 ETH per day. The cap, and ETH’s other improvements, will prevent a mass exodus of validators. More people are likely to become validators.
EIP-6049: Write off SELF DESTROYED
This warns against using the self-destruct instruction, which terminates a smart contract. However, ETH users are still debating how best to use self-destruct. A change to this EIP is likely to come in the future.
ETH Analysis: Will the Upgrade Affect the Price?
Analysts have theories about whether the Shanghai upgrade will affect Ethereum’s price. Some users fear that the upgrade will cause a crash, but there are some arguments against it.
- Withdrawal process: Validators line up to withdraw stakes and go through a two-tier system. At most, only 10% of staked ETH can leave the pool per month.
- Betting popularity will increase: Betting popularity is likely to increase after the upgrade. JPMorgan says Ethereum’s stake ratio will increase after upgrade. The number of validators can rise from half a million to 2.2 million. This will result in a massive net positive. The increased investment will appreciate the value of ETH.
Conclusion
The Shanghai upgrade will improve the security and efficiency of Ethereum’s PoS system. It is not likely to lead to any major negatives and is likely to improve prices in the long term. You can expect to see the upgrade launch in early April 2023 – but delays are expected.
For traders, expect volatility in both directions. Ethereum – and the blockchain industry as a whole – is still young and experiencing growing pains. Bullish and bearish volatility is normal. However, this volatility offers many good opportunities for the prepared.
Disclaimer: “The content is not to be interpreted as investment advice and does not constitute an offer or solicitation to offer or recommendation of any investment product. It is made available to you only for information and/or educational purposes.
You should take independent investment advice from a professional in connection with, or independently investigate and verify, any information you find in the article and wish to rely on.”
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