The Ethereum blockchain is set to undergo a major upgrade in the second half of 2023, known as the Shanghai upgrade. This upgrade will bring a number of improvements to the Ethereum network, chief among them being the ability for users who have staked their ether (ETH) to withdraw both their staked coins and the rewards they have earned.
The launch of the proof-of-stake network, known as the Beacon Chain, in December 2020 enabled users to help validate transactions. However, up until now, staking has been a one-way journey, with users locking their funds in a deposit contract while the Ethereum developers work on the network in real time.
To fill this gap, protocols such as Lido, Rocketpool and StakeWise have begun offering “liquid staking” tokens, which represent staked ETH but fluctuate in price and can be used across the decentralized finance (DeFi) ecosystem. It is unclear what effect the Shanghai upgrade will have on these protocols, as it will enable both new and existing stakers to withdraw their ETH.
The Shanghai upgrade has the potential to increase the popularity of ETH staking, as it will drive competition between staking protocols, while also improving the security of Ethereum’s new PoS chain. This could be seen as a bullish signal for the staking ecosystem, as it will create more opportunities for users to maximize their yield while minimizing their risk.
In addition, Shanghai will spur more innovation in direct staking and liquid staking solutions. The ability to stake, withdraw and restake ETH rewards with more frequency will create more nuanced financial applications, as well as more complex lending solutions to provide people access to ETH staking.
The upgrade will also strengthen ETH’s position as the blueprint for staking protocols. The yield that Ethereum pays after Shanghai will become the “base yield” for crypto, and staking protocols will have to compete with Ethereum’s yield mechanism in order to stay competitive.
Finally, Shanghai will give ETH liquidity providers the emotional security they need in order to confidently commit their stake. The upgrade will make it easier for users to have sovereignty over their assets, as they will no longer need to worry about locking their funds in a contract.
However, there is one important consideration to keep in mind after Shanghai goes live – staking centralization. If the majority of new stakers after Shanghai decide to stake through a provider like Coinbase, then there is a risk of a few centralized and on-chain providers dominating the ecosystem. To avoid this, the Ethereum Foundation should focus on the user experience of single stakers, to incentivize a more resilient staking network.
The Shanghai upgrade marks a significant milestone for the Ethereum network, and will kickstart a new cycle of innovation focused on ETH staking. Liquidity providers will be the tangible beneficiaries of this innovation, as they will have access to a growing ecosystem of features, tools and service providers. In the end, the upgrade will create a more secure network, with more decentralization and more choice for users.