On April 12, one of the most monumental moments in crypto history took place: the Ethereum Shanghai upgrade. The upgrade was a big key step following the Ethereum Merge that happened back in September 2022, where the network officially transitioned from a Proof-of-Work (PoW) to a Proof-of-Stake (PoS) consensus mechanism.
Since the Shanghai upgrade, ETH (Ethereum’s native token) staking reached the largest weekly token inflow in almost two and a half years, according to CoinDesk. The upgrade also sparked massive interest from institutional investors, with institutional-grade staking service providers seeing three times larger inflows in April as compared to March.
So why the sudden interest? What exactly was the Shanghai upgrade and why has it sparked so much interest in Ethererum?
The Shanghai upgrade consisted of several Ethereum Improvement Proposals (EIPs), which are standards established to specify potential new features or processes for the Ethereum network. EIP processes were put in place for the decentralized Ethereum community to discuss and develop network upgrades and application standards.
A total of 5 EIPs were deployed during the Shanghai upgrade, including:
All of these EIPs were deployed to bring positive change to the Ethereum network, but EIP-4895 was arguably the most anticipated feature of the upgrade. Before we dive into what exactly this means, it’s important to understand a fundamental concept of the Ethereum network. Ethereum operates on two layers: the execution layer (the Ethereum Mainnet), and the consensus layer (the Beacon Chain).
The Shanghai upgrade consisted of upgrades to both the execution and consensus layer of Ethereum. The upgrade is also commonly referred to as the Shapella upgrade, which is a combined term referring to the Shanghai upgrade (for the execution layer) and the Capella upgrade (for the consensus layer). For simplicity’s sake, we’ll continue referring to the upgrade as the Shanghai upgrade.
Simply put, the Shanghai upgrade was a planned hard fork for Ethereum’s execution and consensus layer. Forks are changes made to a blockchain protocol, with hard forks referring to a situation where the non-upgraded versions are no longer compatible with the upgraded version. This means that with the Shanghai upgrade, the non-upgraded nodes are no longer able to participate in the staking and validation process.
The EIP-4895 feature as part of the Shanghai upgrade brought one fundamental change to the Ethereum network: it enabled Ethereum validators to unstake or withdraw their previously staked ETH. Ethereum requires validators to stake a total of 32 ETH, with the tokens subsequently locked for an undetermined period of time. Users that had their ETH locked in the Beacon Chain are now able to withdraw their tokens – either fully or partially – with the Shanghai upgrade.
Other features of the Shanghai upgrade included reducing gas costs for developers when accessing warm COINBASE addresses (EIP-3651), reducing the size of smart contracts and optimizing contract code (EIP-3855), and more.
The main motive of the Shanghai upgrade, particularly in giving users the ability to withdraw their previously locked ETH, was to boost liquidity across the Ethereum network and the broader cryptocurrency market. Users will also be able to notice lower fees, making it cheaper to transact on the network.
Boosting liquidity across the market will put more control in the hands of investors themselves, rather than having them rely on additional liquidity providers for markets to operate. Cheaper fees would allow more developers to deploy and run smart contracts on the Ethereum network, and invite a larger portion of interested users that wish to use decentralized applications built on Ethereum or transfer digital assets built on the network.
Ethereum’s Shanghai upgrade was a big step to increase transaction efficiency and to reduce transaction fees, which will naturally lead to increased utilization of the network. As the most widely used blockchain network to date currently hosting over 4000 applications, the upgrade is extremely positive not just for Ethereum’s long-term future, but also the entire blockchain industry. The Shanghai upgrade is a step closer to mainstream adoption of digital assets, and it will be interesting to see how much more inviting the digital asset industry will be to developers, users, and institutions worldwide.