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Ethereum’s ‘Shapella’ Upgrade: What It Means For The Crypto Market?

Author: Stelian Olar
Stelian Olar
All publications of the author

The Ether fever is once again on the rise as the recent Ethereum network upgrade is expected to unlock staked assets and increase the long-term profitability of the digital currency. Ethereum (ETH) the second-largest cryptocurrency has undergone another major technical upgrade on April 12, known to the cryptocurrency community as the Shapella upgrade. 

With the Shapella upgrade, ether holders will be able to withdraw their assets, previously locked-in centralized exchanges like Coinbase, Binance, and Kraken, or decentralized finance protocols (DeFi) like Lido Finance. 

Leading up to one of the most anticipated events since the Ethereum blockchain completed the Merge on 15 September 2022, the ETH token price rallied 6% since the start of the month trading at an average price of USD 1,900 – based on Binance pricing data.

At the time of writing, one ETH is worth USD 1,920, up 1.39% since the Shanghai upgrade.

Additionally, the 24 trading volume increased by 16.8% on the day of the Shapella upgrade to almost $10.9 billion. This rally follows the past pattern of excitement surrounding network upgrades, as witnessed during the transition to a proof-of-stake system in September 2022. 

Source: Coinmarketcap

As Ethereum moves towards a more energy-efficient system, it is expected to take on the characteristics of a traditional financial asset, with interest paid to holders.

The Shapella upgrade is touted as the most important update for Ethereum since the network's merge in September 2022, wherein the consensus mechanism shifted from proof-of-work (PoW) to proof-of-stake (PoS).

As such, it is expected to have a major impact not just on the entire Ethereum ecosystem but also on the wider crypto market as a whole.

What is the Shapella upgrade?

The Shapella upgrade is a culmination of crucial changes made to both the execution layer, Shanghai Ethereum Virtual Machine, and the consensus layer, Capella. Combine these two terms Shanghai (execution layer) and Capella and you get another fancy name Shapella.

This upgrade will include updates to the Engine API that connects these layers, making it easier than ever for users to stake their ETH and earn rewards. 

This network upgrade was activated at epoch 194048, which occurred at 22:27:35 UTC on April 12, 2023.

One of the primary objectives of the Ethereum Shapella upgrade is to enhance the staking experience for Ethereum holders by enabling them to withdraw ETH from the staking contract. This feature will significantly decrease the risks of holding staked Ethereum (stETH) or liquid staking derivatives (LSDs) through platforms like Lido Finance. 

The rise of decentralized platforms such as Lido DAO (LDO), Rocket Pool (RPL), and Frax Shares (FXS) has enabled ETH holders to stake their assets and receive a liquid staking token as a reward. This token can then be utilized within the DeFi ecosystem to generate additional yield.

The benefits of the Ethereum Shapella upgrade are expected to be significant, including: 

  • reduced gas fees,

  • improved scalability, 

  • and faster transaction speeds. 

By reinforcing the foundation of the network, Shapella lays the groundwork for a more secure and stable DeFi ecosystem that can support a wide range of use cases and applications. 

This upgrade will also change how Ethereum is secured and will swap out miners for validators. Validators will use their cache of ether to verify transactions and mint new tokens, turning Ether into something like a traditional financial asset that pays interest to holders.

Shapella Upgrade’s Potential Impact

One of the most significant impacts of the Shapella upgrade on the Ethereum network is the potential unlocking of a massive $34 billion worth of staked ETH. This liquidity injection could have far-reaching consequences for the broader crypto market. 

According to a report by IntoTheBlock, the Shapella fork will allow validators to withdraw staked ETH, unlocking billions of dollars of previously locked funds. However, due to security concerns, withdrawals will be processed with a delay, preventing a sudden exodus from the network.

Source: IntoTheBlock

The report further notes that partial withdrawals will take around 4 to 5 days, while the full withdrawal process could take over 100 days, with an estimated daily withdrawal of $80 million to $100 million worth of Ethereum.

As this significant amount of staked ETH re-enters the market, it could potentially increase liquidity and bring more attention to the Ethereum network.

It remains to be seen how this influx of funds will impact the price of ETH and the broader crypto market, but the unlocking of $34 billion worth of Ethereum is undoubtedly a significant event for the entire crypto community.

Ethereum 2.0 Staking Contracts Enable Withdrawals: What Does This Mean for ETH Holders?

As the Ethereum network undergoes significant upgrades, including the ability to withdraw from Ethereum 2.0 staking contracts, the implications for ETH holders remain uncertain. 

Up until now, the staking contract launched in December 2020 only allowed one-way deposits of Ether. However, with the advent of the Ethereum Improvement Proposal EIP-4895, there is a new development that could be a game-changer. 

This proposal allows for staked Ether to be "pushed" from the Beacon Chain to the Ethereum Virtual Machine (EVM) for withdrawals, opening up a whole new world of possibilities for those holding staked Ether. The EIP-4895 update provides an unprecedented level of flexibility and liquidity, allowing users to withdraw staked Ether and use it in a multitude of ways across the DeFi landscape.

Source: beaconcha.in

With 18 million Ether staked on the Beacon Chain, valued at $34 billion, incremental unlocking of funds can occur over time.

However, recent On-Chain data shows a decline in staking provider deposits over the past week, raising important questions about how ETH holders' actions may impact Ethereum's price moving forward. As the network continues to evolve, ETH holders must navigate the potential opportunities and risks of these upgrades.

Source: beaconcha.in

How will Shapella affect ETH price?

Now that the Shapella update is behind us many ETH investors are wondering how it will affect the value of the cryptocurrency. One area of concern is the withdrawal of staked ether, which could potentially decrease demand and cause a price drop.

According to a report from the K33 research firm, the upgrade could result in the sale of around 1.3 million ETH, worth approximately $2.4 billion but the majority of this is expected to come from reward withdrawals, with an additional amount being sold as part of the bankruptcy proceedings for Celsius.

While the report suggests that this selling pressure could put downward pressure on ETH's price, there are mitigating factors to consider.

The amount being sold only represents about 20% of the average daily trading volume for ETH, so it is unlikely to overwhelm the market. Additionally, the withdrawal process takes several days, which can prevent sharp price drops and allow the market to adjust to the increased supply of ETH.

Overall, the impact of the Shapella upgrade on ETH's price remains to be seen.

Will the potential selling pressure be offset by buyer demand, or will it lead to a significant price drop?

Only time will tell.

Withdrawal System and Selling Pressure

The two-tier partial and full withdrawal system allows stakers to withdraw amounts exceeding 32 ETH or their entire 32 ETH, plus additional rewards.

But what about gas prices?

The Ether withdrawals won't require any gas costs but there will be a limit of 16 partial or complete withdrawals per block, which means there will be a delay in the amount of ETH moved to sell.

So, what can we expect in terms of selling pressure?

Based on the Nansen report suggests there will be three phases of selling pressure after the upgrade:

  1.  In the first phase, lasting for 27 hours after the update, partial withdrawals will lead to daily selling pressure of around 84,000 to 125,000 Ether per day (or roughly $133 million to $197 million).

  2. The second phase, lasting between the third and fourth day after the upgrade, will see the maximum selling pressure from partial and full withdrawals, adding an extra $218 million to $275 million in selling pressure per day.

  3. Finally, the last phase of selling pressure will be mainly from full withdrawals, lasting between 19 to 52 days and adding a daily selling pressure of between $127 million and $154 million.

It's important to note that while there will be selling pressure, the staggered withdrawal system and limits on withdrawals per block should help mitigate any major price drops. 

ETH's Price Facing Resistance: Will it Break Through or Experience a Correction?

The current state of Ethereum's (ETH) price is causing a stir in the crypto market, as it struggles to break through its resistance levels. 

As of now, ETH's price is “hugging” its upward channel resistance. Since the beginning of the year, ETH has had a bullish trajectory, moving inside an ascending channel, with a year-to-date increase of over 56%.

So far the Shapella upgrade failed to put any downside pressure on the ETH’s price. However, while the bulls remain hopeful of the potential breakout, the bears have their eyes set on the $2,000 big psychological level, which seems to be the biggest obstacle to ETH's price. 

On the flip side, the short-term support zone lies nearby at the $1,840-20 support zone followed by the $1,676  role reversal support level.

Final Thoughts

The Shapella upgrade is a significant turning point for Ethereum, bringing a host of benefits that are sure to attract more users and investors to the network.

While short-term volatility is likely, the long-term benefits of increased transaction capacity, decreased costs, and improved smart contract security and efficiency are substantial. The big question remains: will ETH break through its resistance level or experience a correction?

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Risk Warning: Your capital is at risk. Statistically, only 11-25% of traders gain profit when trading Forex and CFDs. The remaining 74-89% of customers lose their investment. Invest in capital that is willing to expose such risks.