The upcoming Ethereum Shanghai hard fork is scheduled for March 2023, and the upgrade will end the network’s transition to PoS, which began with the Merge event on September 15, 2022. After Shanghai is deployed, previously locked Ether will be released for the first time since December 2020.
According to Etherscan data, there are currently over 16.6 million ETH locked in PoS staking protocols, worth $28 billion as of February 16, 2023. Ethereum’s transition from PoW to PoS has already begun to hit its mark. It was originally created to shrink the supply of ether. In the 154 days following the merger, more than 24,800 ETH were burned, resulting in a 0.05% yearly Ethereum shrink.
Important ether stats since the merger.Source: Super Sound Money
On February 16, the total supply of Ether was 120 million, which means that more than 10% of the supply will be unlocked, and rewards will be provided from the Shanghai update.
Let’s explore on-chain metrics to determine what to expect during the Shanghai upgrade.
Partially locked ETH is liquid thanks to liquid collateralized derivatives
In order to enjoy the income bonus before the Shanghai upgrade, investors must lock their ETH and run a trusted node. The minimum staking requirement is 32 ETH, which is locked to be completely illiquid, meaning traders have limited practical options for these tokens.
Liquid Staking Derivatives (LSD) allow users to benefit from staked Ether while maintaining the ability to sell derived tokens received on secondary markets. The LSD protocol collects and locks the native Ethereum, providing users with another token representing the equity in the pool.
Liquid staking derivatives went unnoticed until Lido and other protocols started seeing inflows after The Merge. Liquid staking has surpassed illiquid staking since the inception of Ethereum staking. As of February 13, 57% of all ETH was collateralized in liquid form, compared to 43% that was illiquid.
Mortgage liquidity and illiquidity.Source: Binance
With the majority of Ether locked in LSD, investors now have access to liquidity, which may reduce selling pressure following the Shanghai upgrade.
Very few stakers are profitable
Back in December 2020 when ether staking began, the price of ether ranged from $400 to $700. By contrast, many investors started betting on ether near its all-time high of $4,200. According to Binance:
“We noticed that a significant amount of ETH (approximately 2 million) had been staked in the $400-$700 price range—the earliest stakers as of December 2020—due to the then little-known liquid staking , and therefore illiquid.”
Many investors holding ether are now recording unrealized losses as ether has corrected 69% since its all-time high.
ETH price at the start of staking.Source: Binance
With a liquidity date currently still undetermined, a small number of profitable stakeholders may have a firm belief in the Ethereum network. With a large number of stakers losing money and gainers likely to be long-term investors, the price of Ether may not drop significantly when tokens become unstakeable.
Lido goes beyond a single staker
On January 2, 2023, Lido officially surpassed MakerDAO to become the platform with the highest total locked value of DeFi. Lido is also the largest entity on Ether as of February 13. Lido holds more than 5 billion ETH, and the protocol accounts for 29.2% of all entities. Notably, nearly 30% of stakeholders currently have liquidity options through Lido.
A single staker running a node takes the risk of running a node at home or with a small team. A single stakeholder may view ether as a long-term currency due to high node costs and risks involved. Single stakeholders currently account for 24.9% of the total.
Ether is collateralized by entities.Source: Binance
Since individual stakers or Lidos hold nearly 55% of all staked Ether, the risk of Ether dumping is reduced.
While on-chain data surrounding the Shanghai upgrade could be positive for the ethereum network, some analysts are predicting a sharp drop in ether prices.
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As reported by Cointelegraph