In just two weeks, if all goes according to plan, Ethereum’s much-anticipated Shanghai upgrade will go live, allowing staked ETH to be withdrawn from the network and complete the multi-strong transition. .
As of December 2020, when Ethereum began its PoS model journey—where users stake cryptocurrencies to validate on-chain transactions and are then rewarded for participating in encrypting newly created cryptocurrencies—network participants pledged ETH worth up to $32.95 billion.
According to the Ethereum Foundation, in September, the Marge event successfully upgraded the Ethereum mainnet to a PoS consensus mechanism, permanently changing the way Ethereum transactions are processed and reducing the network’s carbon footprint by 99%.
But Merge does not grant stakeholders the ability to withdraw their locked ETH or the rewards generated by such activity. These funds remain on Ethereum. Finally, after more than two years, the Shanghai upgrade will help stakers withdraw this batch of locked ETH.
On April 12, at 18:27 local time, the Shanghai upgrade started. What did that seismic moment in Ethereum’s history mean for the network, its participants, and the crypto ecosystem?
In terms of technology, Shanghai’s contribution is not as great as you might think. Most Ethereum stakers who have already deposited ETH onto the network through intermediaries like Lido and Coinbase will not need to do anything other than wait once Shanghai is up and running.
The pledged ETH and rewards will be withdrawn by the intermediary on various dates after the successful implementation in Shanghai. Lido, the most liquid staking protocol, recently announced that withdrawals will be available about a month after the upgrade after a series of security checks.
Meanwhile, Coinbase has yet to give an exact timetable for launching ETH withdrawals. For some clients, the process can take up to several months, they said. All participants staking Ethereum through a third party should check with the company about their withdrawal times.
In order to withdraw, the validator needs to provide the withdrawal address (usually, most validators have submitted the address during the staking process). Once the withdrawal address is sent to Ethereum, it cannot be changed.
Validators can then choose to withdraw some or all of their funds. If a validator’s withdrawal information is updated, funds will be automatically sent to their withdrawal address. Independent stakers can also choose to withdraw in full, including an initial deposit of 32 ETH and receive staking rewards, thus ending the validator’s participation in the network. To fully exit the Ethereum staking process, a validator simply sends an exit message to the network using the validator and client secret.
Some and all withdrawals will be processed in the order they are received by the network; the initial queue may last 2 to 3 days depending on traffic expected to arrive shortly after launch in Shanghai.
What does Shanghai mean for the Ethereum ecosystem?
While Shanghai is certainly a noteworthy event for individual investors and symbolizes the culmination of Ethereum’s transition to PoS, the upgrade will not significantly change the way users interact with Ethereum, nor the economic foundation of the network.
“Most people have been able to sell their staked ETH for a long time because most of the ETH is staked through liquid collateral protocols like Lido or Rocket Pool,” said Jacob Cantele, product manager for Ethereum’s layer-2 Mantle. . “So I really don’t think Shanghai represents a major shift in the ethereum economy.”
Many of these intermediary protocols have issued tokens to their clients representing ETH collateral, which means that the majority of funds held in ETH collateral contracts have moved freely across the crypto ecosystem over the years. With Ethereum’s internal mechanics fully converted to PoS in September, the network is poised to catch up to Shanghai without much difference.
“The Shanghai upgrade is exciting, but I think it’s just another step forward,” said Alison Mangiero, executive director of the Proof of Stake Alliance, an advocacy group for PoS blockchain networks like ethereum.
What does Shanghai mean for the wider crypto environment?
But while affairs of Ethereum are unlikely to change much after Shanghai, the political landscape outside the network’s virtual borders could be significantly affected by the escalation.
Over the past year, and especially since the launch of the FTX cryptocurrency exchange last November, U.S. regulators have recently cracked down on cryptocurrency companies, especially those offering staking services. In February, the SEC fined centralized cryptocurrency exchange Kraken $30 million, alleging that its intermediary staking services constituted illegal securities.
Kraken competitors like Coinbase took the opportunity to clarify that their own staking services do not determine the rate of return on internal staking deposits the way Kraken does, and thus should not be considered profitable products. Still, last week the SEC sent a Wells notice to Coinbase, alleging that the company’s staking services also constituted unregistered securities.
Shanghai’s implementation may not immediately change the escalating battle between the SEC and staking providers. But that could put another, larger mortgage-related target on the radar of the federal agency: ethereum itself.
According to the Wall Street Journal, on the day of the successful conversion of The Merge event in September last year, SEC Chairman Gary Gensler told reporters that due to the hardware mechanism, the PoS network can be regarded as a securities issuance service. Since that day, Gensler has hinted that ETH might be a security, mostly implying that “only bitcoin” is a commodity.
Going forward, the SEC may use the Shanghai implementation as evidence that ETH is a security.
“Unless the Shanghai upgrade is successful, people won’t be rewarded with the ether they earned as collateral,” said Michael Selig, a cryptocurrency regulatory lawyer who previously worked at the CFTC.
While Selig firmly believes that the SEC’s move constitutes a misunderstanding of securities law, especially given the decentralization of ethereum’s core development team, he worries that it could become an avenue for scrutiny of the entire ethereum network.
“What do they have to say? These are investment contracts, and it’s proof that someone is managing or working hard,” Selig said.
Such an argument can only be made once withdrawals are enabled on Ethereum and a theoretical contract between Ethereum and its users is executed. If the Shanghai upgrade fails, the SEC will have a stronger argument, representing a series of disgruntled investors, and the network has yet to complete the investment agreement. …
It remains to be seen whether the SEC’s interest in cryptocurrency regulation has grown to one of the sticking points in trying to undo the entire blockchain ecosystem. Either way, April 13 (UTC) — the date of the Shanghai upgrade — will remain an iconic milestone for the crypto industry. It would be a symbolism that usually has more tangible implications in the political sphere.
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