All you need to know about Ethereum’s upcoming Shanghai Upgrade

The dust is yet to settle on the Ethereum Merge finalised last September. Still, there are indications of another significant upgrade in the works on the Ethereum ecosystem called Shanghai Upgrade. 

The upgrade is scheduled to come up this March. Through the process, the ether staked on the Beacon Chain in late 2020 will finally be released, but it’s not that simple. 

In this explainer, we will demystify what the Shanghai Upgrade is and its significance for the Ethereum community. 

What is Ethereum Shanghai Upgrade?

To understand this upgrade sufficiently, it is important to have an overview of the landmark Merge that took place last year.

In September 2022, Ethereum completed its switch to a Proof of Stake (PoS) consensus mechanism. Before this, Ethereum used Proof of Work (PoW) and a mining mechanism to process and validate transactions. But after the upgrade, users who want to take part in validating on the network can now stake 32 ether rather than solve computational puzzles using specialised mining equipment.

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However, this was only the first milestone. The next consequential update in the works is the Shanghai Upgrade. 

Since the Merge, which saw the Ethereum mainnet combine with the PoS Beacon Chain, users haven’t been able to remove their staked funds. 

Note: The Beacon Chain was the name of the original proof-of-stake blockchain launched in 2020. It was created to ensure the proof-of-stake consensus algorithm was sound and sustainable before enabling it on Ethereum Mainnet, which was eventually launched in September 2022. Therefore, it ran alongside the original proof-of-work Ethereum.

In simpler terms, the Beacon Chain was a foundational component for the secure, environmentally friendly and scalable Ethereum we have now. However, the issue remains that stakers have not been able to withdraw their locked ether since the launch of the Beacon Chain in December 2022.

Thankfully, the Shanghai upgrade resolves this issue and adds withdrawal functionality. On January 5, Ethereum developers agreed to a March launch date for implementing the upgrade as a network hard fork. 

How will it work?

The Shanghai upgrade will implement EIP (Ethereum Improvement Proposal) 4895, enabling consensus layer withdrawals. 

Note: EIPs are improvements/changes to the Ethereum network and how it runs. Anyone can create an EIP by following the submission format and submitting it to the community and a board of developers for review. An EIP’s technical changes must be approved to become part of an update. EIPs also conform to a specific numbering system, and the Shanghai upgrade is known as EIP 4895.

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Recall that users cannot unlock their staked ether or staking rewards until the Shanghai upgrade is completed. However, after the Shanghai Upgrade, it is expected that only 43,200 ETH can be withdrawn per day to prevent mass withdrawals that would leave the Ethereum network vulnerable to attacks.

Shadow Fork deployed 

In preparation for the Shanghai Upgrade coming up in March. Ethereum Blockchain developers took a step forward this week. They successfully launched a ‘Shadow Fork’ this Monday. 

The Shadow Fork is a test model for the actual mainnet coming up. It lets developers check if the code for the proposed upgrade functions well on an actual blockchain. This will allow Ethereum validators to start testing withdrawals and preparing for when the upgrade hits the mainnet. 

The developers have also noted that more shadow forks will be released in the coming week in the run-up to the network upgrade. There were only a few minor issues, which were all addressed, according to Ethereum core developer Marius Van Der Wijden.

The significance 

The importance of the Shanghai Upgrade differs due to various contexts. Those that have Ether staked directly on the network or through a staking product will now be able to withdraw the funds. 

There are also talks on how the upgrade could impact Ether’s market price. This is, however, difficult to predict. Staked Ether owners can withdraw and sell their holdings when withdrawals are allowed. This unlocks a significant portion of liquidity and could influence the market’s direction. 

Generally, the Shanghai Upgrade enables a crucial feature for Ethereum stakers or those considering staking. Along with Ethereum’s Merge, it’s one of the most anticipated features for users who have patiently waited for a fully-functional Proof of Stake mechanism. While potential effects on the market are uncertain, members of the Ethereum community and broader crypto verse understand and appreciate what it offers.