Approaching Shanghai Upgrade Reignites Interest in the Ethereum Network

Many blockchain projects committed to advancing their ecosystems in 2022, undeterred by the bear market cycle, which prevailed for the better part of the year. Ethereum, the leading smart contracts platform, successfully shipped the merge on Sept 15, followed by another major milestone in Cardano's Vasil upgrade a week later. The Ethereum network completed the transition of the original execution layer to the Beacon Chain, the proof-of-stake consensus layer on its side – a switch that was previously postponed on several occasions. The deployment of the hotly anticipated Vasil hard fork, on the other, represented Cardano's biggest achievement. Polygon, on its end, pursued its zero-knowledge proofs exploits with more aggression simultaneous with other strategic ambitions.

Barely two weeks into the year, actively building ecosystems have reaffirmed the resolve to realize their goals. For the majority, the target is, in essence achieving scalability without ‘handicapping' comprises of either decentralization or security, as is the case for current chains. The Ethereum ecosystem has especially attracted massive attention on this front, ascribable to its eagerly awaited Shanghai upgrade, which was announced last month.

Emphasis on developments affecting the execution layer

When Ethereum developers met last month, they set out to roll out the Shanghai upgrade by March this year, amongst other developments. Last Friday, the Ethereum development teams convened in a virtual meeting, agreeing to rename the ACD calls to ACD Execution (ACDE) calls going ahead as the first highlight. The devs instituted a separate series of ACD Consensus (ACDC) calls for holding discussions pertaining to the consensus layer.

Ethereum devs locked on delivering staked Ether withdrawals by March

The write-up of the Jan 5 ACDE call confirmed progress being on track for the launch of a public testnet of the Shanghai upgrade as early as next month. A full release of the mainnet is then slated to happen in March. The introduction of withdrawal support of staked Ether (ETH) was approved as the sole objective, with developers prioritizing it as the flagship feature.

EOF implementation dropped

Following last week's discussions on which implementations to give precedence, the developers agreed to exclude Ethereum Optimistic Fork (EOF) implementation entirely from the scope so as to meet the set targets on the sole goal. Calls to review the inclusion of the EOF implementation in the Shanghai upgrade scope at a later date were dismissed. No additional EIPs intended for the Shanghai upgrade in place of the EOF EIPs were accepted either. The devs also discussed the issue of different serialization methods between the Ethereum Virtual Machine's (EVM) Encode-Decode (ED) and Canonical Serialization (CS) layers in the meeting.

The next ACDE meeting is planned for Jan 19, which will likely involve more discussion around the withdrawal feature. This week, Ethereum released a developer network dubbed “devnet 2” on Jan 11, followed devnet1 in November, according to notes of the Ethereum consensus layer (CL) meeting prepared by Ben Edgington.

The planned withdrawal of ETH staked back in December 2020 will entail an ‘exit queue' for validators opting to leave. For specifics, the number of validators able to exit per epoch (32 blocks) will hinge on a metric ‘churn limit' that has a minimum value of 4. Its actual figure is, however, derived from a more or less straightforward manipulation of the validator count and a churn limit quotient defined as 65,536, i.e., 2^16.

A predefined withdrawal period will apply to discourage validators from pursuing ulterior interests.

Source: Twitter

Researchers surmise that withdrawal periods for Ethereum won't be as large as other PoS networks like Cosmos in a long timeframe. Another queue, leveraging the same churn rate, will determine inclusion into the validator set.

The enabling of consensus layer withdrawals in EIP 4895 has provided a pretext for the projected growth of decentralized trustless protocols and a rise in the popularity of liquid staking products. The latter has already been observed manifesting in staking platforms' tokens which have been surging and making headlines in the news.

Staked ETH withdrawal inclusion in Shanghai shapes activity around Ethereum markets

Lido DAO's governance token, LDO, is one of those that have thrived on this narrative. CoinMarketCap data shows that the token has climbed double-digit gains in the last seven days. Lido is among the leading ‘known' stakers, with 25.82% of all Ethereum deposited to the Beacon Chain through its pool.

Validator distribution by staking pool. Source: Beaconcha.in

The weekly chart of staked ETH shows that the deposits have picked up after consecutive declines until the week ending Dec 19.  Since the official Shanghai upgrade announcement five weeks ago, the staking ratio figure has increased by roughly 2.6%.

Source: Dune Analytics

The staking contract now holds 13.30% of the total Ethereum supply, going by the more than 16.025 million ETH sent to it. This sum deposited to the consensus layer deposit address translates to roughly $22.7 billion at current prices  The staked share ranks Ethereum lowest among popular proof-of-stake chains that average between 46% and 97%. StakingRewards data shows that Ethereum's staked share trails the ratios of other leading proof of stake chains, including BNB, Cardano, and Solana, with figures of about 97%, 72, and 71%, respectively.

Validator count surpasses 500,000

The latest data on Dune Analytics' ETH staking dashboard tracked Ethereum clients' managers count to 500,625 while depositor addresses exceeded 87,000. This milestone suggests forward-looking conviction in the ecosystem.

Analysts opine that staked ETH withdrawals could conceive an accelerated increase in stakers or at least willingness to stake. Considering the ready availability of staking platforms that offer liquidity on the deposits, however, most might fail to withdraw the staked Ether. The forecasted scenario of an increase in Ethereum's staking ratio will see the current figure grow to the 30-50% range, in the opinion of Messari researcher Kunal Goel.

Unresolved PoS dynamics

Developments around the Shanghai hard fork have drawn a lot of excitement as one of the ecosystem's major events to watch out for in Q1. Industry experts, however, caution that there are still several challenges tied to the new consensus mechanism, which could still hold back the ecosystem this year. Top of the list – and perhaps the biggest concern – is the lack of trust from the community.

Competition from L2 protocols in on-chain activity

Layer-two (L2) protocols have progressively been cementing their place thanks to the convenience they offer in terms of processing transactions. Their tremendous adoption as observed in daily transactions, has resulted in Ethereum mainnet's transactional activity contracting in the last three months. Data from L2 tracking website L2beat shows that the average of combined L2 activity (calculated in terms of transactions per second) has been above that of Ethereum since Oct 12.

Source: L2beat

The average L2 transactions per second (tps) was on Jan 12 observed at 25.06 against Ethereum's 12.56 equivalent tps average. This domination has been primarily influenced by Arbitrum and Optimism. The two rank among the top 10 biggest DeFi protocols in terms of total value-locked data ahead of other blockchain ecosystems like Solana and Fantom, as per DeFi Llama data.

Ethereum (ETH) price action

Ethereum (ETH) has on Friday cooled off just above $1,400 on mild correction after its second price spike this week less than 24 hours ago. The recent uptrend adds to an encouraging streak of green candles in 2023, which have seemingly renewed little confidence among price bettors. Thursday's gain, in particular,  pushed Ether price into grounds above $1,400, uncharted for more than two months, whilst forming a support line around $1,365 on the hourly ETH/USD chart.

Though Ethereum is among the few top crypto projects that have changed hands above the 200-day simple moving average (SMA) this week, a majority of alts and Bitcoin are still suppressed below their respective averages, including Bitcoin. This observation suggests a weak market breadth. Bulls latched onto the $1,400 mark in the downside action witnessed earlier today, but their grip is likely to be retested in the short term if another attempt to clear $1,430 ends in failure.

Bets on the medium-outlook, centred around Shanghai, have already been floated with the majority in harmony with potential sell-off pressure from the unlocking feature ensuing the upgrade. Analysts maintain a bullish long-term projection targeting the 200-3D EMA around $1,880, which has twice been a key resistance – in May and August 2022. This week, market insight provider Santiment observed aggressive ETH accumulation by deep-pocketed investors, reflected in the increase of ‘whale' addresses by 3000 since November.

ETHDenver conference

This year's edition of the annual community-funded ETHDenver conference is also one to note in the calendar, kicking off with the #BUIDLWeek between Feb 24 and Mar 1. The flagship #BUIDLathon will encompass a series of development activities whose participation is incentivized by bounties as well as casual engagement community events. This educational experience will be followed by the core event that will come to an end on Mar 5. Confirmed speakers for the main event include Ethereum co-founder Vitalik Buterin, Governor of Colorado Jared Polis, and Big Green DAO's Kimbal Musk. While official venues for the free-to-attend event are yet to be confirmed, the community of artists, developers and other enthusiasts has demonstrated a sense of eagerness.

To learn more, check out our Investing in Ethereum guide.