The Ethereum Shanghai Upgrade is one of the Ethereum network’s most anticipated upgrades. The upgrade completes Ethereum’s transition from proof-of-work to proof-of-stake. But why has this upgrade garnered so much attention? What will it change in the Ethereum ecosystem, and how will these changes affect ETH traders, investors, and developers? This article dives deep into the Ethereum Shanghai Upgrade, breaking down all the details.
What Is The Shanghai Upgrade?
The Ethereum Shanghai upgrade, also known as the Shanghai Fork, is an Ethereum network upgrade geared toward making the network more consistent, upgradeable, and efficient. When Ethereum launched in 2015, there was only one other blockchain, Bitcoin, to benchmark.
At the time, Bitcoin had several shortcomings, which Ethereum helped to resolve. However, because there was little advancement in the blockchain sector, the Ethereum network, however effective, had shortcomings of its own, which more novel blockchains like Polygon and Solana highlighted.
To help fix these pitfalls, the Ethereum team has released a series of updates. One such update was the Ethereum Merge that took place in September 2022. The Merge was a technical update that helped transition the network from its proof-of-work consensus mechanism to the proof-of-stake mechanism. Moving to PoS significantly reduced Ethereum’s energy-intensive minting efforts, lowered gas fees, and improved network speeds.
When Is Ethereum Shanghai Upgrade?
The Ethereum Shanghai Upgrade is scheduled for sometime in March 2023. The exact date is not yet set, but there’s a high likelihood that it will occur around mid-month. The upgrade isn’t time-intensive; it will take effect almost immediately after its formally launched.
What Will the Ethereum Shanghai Upgrade Have?
Following the Merge, there was still a need to make the network more efficient for its users, hence the proposal for the Shanghai fork. This upgrade proposes five key improvements known as the Ethereum Improvement Proposals (EIPs).
Let’s discuss these EIPs in greater detail.
Ethereum Object Format
The Ethereum Object Format (EOF) holds all five EIPs proposed in the Ethereum Shanghai upgrade. It is a suite of five approaches that target making execution on the Ethereum blockchain more effective. EOF is the first-ever upgrade focused on the Ethereum Virtual Machine, making it one of the most significant upgrades in the network’s history.
Here are the five proposals contained in this format.
- EIP-3540: This proposal aims to change the structure of EVM instructions. As a result, it will make it easier to upgrade the virtual machines.
- EIP-3670: The second proposal will introduce code validation for smart contracts when deploying them. It will reduce the execution costs of smart contract deployment on the blockchain.
- EIP-4200: This upgrade will improve the pace of the Ethereum stack machine. An ETH stack machine is the technology responsible for queuing transactions on the Ethereum network. A faster stack machine will result in faster transactions and lower gas fees.
- EIP-4750: With this proposal, stack machines will have new functions to help improve their performance, making Ethereum-based programs more efficient.
- EIP-5450: This upgrade helps detect whether an Ethereum stack machine is at full or minimum capacity. It prevents stack overflows and underflows, which can compromise the system’s performance.
Beacon Chain Stake and Withdrawal
Besides the Ethereum Object Format that proposes EIPs, the Shanghai upgrade will also introduce a new feature to the Beacon Chain staking process. The Beacon Chain is Ethereum’s proof-of-stake mechanism, which was launched to ensure the network’s PoS logic was sound before pushing it to the Ethereum mainnet.
Using this mechanism, Ethereum users could stake ETH in the network but not withdraw their staked coins. Now, courtesy of the EIP-4895 proposal, Beacon Chain stakeholders can withdraw their staked ETH. This upgrade will lead to withdrawals of about 16.5 million staked ether, explaining the excitement of the Ethereum community.
How Will Shanghai Upgrade Affect the Ethereum Network?
The Ethereum Shangai upgrade will have a ton of impact on the Ethereum network. The first and easiest way to foresee impact is the realization of the key developments listed on the network’s roadmap. For example, the upgrade will clear the way for the sharding process, which is scheduled to launch later in 2023.
Ethereum sharding is the process through which the network performs parallel processing to increase the network’s throughput. Sharding allows the Ethereum blockchain to run multiple simultaneous transactions, increasing the amount of data it can process at a given time.
The sharding upgrade will occur in two phases, one in 2023 and the other in 2024. In 2023, it will launch the beta phase to make more data available on the blockchain. This phase will also include a rollup feature that will enable the network to perform more transactions per second.
The second sharding phase will focus on allowing and improving communication between shards. There is still some debate around enabling each shard to hold its own smart contracts and making them quantum resistant. However, the finer details are yet to be documented.
Affect on Ethereum’s Price
The scheduled Shanghai upgrade can have a supply and demand impact on Ethereum, affecting its market price. Because of the tension and speculation about the upgrade, ETH’s price may experience significant volatility during and after the upgrade.
Considering that a whopping $25 billion worth of ETH will be released from the staking reserves into the market, there might be a massive liquidation of assets, resulting in steep price fluctuations. If this happens, it will lower the yields from ETH staking pools, encouraging investors to transfer their funds to more lucrative staking pools, which could hurt ETH prices.
However, ETH volatility may not be such a downside for investors who understand volatility swaps. These are contracts that investors agree to, predicting the extent of a token’s price fluctuation over a given period. It allows traders to bet on and benefit from predicting volatility patterns in the future.
Affect on Ethereum Investors
The impact of the Shanghai upgrade on investors will depend on the type of investor. Short-term investors and day traders may experience big price changes in the days leading up to and following the upgrade. This will offer a chance to monitor ETH prices and capitalize on their short-term movements to make a profit.
Long-term investors, on the other hand, are likely to experience increased value in their ETH investments after the Shanghai upgrade. The Shanghai fork will scale up the service of the Ethereum network. The upgrade enables faster transactions, more affordable smart contract deployments, and more effective Ethereum programs. Ethereum users will respond positively to this increased network use, ultimately increasing ETH’s market valuation.
Consequently, this upgrade and the improvements brought by the Merge could motivate institutional adoption of the ETH token. Many companies will likely come on board the Ethereum network as investors through the staking mechanism. In turn, ETH becomes a blue-chip asset, and its price increases.
Affect on Ethereum Traders?
The Ethereum blockchain is considered one of the most expensive blockchains to trade on. Due to the slow speed of transactions on the platform, most average traders have to pay very high gas fees when they trade on the network.
This gas fee problem trickles down to purchases of non-fungible tokens (NFTs) linked to the network. For instance, during the launch of Yuga Labs’ “The Otherside” NFT collection, buyers had to spend as much as 2.5 ETH on gas fees alone. Such costs make it difficult for traders to explore the network’s benefits.
However, with the Shanghai upgrade, this will change. Ethereum will now be able to process more transactions at higher speeds, which will improve even more once Sharding is introduced. With faster transactions, gas fees will drop, and traders can get maximum profits from their blockchain transactions.
Lower costs will also attract more developers to the network, increasing the number of decentralized finance (DeFI) systems and decentralized applications (dApps) it supports. In turn, traders will have a wider variety of platforms to transact on, improving their earnings.
Affect on Ethereum Developers
The Ethereum Shanghai upgrade, particularly the EOF, will improve developer experiences on the network. This format will make stake management easier, reducing the chances of
Ethereum-based applications are crashing. It will also make code validation easier at deployment, allowing developers to release smart contracts on the blockchain without hassle. Additionally, the upgrade will make it easier to update EVM-compatible applications.
What is the difference between the Ethereum Merge and the Ethereum Shanghai Upgrade?
The Ethereum Merge was a technical upgrade that transformed the network’s consensus mechanism from proof-of-work to proof-of-stake. ETH holders can now stake their tokens for profit because of this upgrade.
On the other hand, the Shanghai upgrade is a network overhaul geared at improving the effectiveness and consistency of the Ethereum blockchain. This upgrade targets Ethereum Virtual Machines, smart contracts, and the fundamental system attributes of the Ethereum blockchain. By the end of this upgrade, the chain will have faster, more affordable transactions and the capacity to run system updates more effectively.
Should I avoid investing in Ethereum until after the Shanghai Upgrade?
Depending on the type of trader you are, you can choose to invest in ETH during the upgrade period or wait until after its conclusion. Short-term traders can capitalize on the price fluctuations during the upgrade period to day trade. Long-term traders, on the other hand, can invest while ETH prices are lower due to the uncertainty of the upgrade because ETH prices are likely to increase significantly after the upgrade.
Will the Ethereum Shanghai Upgrade negatively affect ETH prices?
The Ethereum Shanghai upgrade will affect ETH prices, but it is unclear to what extent. ETH prices may plummet due to the market saturation that will result from releasing staked ETH for withdrawal. However, it may also rise as more individuals see the benefits of the upgrade and invest in the network.