What Is Shanghai Upgrade, The Latest Spotlight Of Ethereum?

• Shanghai upgrade allows the withdrawal of stakes, which was not possible before.
• This has resulted in increased liquidity, lower transaction fees, and scaling of the network.

The Shanghai Upgrade is the latest Ethereum Improvement Proposal (EIP) which allows users to withdraw their staked ETH. This EIP-4895 is a hard fork for the Ethereum network. 

What is Staking in Ethereum?

Previously, Ethereum used a Proof-of-Work (PoW) protocol for its consensus mechanism. Later, realizing its shortcomings, The Merge took place which replaced the earlier protocol with the Proof-of-Stake model. 

In this model, users who wanted to take part in validating transactions and propose a new block had to stake their coins. This amount was fixed at 32 ETH and was equal to $50,000.

Consequently, small investors preferred Stake Pools, where several users staked according to their capacity, and the pool participated in block validation as a single entity.

Staking ETH had several benefits

It was a source of passive income for users. They earned cryptocurrencies in exchange for their staked crypto. This is similar to getting an interest on bank deposits.

For beginners, staking was an early-to-start option, where they could immediately put their tokens into use, instead of taking time in investment-related decisions.

Staking coins is useful for maintaining the security of the blockchain and for supporting the crypto projects you like. 

However, staking also comes with risks

Staking a gamble, as is the case with the whole cryptocurrency market. You need to lock your crypto for a fixed period of time like 2 years. During this period, you cannot withdraw your staked coins even if the prices go down and you are losing money. 

In case the pool you chose turns out to be a hoax and gets punished by the network, you may lose your tokens. Thus, enabling token withdrawal was a serious concern and a much-needed update. 

Role of Staking in Validating a Transaction

In PoW, the nodes prove that they have done some computational work in solving a cryptographic puzzle, which uses up their economic resources, and hence demonstrates they are not fraudulent. They validate genuine transactions and are rewarded for doing so. In PoS, the nodes are staking their coin and taking economic risks and this demonstrates that they are genuine. They know that if they are scammers, the network will identify them and penalize them by burning their stakes. 

Withdrawing your Stakes

The Shanghai Update was made to enable users to withdraw their stakes from the beacon chain, which was not possible before.

This was a hard fork in the Ethereum blockchain.

Hard Forks

A fork is a divergence in a road when the traveler is at a crossroads. Similarly, hard forks are updates made to the blockchain’s protocol where new rules are added. These rules are agreed upon by the majority of nodes and are for improving the blockchain.  Users who choose to follow the new path need to upgrade to a newer version. The nodes who disagreed can choose to carry on on their old path. However, the old nodes will find their system incompatible with the new version and will have to shift to the latest upgrade. 

 With the rolling out of Shanghai Update, users can now withdraw their stakes locked in the Beacon chain and the platform will not charge a gas fee. This will increase the liquidity for speakers wishing to withdraw their stakes. 

Other Shanghai Updates

Apart from the EIP-4895 which focuses on withdrawing stakes, there are more things included in the package which are:

Warm Coinbase addresses

EIP 2929, proposes to make Coinbase addresses warm at the start of transaction.

Shanghai Update and Ether Price

Whenever Ethereum rolls out a feature it affects the market price of ETH. This happened during The Merge and is also expected to happen after this update.  Currently, there are more than 17 million ETH locked as stakes which will be liquidated together. The result is simple, the easy availability of ETH from the locked stakes, has increased its demand, resulting in an increase in price.   Users may also face exit queues due to a large number of users liquidating their stakes, which ultimately results in limiting the amount of ETH unstaked in a day.