Everything you need to know about the Ethereum Shapella hard fork

Ethereum is undergoing a significant transformation with the Shapella upgrade, which is scheduled to go live today, April 12, at 6:27 p.m. EDT.

This major milestone will enable users to withdraw their staked Ether on the network for the first time, marking the completion of Ethereum’s transition from proof of work to proof of stake.

What is Shapella?

Shapella is a combination of the Shanghai and Capella upgrades that will take place simultaneously, enhancing Ethereum’s consensus and execution layers.

Since The Merge, which occurred seven months ago, Ether staking has been a one-way system, allowing users to stake Ether but not withdraw it. Shapella aims to resolve this issue by enabling validators and users to unstake their Ether on the network.

The main feature of the upgrade is Ethereum Improvement Proposal (EIP) 4895, which allows validator staking withdrawals on the network. Developers have also included additional specifications within Shapella to optimize transaction fees for certain activities on the network.

Withdrawals: Partial and Full

The Shapella upgrade introduces two types of withdrawals: partial and full.

Partial withdrawals enable validators to access their balance exceeding the 32 ETH required to establish a validator node. In contrast, full withdrawals allow validators to exit their stake on the Beacon Chain entirely, taking their full ETH balance, including their original 32 ETH and any accrued rewards or penalties.

Withdrawals will not be immediately available to all users due to a limit on the number of validators that can withdraw each day. This queue system ensures a gradual and stable withdrawal process, maintaining Ethereum’s stability.

Unstaking Ether

Approximately 57,600 ETH ($109 million) per day can be withdrawn through full withdrawals, in addition to partial withdrawals, according to Pooja Ranjan, founder of EtherWorld.co and project manager at Ethereum Cat Herders.

Validators have been able to join the unstaking queue even before Shapella, but only 1,622 validators have exited the network as of April 9. Some validators may be waiting for Shapella’s implementation before joining the queue.

https://twitter.com/lemiscate/status/1644962235737858049?

Why delay unstaking after The Merge?

The decision to delay Ether unstaking was made to minimize complications and risks associated with The Merge, which was already a complex process. By separating the changes, developers had more time to test each upgrade and ensure proper functionality.

Additionally, by postponing withdrawals, Ethereum’s security and proof-of-stake consensus mechanism were maintained through a more controlled environment during the transition.

What to expect post-Shapella

The Shapella upgrade will impact the Ethereum ecosystem in various ways, providing users with increased flexibility to allocate their previously locked assets. In the short term, accessing these funds may result in price fluctuations, but as many users staked their Ether at higher prices, they may not want to sell at a loss.

The average deposit price across all staked ETH is $2,136, down 12.7% from Ether’s current price of $1,865, resulting in a net unrealized loss of $4.7 billion.

On-chain intelligence platfor, Glassnode notes:

“After the peak unrealized loss of $16B in July 2022, the net unrealized loss now amounts to $4.7B. It is mainly carried by the Whale sized depositors, who hold a 76% share of the unrealized losses.”

Ken Timsit, managing director of Cronos Labs, states, “ETH stakers will likely monitor withdrawals and may overreact in the short term if there is significant demand or signals pointing to large ETH liquidations.”

Glassnode predicts that only 170,000 Ether of the total 18.1 million ETH staked on the Beacon Chain will be unlocked within the first week following the Shanghai hard fork.

This figure comprises 100,000 Ether ($190 million) in staking rewards and 70,000 ETH worth of staked Ether ($133 million).

Glassnode’s analysis indicates that the hard fork is unlikely to have a dramatic impact on Ether’s price action, as several mechanisms are in place to prevent an excessive supply of Ether from flooding the market at once.

Furthermore, Glassnode notes that only 22% of the 253 exiting depositors are currently in profit, suggesting that selling pressure may be limited.

Fidelity Investments shares a similar outlook, stating in an April 5 report that selling pressure is expected to be muted due to the likelihood of partial withdrawals being re-staked and the extended duration of the withdrawal process.

With the unlocking of staked Ether enabled by Ethereum Improvement Proposal-4895, the Shanghai upgrade brings Ethereum closer to a fully functional proof-of-stake system while minimizing potential market disruptions.