What Is the Ethereum Blockchain’s Shanghai Hard Fork, and Why Does It Matter?

Since its switch to a proof-of-stake system in September, Ethereum will face its first major update, often known as a “hard fork,” in March. When Ethereum's impending “Shanghai” upgrade is completed, the validators who assist run the network will be able to withdraw 16 million staked ether (ETH).

Although the main focus of Shanghai will be implementing Ethereum Improvement Proposal-4895 - the change that allows validator withdrawals - the update's full roster of changes has just been finalized, and it includes additional upgrades that Ethereum app developers and many of the chain's users are sure to notice.

What is EIP-4895？

The highlight of Shanghai is EIP-4895, which will allow validators to withdraw the 16 million ETH they have “staked” thus far to help protect the network.

When Ethereum switched from proof-of-work (PoW) to proof-of-stake (PoS) in its most recent major update, nicknamed the Merge, the network began employing validators rather than miners to add blocks to the blockchain. To participate in the block validation process, validators must stake 32 ETH with the chain. Each ETH invested works as a lottery ticket: the more ETH a validator bets, the more likely it is that they will be chosen to “propose” the next block of Ethereum transactions and collect network rewards.

Before validators decided to participate on the PoS blockchain, they were informed that their staked ETH and any collected incentives would be locked up until the chain was updated. Since December 2020, when Ethereum released its PoS “Beacon Chain” as the first step towards the Merge, validators have been staking ETH and earning rewards. Those validators can now finally cash out their share.

What is the importance of the Shanghai hard fork？

EIP-4895 is the major focus of the upgrade, since stakeholders may wish to start cashing out any awards they've earned over the last two years - or simply have more control over their funds, given the recent volatility in crypto markets.

However, aside from unlocking locked cash, the PoS blockchain has been underutilized since its inception. Even though the blockchain is operational today, stakeholders have been required to pledge to keeping their cash locked in order to keep Ethereum running. The entire operation of a proof-of-stake blockchain will now come to life with the mechanism that will release staked ETH, implying that stakers can finally have control over their funds and determine what they want to do with their winnings.

How can a validator unstake its ETH？

Once Shanghai becomes live, you have two choices for unstaking your ETH if you are operating a validator. The first step is to create a “withdrawal credential,” which will immediately unstake the acquired rewards from your validator. The second way is to completely exit the Beacon Chain and unstake all 32 ETH by having your validator willingly remove itself from the blockchain.

When it comes to accessing the ETH you wish to unstake, “it depends on how many people will unstake at a moment,” Marius Van Der Wijden, an Ethereum Foundation developer mentioned. Only 16 partial withdrawal requests can be placed in a slot (which occurs every 12 seconds), and the blockchain has a single queue for both full and partial withdrawals. However, the chances of all validators leaving the blockchain are small, considering that staking would open a new chapter for Ethereum and those who trade on top of it.

Are crypto traders rushing to sell their ETH？

As a new era of unlocked ETH begins, crypto traders are watching how the market will react. Some traders predict that once staked ETH is released, there will be some sell pressure, while others believe that Shanghai would just stimulate further staking.

Currently, there is approximately 1 million ETH in accrued awards that may be redeemed instantly as Shanghai goes live. Traders will be monitoring to see if the unlocked ETH is cashed out immediately and if it lowers the price of ETH.

What else is in the Shanghai hard fork？

The four smaller EIPs contained in Shanghai are related to gas fees, which are a type of tax that users must pay in order to transact on the Ethereum network. Gas prices can be costly during periods of heavy activity, and Ethereum developers hope to include measures that would lower excessive gas fees for companies developing on the blockchain.

EIP-3651 recommends lowering the gas cost of accessing the “COINBASE” address, which is utilized by validators and block builders. (Aside: This has nothing to do with the cryptocurrency exchange Coinbase.) According to Matt Nelson, a Product Manager at ConsenSys, the code modification could boost Maximal Extractable Value (MEV) payments as well as other user experiences.

“This EIP corrects a previous error about the cost of accessing the COINBASE address and provides some additional benefits to consumers and developers that open up new use-cases,” Nelson explained.

Other EIPs included in the package are:

• EIP-3855 – creates a code dubbed “Push0” that will lower gas costs for developers

• EIP-3860 – puts a cap on the gas cost for developers when interacting with ‘initcode’ (a code used by developers for smart contracts)

• EIP-6049 – will notify developers of the depreciation of a code known as “SELFDESTRUCT,” which also relates to reducing gas fees

Whats next for Ethereum after the Shanghai hard fork

The developers opted to keep the scope of Shanghai relatively small in order to issue staked ETH withdrawals as soon as feasible. As a result, certain significant modifications to the Ethereum protocol have been delayed from Shanghai until the third quarter of 2023.

Among these is “proto-danksharding,” an admittedly ominous-sounding term that essentially refers to a means of making the blockchain more scalable by dividing the network into many chains, or “shards.”

Changes to the EVM Object Format (EOF), which contains many minor improvements to the Ethereum Virtual Machine, are also on the horizon.

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