Ethereum’s Shanghai fork is coming – but that doesn’t mean investors should abandon ETH

Ethereum’s next big rally, Shanghai, is on the horizon in March. Shanghai hard forks will implement further improvements to the Ethereum network, as well as allow Ether (ETH) stakers and validators to withdraw their assets from the Beacon Chain.

At the time of writing, the ETH staked is about 14% of the total supply, or 16 million coins. This equates to a value of over $25 billion at ETH’s current price, a significant amount that will gradually liquidate after the fork.

Some ETH stake holders waited more than three years to withdraw their rewards. Does this mean most of them will be lining up to withdraw and sell their ETH as soon as possible? This scenario is impossible. There are numerous reasons why investors should not worry about the pending update, and most Ethereum stakeholders will increase their investment in sting after Shanghai.

Ethereum will remain the leading PoS network

While ETH is the second largest cryptocurrency by market cap, Ethereum is the leading proof-of-stake (PoS) network. At the time of writing, it accounts for about 65% of the total value locked in decentralized finance (DeFi) protocols, at around $48.7 billion.

Total value locked across all blockchains. Source: DeFi Llama

Despite the current market, the amount of ETH deposited over time has continued to grow at a steady, steady pace, reaching over 500,000 validators in January 2023.

Staking productivity remains strong

Staking returns remain stable and currently stand at an annual percentage rate (APR) of around 5.45%. Therefore, new entrants should familiarize themselves with the overall revenue compensation structure, which consists of staking rewards, tips and maximum withdrawal value (MEV).

With MEV-Boost, stackers can increase their rewards by 2x-3.5x over vanilla blocks. However, when demand for ETH increases, it is ultimately the tips and MEV that improve ETH staking returns. MEV relayers moved around 85,000 ETH after switching to proof-of-stake, enabling an increase of 32,500 ETH in additional rewards.

Liquidity attracts interested parties

As with any market, liquidity is king. Most investors were initially reluctant to acquire ETH because doing so would require their funds to be tied up indefinitely. Staking ETH required a minimum of 32 ETH, meaning that when Eth2 launched in December 2020, the entry price was around $19,000. At its peak in November 2021, the price was around $150,000.

Related: Post-Merge ETH is deprecated

These costs have given validators pause, and many have stopped securing the network. However, the Shanghai update will remove this uncertainty and token holders will be allowed to withdraw their distributed assets. The obvious reaction is to assume that people will simply withdraw their funds and “cash out”, but we will probably see the exact opposite. With such a large percentage of investors initially reluctant to participate in ETH – remember that only 14% of the supply is currently at stake – ETH’s share is likely to rise with the risk of uncertainty surrounding the pullback.

In addition, many ETH stakers bought the token during the bull run, when prices reached $4,500. However, with the current price hovering around $1,600, current shareholders are unlikely to sell at a loss. With MEV boosted rewards close to 7% and a positive outlook for market price increases due to deflationary tokenomics, we expect significant inflows into ETH sting.

Liquid staking growth

Stakers can stake ETH directly with Ethereum, which requires 32 ETH, or through liquid pool protocols such as Lido and Rocket Pool. Liquid sting is a concept that democratizes Ethereum sting for investors who can participate as little as 0.01 ETH. A small amount of Ether can be obtained when investors exchange their ETH for derivative tokens that are individually backed and reflect the amount of Ether put into the pool.

The capital efficiency of liquidation is one of its main advantages for investors. Sometimes referred to as liquid staking derivatives (LSD), this gives you the freedom to enter and exit the market at will. Being a derivative gives investors access to additional markets, and the LSD industry is just starting to take off.

Suggestions for improvement and their impact

The upcoming Shanghai upgrade (EIP-4895) will focus on fallback capabilities at the execution layer – Shanghai – and at the consensus layer, referred to as the Capella upgrade. The Capella update is particularly useful for ETH participants who are interested in understanding how the withdrawal will work, as the consensus layer requires interaction to complete a full withdrawal.

Related: Income tax you never earned? It is possible after the Ethereum merger

Ethereum’s roadmap has had several updates since Shanghai—sometimes referred to as the “Surge,” “Verge,” “Purge,” and “Splurge”—demonstrating the dedication and long-term vision of the community essential to the future evolution of the protocol. In the near future, EIP-4844 (proto-danksharding) may expand Ethereum with new transaction fees that reduce gas fees, and EIP-3540 will aim to reduce the resource requirements of the Ethereum Virtual Machine.

In 2022, Ethereum saw a 178% increase in developer activity for programming libraries, reaching 1.5 million downloads. Despite the market downturn, developers have ramped up real-world solutions and continued to build smart contracts on Ethereum, hitting 4.6 million deployments for Q4 2022.

Ethereum mainnet smart contracts are implemented quarterly. Source: Dune

The success of Ethereum’s transition from proof-of-work to proof-of-stake should not be viewed as an incredible achievement. Now that the move has been a huge success, improvements will be released faster thanks to a community unmatched in creativity, values ​​and long-term vision. The foundation and proof-of-stake of the cryptocurrency is built on Ethereum, and it has a highly promising future.

Investors and shareholders would be wise to secure ETH and continue to centralize the network. Earning passive income in addition to rewards doesn’t hurt the decision to stay.

Konstantin Boyko-Romanovsky He is the CEO of Allnodes. He holds a master’s degree in architecture from the Moscow Institute of Architecture and has worked in the video game industry for over ten years, focusing on the Russian and Eurasian markets.

This article does not contain investment advice or recommendations. Every investment and trading action involves risk and readers should do their own research before making a decision. The views, opinions and opinions expressed herein are solely those of the author and do not reflect or represent the views and opinions of Cointelegraph.

Source link