What is the Ethereum Blockchain Shanghai Hard Fork and why is it important?

In March, Ethereum will undergo its first major update – also known as a “hard fork” – since moving to a proof-of-stake system in September. Once Ethereum’s next “Shanghai” upgrade is complete, 16 million staked ether (ETH) will finally become withdrawable by the validators that help run the network.

While Shanghai’s main focus is on implementing Ethereum-4895’s improvement proposal – the change that unlocks validator withdrawals – the full list of changes for the update has just been finalized, and it includes additional upgrades that are sure to be noticed by Ethereum app developers and many others. channel users.

What is EIP-4895?

Shanghai’s star is EIP-4895, which will free validators to withdraw the 16 million ETH they have so far “staked” to help secure the network.

When Ethereum changed its consensus mechanism from proof-of-work (PoW) to proof-of-stake (PoS) in its last big update, dubbed the merge, the network started using validators instead of miners to add blocks. to the blockchain. Validators must stake 32 ETH with the chain in order to participate in the block validation process. Each staked ETH acts as a sort of lottery ticket: the more ETH a validator stakes, the more likely they are to be selected to “propose” the next block of Ethereum transactions and earn network rewards.

Before validators agreed to participate in the PoS blockchain, they were told that their staked ETH and all accrued rewards would remain locked until a subsequent chain update. Validators have been staking ETH and racking up rewards since December 2020, when Ethereum released its PoS “beacon chain” in its first step towards merging. From now on, these validators will finally be able to cash in their stake.

How important is the Shanghai hard fork?

EIP-4895 is the main focus of the upgrade, as stakers may want to start cashing out all the rewards they’ve earned in the last two years – or just get more control over their funds, being given the uncertainty in the crypto markets over the past year.

But aside from accessing escrow funds, the PoS blockchain has not been fully showcased since it went live. Even though the blockchain is working fine today, bettors had to pledge to keep their funds locked in order to keep Ethereum going. Now, with the mechanism that will unlock staked ETH, the full workings of a proof-of-stake blockchain will come to life, meaning stakers can finally have control of their funds and decide what they want to do with their rewards.

Read more: Ethereum in 2023: Here’s what to expect

How can a validator withdraw their ETH?

If you are using a validator, there are two options for withdrawing your ETH once Shanghai goes live. The first is to set up a “Withdrawal ID”, which will automatically remove the accumulated rewards you have earned from your validator. The second option is to leave the Beacon chain completely and delete the 32 ETH, asking your validator to voluntarily send a message that they are withdrawing from the blockchain.

As for how long you can access the ETH you want to withdraw, “it depends on how many people will be withdrawing at once,” Ethereum Foundation developer Marius Van Der Wijden told CoinDesk. Only 16 partial withdrawal requests can be placed in a slot (which happens every 12 seconds), and there is a single queue for full and partial withdrawals on the blockchain. But the likelihood of all validators choosing to leave the blockchain is slim, given that staking will open a new chapter for Ethereum and those who trade additionally.

Are crypto traders rushing to sell their ETH?

As a new era of unlocked ETH begins, crypto traders are paying attention to how the market may evolve. Some traders believe there will be some selling pressure once the staked ETH is released, while other traders say Shanghai will only encourage more staking.

Currently, there are approximately 1 million ETH in accumulated rewards that can be withdrawn immediately once Shanghai is live. Traders will monitor if the unlocked ETH will be cashed out instantly and if it drives down the price of ETH.

Read more: Crypto traders are already placing bets on Ethereum’s ‘shanghai hard fork’

What else is in the Shanghai hard fork?

The four smallest EIPs included in Shanghai relate to gas fees – a kind of tax that users pay to transact on the Ethereum blockchain. Gas fees can be expensive during busy times, and Ethereum developers aim to add mechanisms that will reduce high gas fees for those building on the blockchain.

EIP-3651 offers access to the “COINBASE” address, a software used by validators and block builders, at a lower gas cost. (By the way: this has nothing to do with the Coinbase crypto exchange.) The code change could improve maximum extractable value (MEV) payments as well as other user experiences according to Matt Nelson, chief product officer at ConsenSys. .

“This EIP corrects a previous oversight on the cost of accessing the COINBASE address and provides additional benefits to users and developers who open up new use cases,” Nelson told CoinDesk.

The other EIPs in the package are:

• EIP-3855 – creates a code called “Push0” that will reduce gas costs for developers
• EIP-3860 – caps gas cost for developers when interacting with ‘initcode’ (a code used by developers for smart contracts)
• EIP-6049 – will notify developers of the deprecation of a code known as “SELFDESTRUCT”, which also relates to reducing gas charges

What’s next for Ethereum after the Shanghai hard fork

The developers decided to keep Shanghai’s scope relatively small, primarily so that staked ETH withdrawals would be released as soon as possible. As a result, other significant changes to the Ethereum protocol have been pushed back from Shanghai to Q3 2023.

These include “proto-danksharding,” an admittedly ominous term that simply refers to a method of making the blockchain more scalable by dividing the network into multiple chains, or “shards.”

Changes to the EVM Object Format (EOF) are also on the horizon, which include several small upgrades to improve the Ethereum virtual machine.

This article originally appeared in Valid pointsCoinDesk’s weekly newsletter outlining the evolution of Ethereum and its impact on the crypto markets. Subscribe to receive it in your inbox every Wednesday.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.