Why hasn't the selling pressure on Ethereum emerged after the "Shanghai upgrade"?

Author: Kyle, Metaverse Daily

The Web3 associated cryptocurrency asset market has re-entered a bullish phase, and the Ethereum blockchain, widely regarded as the mainstream infrastructure of Web3, has recently undergone a significant upgrade.

This upgrade is named the "Shanghai Upgrade," inspired by the community's hope that Ethereum can develop and prosper in a diverse manner like Shanghai. The most significant change brought by the Shanghai Upgrade is that validators can withdraw the native cryptocurrency asset ETH that has been staked on the Ethereum network.

This marks the final phase of Ethereum's transition to a Proof of Stake (PoS) mechanism. About two and a half years ago, Ethereum launched the PoS mechanism's beacon chain, allowing users to stake at least 32 ETH to become validators maintaining the network's operation, but withdrawals of ETH were not supported. During this period, over 560,000 validators and 18 million ETH were "locked" on-chain. It wasn't until the completion of the Shanghai Upgrade that the "gate" was finally opened, leading some market analysts to believe that ETH would face selling pressure.

Now, more than a week after the Shanghai Upgrade was completed, the anticipated "sell-off" has not materialized, and the price of ETH has even risen. Besides the long withdrawal processing time, more users have chosen to "hold their ground" and continue staking. After a brief period of net outflow, the amount of staked ETH has begun to return to a net inflow state.

ETH Did Not Drop After Ethereum "Opened the Gate"

At around 6:30 AM Beijing time on April 13, the highly anticipated Ethereum Shapella upgrade (hereinafter referred to as the "Shanghai Upgrade") was completed, and it has been a week since then, meaning that validators can now withdraw their staked ETH from the Ethereum beacon chain.

The performance improvement of the Ethereum network due to the Shanghai Upgrade is quite limited, with the main impact being the release of over 18 million ETH that were locked. Before the upgrade, many were concerned that this portion of ETH would exert significant selling pressure on the market, potentially causing a sharp decline in ETH's market price.

ETH Total Staking Trend

However, the anticipated crash did not occur, and ETH even achieved three consecutive days of price increases following the upgrade. As of April 20 at 4 PM, ETH was priced at $1950, up 1.83% from $1915 at the time of the upgrade.

To understand the significance of the Shanghai Upgrade, we need to go back about two and a half years.

In 2020, Ethereum operated on a "mining" model where "miners" ran machines to "record" transactions on the network and earn ETH rewards, commonly known as "mining." This is similar to Bitcoin's "mining," determined by the "Proof of Work" (PoW) mechanism used at the network's inception. The biggest drawback of this method is its "energy consumption," which is very high; moreover, miners have no requirement to lock assets as collateral when mining, limiting the protocol's ability to penalize malicious actors after an attack.

Therefore, the Ethereum Foundation aimed to change the consensus mechanism to "Proof of Stake" (PoS), allowing users to stake 32 ETH to qualify as validators, earning block rewards in ETH by packaging transactions for the network. The benefit of this mechanism is that the network no longer requires energy-intensive mining machines, and more participants can join, which helps enhance the decentralization and security of the network.

However, the transition of the consensus mechanism is a monumental project. To ensure the network operates normally and smoothly transitions to the PoS phase, the Ethereum Foundation devised a "three-step" process. The first step was to launch a new network called the "Beacon Chain" with the PoS mechanism. Initially, this chain was independent of the PoW mechanism of Ethereum, primarily to verify that staking as a node on the Ethereum mainnet was feasible, reliable, and sustainable.

For the Beacon Chain to operate normally, it required validator nodes to maintain the network. Therefore, in early November 2020, the Ethereum Foundation enabled the "deposit" function for the Beacon Chain, allowing users to stake at least 32 ETH to become validator nodes and help operate the network, earning approximately 5% annualized validation rewards while "working." However, at that time, deposited ETH could not be withdrawn, and the withdrawal function would only be opened after the Shanghai Upgrade.

The second step of the "three-step" process was the merge. After verifying the feasibility of the Beacon Chain, Ethereum completed the merge upgrade on September 15, 2022, combining the original PoW mechanism mainnet and the Beacon Chain, with the latter officially becoming the "consensus layer" of the Ethereum mainnet, marking Ethereum's transition to the Proof of Stake (PoS) mechanism.

The Shanghai Upgrade is the final step. According to data from OKLink, on the day before the Shanghai Upgrade, there were already over 560,000 validators and 18 million ETH staked in the network, equivalent to 16% of the total ETH supply, approximately $37 billion. At this point, the network was already quite stable, and once the Shanghai Upgrade was completed, deposits could be withdrawn at any time.

The two-year-long transition of the consensus mechanism has finally come to a successful conclusion, and the better news for the ETH market is that the price of this cryptocurrency asset did not drop due to the "unlocking" of network staking.

Only 0.56% of Total Supply Withdrawn in a Week

A week has passed, so why did the anticipated selling pressure not materialize?

One direct reason is that withdrawals do not arrive immediately. Due to the large number of stakers and limited network performance, users need to queue to withdraw their staked ETH. Research institutions estimate that, based on the current number of active validator nodes on Ethereum, approximately 57,600 ETH can be withdrawn daily. At this rate, it would take over 300 days for all stakers to withdraw their ETH.

Looking at the actual withdrawal situation, within two hours after the Shanghai Upgrade, approximately 17,350 ETH were withdrawn, while 128 ETH were deposited. However, this significant net outflow momentum did not continue for long.

According to real-time data from Token Unlock, from the completion of the Shanghai Upgrade to April 20 at 4 PM, a total of 1.33 million ETH were requested for withdrawal, while 655,600 ETH were deposited during this period, resulting in a net outflow of approximately 674,400 ETH.

Recent data shows that the daily net inflow of ETH has begun to significantly exceed the withdrawal amount. On April 19, approximately 20,800 ETH were withdrawn, but at the same time, 105,300 ETH were staked. Currently, the total amount of staked ETH is about 17.36 million, with approximately 721,000 ETH queued for withdrawal.

ETH Staking and Withdrawal Data

Currently, the total supply of ETH is approximately 119 million, and the amount that has flowed out of the ETH staking protocol in the past week accounts for only 0.56% of the total supply. According to data from April 20, the 24-hour trading volume of ETH reached 4.12 million, far exceeding the daily outflow amount. This indicates that the recent selling pressure has had a limited impact on the market.

In fact, there are differing views in the industry regarding how Ethereum's introduction of "withdrawals" will affect the market. Some believe that the circulation of ETH will increase, leading to a price drop; while others believe that the ability to freely deposit and withdraw will give more people confidence to stake, potentially leading to an upward trend in staking volume in the future.

Cryptocurrency market analysts view this matter from the perspective of investment returns. Most believe that many users staked ETH at high prices and are currently in a "locked" state, thus lacking the motivation to withdraw and cash out. According to market trends, although the price of ETH was only about $390 when the Beacon Chain's deposit function was launched in November 2020, it surged significantly in 2021, peaking at $4,871, which led to a continuous increase in the cost for later stakers.

Researchers from Fidelity's digital asset management division noted that during the recent rebound cycle in the cryptocurrency market, about half of the new funds invested were previously in a loss position for most stakers' ETH holdings.

Additionally, before the Ethereum Shanghai Upgrade, there were already many liquidity solutions in the market. For example, the decentralized staking protocol Lido provides stakers with a 1:1 "stETH" staking certificate. Although ETH cannot be withdrawn, users can sell this certificate at any time to gain liquidity. Furthermore, cryptocurrency exchanges like Binance and OKX, which have a large number of cryptocurrency asset users, also offer similar staking solutions, allowing many users looking to profit from the Ethereum upgrade process to freely enter and exit the staking market without waiting for the withdrawal function to open.

Fidelity analysts pointed out that about one-third of the staked ETH could have already been liquidated through tokens like stETH, indicating that the potential selling pressure is not as significant as imagined.

In the long run, the completion of the Ethereum Shanghai Upgrade marks the maturity of its Proof of Stake consensus mechanism, ushering in a new era of development. The anticipated "sell-off" did not occur, reflecting a certain level of value recognition. The greater challenge for Ethereum moving forward is to enhance network performance, allowing more applications to flourish on the network, which is also an important foundation for Web3 to be seen and adopted by a broader audience.