Ethereum Shanghai Upgrade - Potential Impact
The Shanghai upgrade marks a significant milestone for the Ethereum network, enabling depositors to access their staked ETH for the first time since the launch of the Beacon Chain. With the upgrade, two main types of withdrawals will be possible: partial and full. Partial withdrawals, or skimming, will permit validators to withdraw their cumulative staking rewards, while full withdrawals will enable the complete withdrawal of staked ETH. This analysis aims to explore the potential implications of these withdrawals on the Ethereum economy and address concerns regarding the supply unlock event.
Shanghai presents a unique situation where rewards have accumulated over two years and will be unlocked simultaneously. The excess balance, which is not actively participating in Proof-of-Stake, amounts to around 1.137M ETH or about 2.1B in value. After the Shanghai upgrade, this sum will be automatically withdrawn from the Beacon Chain and transferred to the depositor's Ethereum mainnet address as an automatic balance update.
Validators with 0x00 withdrawal credentials own nearly 75% of the total accumulated rewards, while those with 0x01 credentials will have access to the remaining 25% (equivalent to 276k ETH). In an extreme scenario where all remaining validators update their withdrawal credentials after the Shanghai upgrade, we could see the entire sum of 1.137M ETH exit the Beacon Chain over 4.5 days.
Considering the depositor segmentation, a significant portion of the staking rewards is expected to be locked up again, as large staking providers such as Lido have vowed to primarily re-stake their rewards. Furthermore, non-institutional depositors with more extensive holdings are less likely to feel pressure to sell their ETH, especially given the recent positive market trend.
For full withdrawals, the daily number of validators that can exit is limited by the churn rate, which currently allows for a maximum of 1800 validators (or 57.6k ETH) to be withdrawn daily. Considering the withdrawal period determined by the churn limit, validators must pass through a withdraw-ability delay. This waiting period is 256 epochs for voluntarily exited validators, or around 27 hours long, and for slashed validators, it is 8192 epochs, or about 36 days. We have simulated the accumulated ETH accessible right after the Shanghai upgrade, approximately 45,098 ETH (equivalent to 83.3M).
Most existing validators belong to solo-stakers or stakers from the early days of the Beacon Chain, who are likely to have a high conviction rate. Therefore, most withdrawals are expected to be related to changes in their technical setup rather than completely exiting their position.
Considering partial and full withdrawals, we can model the potential supply pressure during the first week after the Shanghai upgrade. 1.54M ETH (2.93B) could become liquid in the most extreme case. On the other hand, based on a 50% withdrawal credential update, segmentation of depositors, and different assumptions, our best estimate suggests that 170k ETH (323M) could be sold.
Comparing these numbers to typical weekly exchange inflow volumes, even the most extreme case of 1.53M ETH is within the average weekly exchange inflow range. This indicates that the unlock event is on a similar scale to day-to-day trade for ETH markets and is unlikely to be as dire as many speculate it to be.
In conclusion, while it is impossible to predict the outcomes of the Shanghai upgrade fully, this analysis provides insights into the potential economic implications of the supply unlock event. The bulk of unlocked staking rewards is expected to come from users redeploying towards liquid staking providers, which have little need to sell due to being underwater. Moreover, Ethereum's Proof-of-Stake exit queue design will limit the amount of stake that can be drained from the pool at once, stretching the economic impact over days.
This piece was the summary of this analysis by Glassnode. If you want to read the full analysis, read this: insights.glassnode.com/the-week-onchain-week-15-2023/
Shanghai presents a unique situation where rewards have accumulated over two years and will be unlocked simultaneously. The excess balance, which is not actively participating in Proof-of-Stake, amounts to around 1.137M ETH or about 2.1B in value. After the Shanghai upgrade, this sum will be automatically withdrawn from the Beacon Chain and transferred to the depositor's Ethereum mainnet address as an automatic balance update.
Validators with 0x00 withdrawal credentials own nearly 75% of the total accumulated rewards, while those with 0x01 credentials will have access to the remaining 25% (equivalent to 276k ETH). In an extreme scenario where all remaining validators update their withdrawal credentials after the Shanghai upgrade, we could see the entire sum of 1.137M ETH exit the Beacon Chain over 4.5 days.
Considering the depositor segmentation, a significant portion of the staking rewards is expected to be locked up again, as large staking providers such as Lido have vowed to primarily re-stake their rewards. Furthermore, non-institutional depositors with more extensive holdings are less likely to feel pressure to sell their ETH, especially given the recent positive market trend.
For full withdrawals, the daily number of validators that can exit is limited by the churn rate, which currently allows for a maximum of 1800 validators (or 57.6k ETH) to be withdrawn daily. Considering the withdrawal period determined by the churn limit, validators must pass through a withdraw-ability delay. This waiting period is 256 epochs for voluntarily exited validators, or around 27 hours long, and for slashed validators, it is 8192 epochs, or about 36 days. We have simulated the accumulated ETH accessible right after the Shanghai upgrade, approximately 45,098 ETH (equivalent to 83.3M).
Most existing validators belong to solo-stakers or stakers from the early days of the Beacon Chain, who are likely to have a high conviction rate. Therefore, most withdrawals are expected to be related to changes in their technical setup rather than completely exiting their position.
Considering partial and full withdrawals, we can model the potential supply pressure during the first week after the Shanghai upgrade. 1.54M ETH (2.93B) could become liquid in the most extreme case. On the other hand, based on a 50% withdrawal credential update, segmentation of depositors, and different assumptions, our best estimate suggests that 170k ETH (323M) could be sold.
Comparing these numbers to typical weekly exchange inflow volumes, even the most extreme case of 1.53M ETH is within the average weekly exchange inflow range. This indicates that the unlock event is on a similar scale to day-to-day trade for ETH markets and is unlikely to be as dire as many speculate it to be.
In conclusion, while it is impossible to predict the outcomes of the Shanghai upgrade fully, this analysis provides insights into the potential economic implications of the supply unlock event. The bulk of unlocked staking rewards is expected to come from users redeploying towards liquid staking providers, which have little need to sell due to being underwater. Moreover, Ethereum's Proof-of-Stake exit queue design will limit the amount of stake that can be drained from the pool at once, stretching the economic impact over days.
This piece was the summary of this analysis by Glassnode. If you want to read the full analysis, read this: insights.glassnode.com/the-week-onchain-week-15-2023/
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