Token basics: What is Ethereum’s Shapella upgrade?

Token Takeaways ✍️

✨ Ethereum will launch its long-awaited Shapella upgrade on 12th April. 

✨ Shapella will enable staked ETH withdrawals for the first time.

✨ While some are divided on how Shapella could impact the market, it’s another major milestone for the top smart contract blockchain. 

Ethereum is gearing up for another big upgrade. On 12th April, the world’s top smart contract blockchain will launch a two-pronged update called Shapella. The hard fork will usher in several changes, including enabling staked ETH withdrawals. The update could have a major impact on Ethereum and the broader token ecosystem. In this guide, we unpack what the update means for the space, and why you should care about it. Read on to learn more. 

Please note: Investing in cryptoassets is risky. Due to the volatile nature of the cryptocurrency market, investors run the risk of losing their funds when they make an investment. Returns from cryptoasset investing are not guaranteed, therefore users should always be aware of the risks. 

Ethereum’s Shapella upgrade explained 👌

Shapella is a hard fork update comprised of two parts: Shanghai and Capella. 

Shanghai represents an upgrade on the execution layer, which processes transactions. Capella, meanwhile, is happening on the consensus layer that runs Ethereum’s Proof-of-Stake mechanism. 

Token tips: A hard fork is a type of update that introduces major changes to a blockchain, as opposed to a soft fork where new features are added without changing the blockchain’s rules. 💡

Shapella will introduce a few changes, but the most notable one is enabling staked ETH withdrawals. To understand the significance of this update, it’s worth revisiting Ethereum’s recent history. 

In December 2020, Ethereum launched a chain called the Beacon Chain in preparation for the network’s transition from Proof-of-Work to Proof-of-Stake. 

Ethereum inventor Vitalik Buterin said that the blockchain’s development would be “55% complete” following The Merge to Proof-of-Stake. Shapella is one of the key upgrades to bring the network to 100% completion (Photo: Chet Strange/Bloomberg)

After the Beacon Chain went live, Ethereum users could deposit ETH to secure the network under Proof-of-Stake and earn staking rewards. Anyone who deposited ETH had to lock up their tokens and rewards, so staking involved some risk.

In September 2022, Ethereum completed “The Merge” from Proof-of-Work to Proof-of-Stake. Shapella is the blockchain’s next key update, letting Ethereum users who deposited ETH to secure the network withdraw their assets.

The potential impact on the market 🤔

There are currently around 18 million ETH staked on the Ethereum network across 562,000 validators (every validator makes a deposit of 32 ETH). Based on ETH’s current market price, that equates to about $33.7 billion worth of ETH. 

There’s currently around $33 billion worth of ETH staked on Ethereum (Source: Etherscan)

Ethereum has a circulating supply of roughly 120 million ETH. As the staked token supply represents a large portion of the overall supply, some have warned that Shapella could cause a significant selloff. ETH has increased in value since the Beacon Chain launched, and stakers have also been accruing rewards, which suggests that some stakers may opt to sell their assets.

However, Ethereum will cap staked withdrawals at around 43,200 ETH per day. This reduces the likelihood of a sharp market reaction immediately after the update ships as withdrawals will be gradual. 

Is Shapella a derisking event? ⚠️

Some have taken a different view. Many Ethereum believers have argued that Shapella will reduce risks associated with The Merge and ETH staking. This, they say, bodes well for ETH and the sentiment surrounding Ethereum. 

A successful Shapella launch would also set the stage for Ethereum to progress on its roadmap. The blockchain plans to introduce new features like sharding as it prepares for onboarding more users. 

Token tips: Sharding will introduce 64 new chains on Ethereum to reduce congestion and help the blockchain scale. It’s one of the key updates on Ethereum’s roadmap. 💡

Shapella has also shone the spotlight on liquid staking projects, which issue Ethereum users with a token when they deposit ETH to help them get extra yield on their assets. With a new wave of attention on staking due to Shapella, liquid staking projects could benefit. Lido and Rocket Pool are the two best-known liquid staking projects today. 

The future for the token ecosystem 🔮

While it’s difficult to predict how Shapella could impact the token market in the short term, it should be a good thing for Ethereum if it goes as planned. And as Ethereum sits at the core of the token ecosystem, Shapella should also benefit the broader space. 

Learn more 👀

Now that you’ve read our guide, you should have a clearer idea of how Shapella will impact Ethereum and the broader token ecosystem. To learn more about Ethereum, check out our Collections, The Ethereum Ecosystem and Ethereum’s Mass Adoption Mission, via the app now. 

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