Ethereum Shanghai Emerges As Next Big Thing In Crypto Investment Scene

April 13, 2023 - Around 6 mins mins to read

Key Points:

Ethereum network upgrade enables withdrawals for validators, spurring interest from centralized entities.
Kraken among firms to fully exit as a network validator, following its $30M settlement with SEC.
Deposits to staking pools have grown to 18M ETH, worth approx. $35B, with a shift in share to Lido Finance.

The Ethereum network’s recent Shanghai upgrade has garnered attention as it represents a significant shift in the network’s landscape.

Ethereum Shanghai Emerges as Next Big Thing in Crypto Investment Scene

The upgrade, which went live on Wednesday has given validators with more than 18 million ETH the ability to initiate withdrawals, marking a dramatic step toward decentralization.

The Ethereum network has been working to transition from a proof-of-work (PoW) consensus algorithm to a proof-of-stake (PoS) algorithm. PoS offers a more energy-efficient and environmentally friendly way of securing the network, as it doesn’t require miners to perform complex calculations to validate transactions. Instead, validators are required to “stake” a certain amount of cryptocurrency to participate in the network’s consensus process. The more ETH a validator stakes, the more influence they have in the network’s decision-making process.

Before the Shanghai upgrade, validators who had staked 32 ETH could participate in the network’s consensus process. However, the upgrade has made it possible for validators who secured the network with more than 18 million ETH to initiate withdrawals. Those withdrawals can be either partial withdrawals, which allow validators to collect their rewards and leave at least 32 ETH deposited to continue generating rewards, or full withdrawals, which pull everything off the network.

The Ethereum event in Shanghai has caused ripples throughout the cryptocurrency community, with many investors eagerly watching the developments. To celebrate the occasion, ConsenSys has launched a series of commemorative NFTs, which have been eagerly sought after by investors and collectors alike. Meanwhile, the MetaMask team has provided a comprehensive user guide to help newcomers navigate the Ethereum ecosystem, as well as warning users about potential scams.

Despite the hype leading up to the event, the price of ETH saw only minor fluctuations. Over the course of one hour, the price of ETH rose by a mere 0.2%, while over 24 hours, it saw a modest increase of 1.3%. In contrast, the price of Bitcoin remained relatively stable, experiencing a 0.0% increase and a 0.9% decrease over the same time period.

It is important to note that this is not the first significant upgrade that Ethereum has undergone. In September 2022, Ethereum successfully made the transition from proof-of-work (mining) to proof-of-stake with the Merge upgrade. This was a major development, as it marked a complete change to staking, which had been in the works since November 2020 when validators first deposited their stake.

Looking to the future, the next major Ethereum upgrade is titled Cancun. One of the key features of the upgrade is proto-danksharding, which aims to improve scalability by reducing fees and transaction times. As Ethereum continues to evolve and improve, it is clear that the platform will play an increasingly important role in the world of cryptocurrency and beyond.

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The implementation of the Shanghai upgrade has resulted in some centralized entities exiting the network, with some of the most prominent entities being crypto exchange Huobi, decentralized exchange PieDAO, decentralized finance protocol Staked.us, and crypto exchange Kraken. According to a Nansen dashboard, these entities were among those in line to make withdrawals by Wednesday evening.

Kraken, in particular, is among the firms in line to fully exit as a network validator. The company agreed to stop offering its staking products to U.S. customers in February as part of its $30 million settlement with the U.S. Securities and Exchange Commission. During an interview for an upcoming podcast, Marco Santori, Kraken’s chief legal officer told Decrypt that the SEC knew Kraken would have to wait until withdrawals became available to make good on that part of the settlement.

Non-U.S. customers can choose to keep their ETH in the Kraken staking pool, but U.S. customers will have their funds returned. The settlement was clear on that point, according to Santori. He also stated that Kraken wants to put the affair behind them and won’t be offering staking in the U.S. for ETH.

Before the settlement and Shanghai upgrade, Kraken was a popular staking pool option for people who didn’t have 32 ETH to stake on their own. In early September, 30% of staked ETH was controlled by Lido Finance, 15% by Coinbase, 8% by Kraken, and another 7% by Binance. At the time, there were roughly 14 million ETH staked as the network prepared to upgrade to PoS on September 15. Deposits had grown to 18 million ETH, worth approximately $35 billion, by the time the Shanghai upgrade went live on Wednesday.

However, the growth was not evenly distributed across staking pools. Decentralized liquid staking protocol Lido was the only one to see its share of depositors increase, albeit by 1 percentage point. Coinbase, Kraken, and Binance all saw their share of depositors shrink, according to Nansen.

Coinbase, which runs the second-largest ETH staking pool, is currently facing its own fight with the SEC, which has issued a Wells Notice to the company. The notice warns that the SEC has found potential violations in several of Coinbase’s products, including Coinbase Earn, its staking pool. Coinbase has stated that it plans to fight any charges that may arise from the Wells Notice.

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A Coinbase spokesperson declined to comment on the Shanghai upgrade beyond what the exchange had already shared on Twitter and in blog posts, warning customers that receiving their funds could take a while.

“The Ethereum protocol will take weeks to months to process unstaking requests immediately following the upgrade,” the company wrote.

The exchange said on Wednesday that customers whose ETH is in the queue to be withdrawn will continue to earn rewards until they receive their funds.

Meanwhile, Binance, which runs the next largest ETH staking pool after Coinbase, is now the subject of a sweeping lawsuit from the Commodities Futures Trading Commission. The lawsuit doesn’t make any mention of the company’s staking products, but legal experts have said that the penalties the CFTC is seeking could cripple the company.

In summary, the Shanghai upgrade marks a significant step toward decentralization of the Ethereum network. The implementation of the upgrade has resulted in some centralized entities exiting the network. The SEC has already forced Kraken to remove U.S. customers from its ETH staking pool and alleges Coinbase has committed violations with its own staking products. The CFTC is seeking massive damages in its complaint against Binance, which it says committed derivatives violations and traded against its own customers. It appears that U.S. regulators are working to create more decentralization among the validators securing the Ethereum network.

DISCLAIMER: The Information on this website is provided as general market commentary and does not constitute investment advice. We encourage you to do your own research before investing.

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