What Ethereum's Shanghai update will mean for the crypto ecosystem

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What Ethereum's Shanghai update will mean for the crypto ecosystem

Crypto watchers are looking for Etherum this week, as the currency undergoes an upgrade that some think could have a negative impact on the price of the coin, at least in the short term.

Shanghai is an Ethereum upgrade scheduled to be activated on Wednesday. Most notably, it will enable those who have previously staked their ether onto the network to make withdrawals for the first time, which some market commentators say could have negative implications for the ETH price going forward. The upgrade also includes the implementation of five different Ethereum Improvement Proposals.

What are some interesting things to know about Ethereum's Shanghai upgrade and its impact on the Ethereum ecosystem.

The final step of Ethereum's journey from proof-of-work to proof-of-stake consensus is seen in Shanghai, which is seen as a final step. The use of proof-of-stake is seen as a more energy-efficient method for verifying cryptocurrency transactions where validators are randomly selected based on the ETH, rather than all validators competing to verify blocks first in proof-of-work.

The Ethereum network was founded as a PoW network, but its Beacon Chain, based on the PoS-based network, was first launched in December 2020, and a merger between those two chains, known as The Merge, took place in September 2022.

Since the Beacon Chain's launch, Ethereum users have been able to stake their ETH, yet they have not been able to unstake their ETH. The Shanghai update changes that in the form of EIP-4895 and finalizes this transition to PoS.

Until now, the ability to unstake ETH and their associated staking rewards has been a concern for investors, as it may enable many users who were previously unable to sell their ETH to dump their holdings on the market. The total ETH supply is currently held on the network, with about 15% of it being held on the network.

The report from CoinDesk points to the possibility of as much as $2.4 billion worth of selling pressure hitting the ETH market as a result of Shanghai's dominance in the market.

It should be noted that all of this staked ETH cannot be unstaked all at once. There is a limit to the amount of staking withdrawals that can take place per block, and one February estimate from Into The Block states it would take around 60 days for 20% of validators to unstake their ETH.

Crypto's potential environmental impacts can be heightened by Shanghai's departure from Ethereum's transition to PoS. Miners must prove their reliability to the network by using computer hardware, while PoS prefers to take a stance that involves staking a crypto asset. PoW is consuming much more energy than PoS.

PoS proponents often refer to PoW as wasteful, while PoW, which is used in Bitcoin and is unlikely to be removed from that crypto network, is less secure and prone to centralization.

The ability to unstake ETH is not the only change included in the Shanghai hard fork. For example, there is EIP-3651, EIP-3855, and EIP-3860, all of which are intended to improve the efficiency of transactions on the Ethereum network and lower gas fees for various decentralized applications.

It should also be note that there are a number of consensus-layer changes included in Wednesday's hard fork in the form of an upgrade known as Capella. For this reason, many Ethereum developers refer to the combination of these two enhancements as shapella.