Ethereum’s Shanghai Upgrade: What You Need To Know

Published: Mar 29, 2023
Written By:
Andrew Cahill
Andrew Cahill
Data Analyst

Key Takeaways

  • Ethereum’s Shanghai Upgrade is scheduled for April 12th.
  • It will enable withdrawals of staked ETH for the first time since staking went live in December 2020.
  • Post-Shanghai, ~$33B worth of staked ETH could theoretically be withdrawn and sold. But the chances of a Shanghai-induced ETH sell-off are slim.
  • Shanghai should result in more ETH being staked over the coming months.

Shanghai: The Finishing Touch of “The Merge”

Thus far, Ethereum’s transition from proof-of-work (PoW) to proof-of-stake (PoS) has been marked by two main events:

  • December 2020: The launch of the PoS Beacon Chain and ETH staking.
  • September 2022: The Merge” of the legacy PoW Chain with the PoS Beacon Chain.

With these upgrades in the rearview, the heavy lifting to get Ethereum off PoW and onto PoS is done. But there is still some clean-up to do.

Enter Shanghai.

Shanghai will enable Ethereum stakers to withdraw their staked ETH (some of which have been locked up since December 2020) for the first time.

What You Need to Know

Relative to “The Merge,” Shanghai is a minor technical upgrade. But from a price perspective, it could be a big deal: ~$33B worth of ETH (17.6M ETH) is currently staked. Post-Shanghai, theoretically, all of it could be withdrawn and sold.

Sounds scary, right?

Not that scary, though … Here’s why.

Percentage of ETH staked chart

Of the total 120.5M ETH in circulation, ~85% are not staked (gray bar), ~14% are staked deposits earning rewards (blue bar), and ~1% are staked rewards generated since the launch of the Beacon Chain (yellow bar).

Our view is that the blue bar (staked deposits) has a low probability of withdrawal post-Shanghai, while the yellow bar (staked rewards) has a high probability of withdrawal post-Shanghai. To explain why, we’ll use a simple analogy.

What are Staked ETH Deposits and Rewards?

Consider a landlord that owns and rents out a beach house. The house has been generating steady rental income for over 2 years. But the landlord hasn’t been able to sell it since December 2020.

Think of this landlord as an ETH staker and their beach house as their staked ETH deposits.

Now imagine there is a big mailbox out in front of the landlord’s office. It’s chock full o’ rent checks. But the mailbox has been locked up since December 2020, so the rent checks are sitting inside collecting dust.

Think of these rent checks as staked ETH rewards.

Now imagine that on April 12th, the landlord can finally sell the house. And that same day, they finally get a key to that mailbox.

It would make a whole lot of sense for the landlord to get those checks out of the mailbox. After all, they have been sitting there collecting dust.

But what about the beach house? Even though it could be sold, it probably wouldn’t make sense for the landlord to sell it. It is still likely to appreciate in value (who doesn’t love the beach?), and it will continue to generate rental income for years to come.

Post-Shanghai, we think a similar dynamic will play out as it relates to staked ETH withdrawals. Most stakers will withdraw their staked ETH rewards (i.e., get those rent checks out of the mailbox) but hold onto their staked ETH deposits (i.e., keep the beach house).

Could it really be that simple? Pretty much. But let’s crunch some numbers.

Quantifying The Market Impact of Shanghai

How much staked ETH could (realistically) be withdrawn and sold post-Shanghai?

Under conservative assumptions (50% to 70% of rewards are withdrawn and sold, 0.0% to 7.5% of deposits are withdrawn and sold), Shanghai could induce ~$130M to ~$500M of daily ETH sales the week after the upgrade.

Quantifying Shanghai-induced ETH sell pressure chart

That is not a drop in the bucket. But it’s also not the end of the world, considering ETH volumes. On a YTD basis, daily ETH spot volume has averaged $10.8B. Shanghai-induced sales of ~$130M to ~$500M would represent 1.2% to 4.5% of daily spot volume.

Shanghai sales estimate chart

Potentially a needle mover. But definitely not a big one.

Consider that the bear case. Here are the more bullish considerations:

  • Early stakers knew they wouldn’t be able to withdraw when they staked. They staked anyway. Chances are their diamond hands won’t become paper hands anytime soon – especially since it’s a bad time to sell. ETH is still ~65% below its all-time high.
  • Liquid staking protocols, which account for ~33% of all staked ETH, have already absorbed a big chunk of the demand to “unlock” staked ETH. Also, the largest liquid staking protocol, Lido, isn’t enabling withdrawals until mid-May – further reducing the chances of a near-term sell-off.
  • Enabling withdrawals “de-risks” staking – it puts an end to long and indefinite lockups. This should result in more ETH, not less, being staked post-Shanghai.

Shanghai’s Impact on Ethereum’s Security

Only ~15% of ETH is currently staked. Most other layer-1 networks have staking rates in the 40% to 70% range. So, Ethereum’s 15% is low.

ETH staking rate chart

With withdrawals enabled, seeing this number double to ~30% is not at all outside the realm of possibility. That would increase the dollar value of ETH being staked from ~$30B to ~$60B – a positive for the security of the network.

Bottom Line

Any ETH sell pressure induced by Shanghai should be minor. Ultimately, enabling withdrawals is expected to result in more, not less, ETH being staked over the coming months: a bullish catalyst for Ethereum and ETH.


This report is for informational purposes only and should not be relied upon as a basis for investment decisions, nor is it offered or intended to be used as legal, tax, investment, financial, or other advice. You should conduct your own research and consult independent counsel on the matters discussed within this report. Past performance of any asset is not indicative of future results.

© 2023 All rights reserved.

Andrew Cahill
Andrew Cahill

Andrew previously was a Research Director at The Block; a crypto media and research company. Prior to that, he was a Research Analyst at Fundstrat; an investment research firm.

Andrew Cahill
Andrew Cahill
Data Analyst
Andrew previously was a Research Director at The Block; a crypto media and research company. Prior to that, he was a Research Analyst at Fundstrat; an investment research firm.