Eight months ago, Ethereum began its transition to a proof-of-stake (POS) consensus system. Now, the renowned crypto is taking the next step in its merge roadmap as it makes its Shapella Upgrade live.
Around this time last year, the crypto market completely crashed. At the start of May 2022, Ethereum’s value was $2800. By the end of the month the value had fallen by over $1000 and the market did not recover. Ethereum was not alone in this struggle though as the entire market suffered a similar bear market. Things only got worse before they got better. However, the crypto is at its highest point so far in 2023 and many are putting this down towards the Shapella Upgrade hype.
So what is Shapella?
Shapella is a portmanteau of execution and consensus layers, Shanghai and Capella, as Ethereum states: “Upgrades to the execution layer follow Devcon city names and those to the consensus layer follow star names. ‘Shapella’ is the combination of Shanghai, the location of Devcon 2, and Capella, the brightest star in the northern constellation of Auriga.”
The upgrade went live on 12 April 2023. Both layers were upgraded simultanesously. Shanghai upgraded Ethereum’s execution layer/clients while Capella upgraded the consensus layer/clients. Perhaps the most notable change to come of the update though is the validators can now withdraw ETH from the Beacon Chain back to the execution layer.
Jan-Jaap Jager, CEO at Chainstack, a Web3 infrastructure provider summarised this change saying: “Since the Merge, which combined the Ethereum mainnet with the PoS Beacon Chain, users have been unable to withdraw their staked funds. Shapella resolves this issue, giving stakers more flexibility and control over their assets.”
For the standard ETH holder, this upgrade won’t have any affect on their digital wallets or hard wallets, unless told otherwise by their exchange or wallet provider.
Why is this so important?
For Kadan Stadelmann CTO at Komodo, an open blockchain platform, the importance of the update lay in what doors are opened to future investors: “There are currently over 18 million ETH being staked as of April 11th. Although this represents less than seven per cent of the current ETH circulating supply, we could see a sell-off. The main reason is that much of the total staked amount has been locked for over a year. Market conditions have changed drastically since then, and many stakers might be waiting to exit their positions.
“On the other side, we could see more users begin to stake ETH because unstaking will be possible from this point forward. Plus, the rise of liquid staking means users have more flexibility in using their staked funds.”
The outward impact on the crypto market
Over the past month, ETH’s value has rise by 20.73 per cent, but experts warn this could be the calm before the volatitlty storm crypto is all too familiar with.
Eric Chen CEO and co-founder at Injective Labs, a core contributor to Injective, warned: “The Shapella upgrade will have significant impacts on both the Ethereum and the broader crypto ecosystems. With the newly enabled withdrawal functionality, there will be an immediate increase in ETH entering into circulation. However, with the rise in staking derivatives, the market is likely to see less than expected volatility in response to the supply shock.
“In addition, as institutions and general users now see staking as one of the only viable options to earn low-risk yield on ETH with fast access to liquidity, in the mid to long term, the circulating supply of ETH will be significantly lower. This will overall secure and decentralise the Ethereum network and significantly improve its economic dynamics.
“Beyond the market, however, the implementation of EIP-3651, EIP-3855, and EIP-3860 will enhance the Ethereum development experience. They will also help reduce the gas cost and friction for developers and users interacting with the execution layer of the Ethereum blockchain. These improvements will help Ethereum reach its full potential. It will enable it to solidify its position as one of the most important and valuable blockchain networks in the world.”
Shant Kevonian, CEO and co-founder at Ethermail.io, the web3 email solution, echoed Chen’s thoughts as he said: “The upgrade is expected to lower gas fees for developers. It could also encourage other cryptocurrencies to adopt more sustainable consensus mechanisms, influencing the overall development of the wider crypto sphere in a positive way.”