Why Crypto Is Watching Ethereum’s ‘Shanghai’ Upgrade

The Ethereum network is set to undergo a technical revamp on April 12 that will allow users to withdraw tens of billions of dollars of its native token, Ether. Known as the “Shanghai” upgrade, it’s a necessary step after the world’s most commercially important crypto platform shifted to a less power-hungry process for ordering transactions. Investors burned by recent turmoil in crypto markets will be wondering if, presented with their first opportunity to withdraw their tokens, some Ether holders will run for the hills.

1. What is Ethereum?

It’s a computer network that hosts what are known as smart contracts — self-executing software agreements in which a chain of actions can flow from defined conditions and contingencies. Since it was introduced by crypto entrepreneur Vitalik Buterin in 2014, it’s become a popular platform for developing apps used for everything from trading to gaming. Transactions on Ethereum and many other crypto platforms known as blockchains are publicly viewable and are built on open source software, so developers can jump in and try to make improvements. Ether’s value tumbled during the “crypto winter” of 2022 that saw investors pull back from many digital assets. But the appeal of Ethereum’s underlying technology has endured.

2. What is the Shanghai upgrade?

Until September 2022, Ethereum relied on a costly, energy-intensive process known as proof-of-work to order transactions. That changed when a technical overhaul known as the “Merge” applied an alternative approach — proof-of-stake. People who put up, or stake, Ether can become “validators” of transactions on the Ethereum blockchain and receive an income in return — much like deposits at a bank. Since 2020, users have been able to stake their Ether but couldn’t withdraw it. Shanghai will allow them to take those coins out. About 16% of total Ether supply, worth around $37 billion, was stuck in the protocol for staking as of early April.

3. Why is this a sensitive moment?

It’s not clear how many users will want to cash out once their Ether is unlocked. The token’s value has fluctuated wildly in the years since staking was first enabled — soaring as its popularity grew with institutional and retail investors, then tumbling in 2022. At least initially, demand for withdrawals is expected to outweigh new staking deposits on Ethereum. Longer-term, the opportunity to withdraw staked tokens is likely to make Ether staking more appealing as it will reduce risk for those involved. Investors also expect volatility in so-called liquid-staking tokens, which represent staked Ether and can be used in decentralized-finance apps that let people lend, borrow and trade coins. Prices of some of these tokens have risen in recent months and risk falling in tandem with Ether around the time of the Shanghai upgrade.

4. Will people be able to withdraw staked Ether right away?

They’ll have to join queues, which may be longer or shorter depending on where their stakes are being held. The process is likely to be more complicated for holders of liquid-staking tokens such as Lido. The service, which holds roughly a third of staked Ether, expects to enable withdrawals in May. It could take months for Ether holders to withdraw their coins as Ethereum has put limits in place to make sure too many people don’t withdraw at once, leaving it vulnerable to an attack.

5. Could there be technical problems?

There’s a chance of glitches as Shanghai goes live. During a recent test of the code, transaction confirmations took much longer than expected as many computers handling the process hadn’t had a software upgrade. Still, Ethereum developers have a track record of seamless software changes. There’s also a risk that some nodes in the broader Ethereum blockchain that are holding staked Ether may have lost the keys that enable access to the coins, leaving users shut out.

6. Any other concerns?

Since the Merge, Ether has drawn scrutiny from regulators including the US Securities and Exchange Commission, which has indicated that certain services offering yields from staking cryptocurrencies amount to illegal securities offerings. The Shanghai upgrade, by allowing staked Ether to be unlocked, could result in stepped-up scrutiny.