On Thursday (16 February 2023), Binance Research, the research division of Binance, the largest cryptocurrency exchange by trading volume, released a research report that takes a closer look at Ethereum’s upcoming Shanghai upgrade.

The Beacon Chain introduced staking to Ethereum, but one of its limitations was that validators could deposit ETH to the Beacon Chain, but could not withdraw it. The Shanghai Upgrade, specifically EIP-4895, will change this by allowing validators to withdraw their ETH and any accrued staking rewards.

According to the Binance Research report, which was written by Shivam Sharma, a Macro Researcher at Binance, since the Beacon Chain launched in late 2020, over 16.5 million ETH (over $25 billion as of February 2023) has been staked. Roughly, 520,000 validators have facilitated this staking, with Binance Research naming Lido as the largest player in the market, accounting for around five billion staked ETH and 29.2% of the market. Lido gives users stETH tokens to represent staked ETH on its platform; stETH has largely traded in-line with ETH over the last few months.

The upgrade will introduce two forms of withdrawals: partial withdrawals and full withdrawals. Partial withdrawals refer to withdrawing any earned staking rewards in excess of the initial 32 ETH staked on the Beacon Chain, while full withdrawals refer to the withdrawal of the entire balance.

The report claims that the majority of ETH stakers are underwater:

  • The majority of ETH stakers are underwater and have little financial incentive to sell at the current ETH price (at least on a purely mathematical basis).
  • We note a sizeable amount of ETH (around 2M) was staked at prices in the US$400 – 700 range – this represents the earliest stakers in Dec 2020 – a group that is likely illiquid given that liquid staking was far less known at the time.
  • While this is a considerable chunk of staked ETH and is currently at profit, given these were the earliest stakers in the market, we can imagine these are some of the strongest Ethereum believers.

The Shanghai Upgrade is expected to help those who had previously been hesitant to stake their ETH since withdrawals will eliminate the liquidity risk and uncertainty of an undefined lock-up period. The report says that this could result in a whole bunch of new participants, which could bring a certain amount of buying pressure to ETH, especially if institutional investors can be enticed.

Binance Research also mentions that another significant effect of The Merge was the reduction in ETH supply growth from over 3.5% per year to -0.03%, making ETH deflationary since January 2023. However, it claims the macro environment remains a short-term concern for ETH and the overall crypto space.

Apparently, Ethereum’s DeFi market dominance has decreased from ~96% to ~60% since November 2020, with BNB Chain, Tron, Avalanche, and Solana enjoying significant growth. As for NFTs, Binance Research says that Ethereum remains the top blockchain choice for “most premium collections,” although it does acknowledge that Solana and Polygon have emerged as two potential competitors for Ethereum in the longer term. Polygon has managed to attract Web2 giants, such as Disney and Meta, to NFTs, while Solana has its own vibrant community and remains a great place for newer users/artists to experiment with NFTs.

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