Ethereum’s Shapella upgrade is just around the corner, but what does it mean for Ethereum ($ETH) staking?
The Shapella fork consists of two conjoined upgrades: Shanghai, which includes Ethereum Improvement Proposals (EIPs) related to the execution layer, and Capella, a major update to Ethereum’s consensus layer. The most notable EIP set to be implemented in Shapella is EIP-4895, which enables validators to start withdrawing their staked $ETH in two categories: partial withdrawals (staking rewards only) and full withdrawals (initial deposits and profits).
On Tuesday (April 11), blockchain analytics firm IntoTheBlock (ITB) shared insights on Twitter about the potential impact of the upcoming Shapella upgrade on Ethereum staking. As the upgrade approaches, many are curious if the percentage of $ETH being staked will rise over the mid to long term. ITB suggests that while the network might initially experience a drop in staking due to withdrawals, the evolving network dynamics could ultimately boost the percentage of the supply staked.
According to ITB’s tweet, when comparing Ethereum to other Proof-of-Stake (PoS) chains, the top PoS chains average 45% of their native token supply staked. Binance Coin ($BNB) is the only other chain with less than one-third of its supply staked, likely because holding $BNB offers users a 25% discount on trading fees – a utility not found on other PoS networks.
Given these factors, ITB believes it is highly likely that the amount of $ETH staked will increase in the weeks following the Shapella fork. Retail holders who may have hesitated about staking their assets indefinitely might start to gradually stake more. Moreover, institutional investors who couldn’t previously lock their limited partners’ capital into staking will now have the opportunity to earn a yield on their $ETH, reducing prior risks.
ITB predicts that this increase in staking could reach as high as 25%-30% within a year, bolstering the Ethereum network’s security and decreasing the available $ETH supply to be sold.
On April 6, Lucas Outumuro, Head of Research at crypto analytics startup at ITB, published a blog post titled “Estimating the Impact of Ethereum’s Shapella Upgrade,” in which he analyzed the short to medium-term effects of the upcoming $ETH unlocks. In his post, Outumuro broke down the dynamics of the Shapella fork, the likely outcomes for different industry players, and its implications for the Ethereum network and its native asset.
Outumuro explained that the Shapella fork, set for April 12, 2023, marks the culmination of Ethereum’s transition to proof of stake (PoS), with validators able to begin the process of withdrawing over $34 billion in staked funds. He acknowledged the uncertainty and lack of understanding surrounding these withdrawals and aimed to shed light on the process.
Outumuro delved into the key actors in the staking industry and how the Shapella fork affects them. Liquid Staking Derivatives (LSDs), which currently make up over 35% of all ETH staked, are expected to see net inflows after Shapella due to their liquid nature and lack of exit queues. Unidentified validators, a heterogeneous group, will likely withdraw some ETH but not necessarily sell it, as many may be long-term ETH believers.
He went on to say that American centralized exchanges (CEXs) like Coinbase and Kraken, which hold nearly 20% market share of ETH staked, are likely to experience the largest withdrawals following the Shapella fork due to government intervention. Some of their users may sell their assets, while others may withdraw the $ETH and hold it or move it into LSDs.
As for staking services, which manage validators on behalf of clients, he expects them to conduct partial withdrawals to cover their operating costs but believes that full withdrawals are less likely. International crypto exchanges could see net inflows and some selling.