Lucas Outumuro, Head of Research at crypto analytics startup IntoTheBlock’s (ITB), recently published a blog post titled “Estimating the Impact of Ethereum’s Shapella Upgrade,” in which he analyzes the short to medium-term effects of the upcoming $ETH unlocks. In his post, Outumuro breaks 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 explains 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 acknowledges the uncertainty and lack of understanding surrounding these withdrawals and aims to shed light on the process.
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).
Outumuro delves 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, are likely to withdraw some ETH but not necessarily sell it, as many may be long-term ETH believers.
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.
Staking services, which manage validators on behalf of clients, are expected to conduct partial withdrawals to cover their operating costs, but full withdrawals are less likely. International crypto exchanges could see net inflows and some selling.
Outumuro suggests that the dynamics of the Shapella fork could lead to a reshuffling of market share between industry players. While withdrawals might decrease the amount of ETH staked in the days after Shapella, several factors could lead to an increase in the following weeks.
Coinbase’s Head of Staking predicts that the amount of ETH staked will follow a J-curve, declining before climbing. This is due to the elimination of technical and economic risks associated with staking after the Shapella fork. Outumuro also notes that the percentage of ETH supply staked is significantly smaller compared to other PoS chains, which could change after the fork.
As the risks associated with staking are reduced, retail and institutional investors might be more inclined to stake their ETH. This could lead to an increase in the amount of ETH staked over time, potentially reaching 25%-30% within a year, making the Ethereum network more secure and reducing the available ETH supply to be sold.