Ethereum (ETH-USD) is one of the best-known cryptocurrencies out there. The world’s second-largest token, this project provides the infrastructure and plumbing for a significant portion of the decentralized finance (DeFi) ecosystem. Indeed, via pioneering smart contracts within blockchain technology, Ethereum has ushered in a whole new world of utility-creating applications in the blockchain space.
A recent so-called Shapella upgrade (which is actually a combination of two upgrades, Shanghai and Capella) could provide even more utility to the Ethereum network.
Well, the Shanghai upgrade allows for staked Ethereum to be withdrawn from Ethereum’s beacon chain. Accordingly, for those staking on the Ethereum network (via last year’s Merge upgrade), investors will now have the ability to withdraw their Ether from the network. This could create a more robust demand for staking over time.
The Capella upgrade will provide improvements to Ethereum’s consensus mechanism and further improve the network overall.
Let’s dive into what this all means.
The implementation of the Shapella hard fork, also referred to as the Shanghai upgrade, took place on April 12. As mentioned, this upgrade significantly reduced the risks of staking Ethereum by permitting the withdrawal of locked coins whenever desired. The significant milestone has stimulated institutional interest in Ethereum, the second-largest cryptocurrency by market capitalization.
The recent increase in open interest and rise in the price of Ether indicates a surge of new investments in the market, further confirming the cryptocurrency’s upward trend. According to CoinDesk data, Ether’s price has increased by 8% after implementing the Shapella hard fork. Additionally, the spread between futures and spot market prices, known as the basis of the end, has increased, doubling the three-month premium to over 4%. The widening base and the rise in open interest suggest investors have taken a bullish approach to cryptocurrency.
While investor optimism appears to have dwindled of late (as it did with the Merge), it’s clear this upgrade is a big deal for the community over the long-term.
How The Shapella Upgrade Works
The Shapella upgrade is a combination of changes to the Shanghai Ethereum Virtual Machine and the Capella consensus layer, as well as modifications to the Engine API that links these two layers. Following successful transitions in Sepolia and Goerli, client teams have planned to activate the Shapella upgrade on the mainnet.
The Shapella Upgrade, a hard fork, incorporates EIP-4895, which codifies the new unstaking policy into Ethereum. Since the release of the Beacon Chain in December 2020 (before being merged with the old PoW chain), validators have been able to stake ETH. Withdrawals on the Zhejiang testnet were enabled on 7 February 2023.
The primary concern was whether the upgrade would result in a “buy the news” or “sell the news” situation, even though the news was somewhat predictable. According to Glassnode’s on-chain analysis, a maximum of 170K ETH may be sold, but this is the highest possible estimate.
The recent upgrade allows validators to withdraw their staking rewards partially or fully. Validators can remove all of their staked ETH or just the accumulated dividends. However, most validators with a 32 ETH commitment are anticipated to continue to support the network by staking.
Where Will Ethereum Head Next?
The Ethereum network has a pre-planned roadmap for its future, and the next major upgrade will be sharding. The upgrade is expected to be a significant turning point for the network, as it aims to reduce gas fees to a considerable extent.
Stabilizing gas fees on Ethereum is expected to impact the network’s long-term growth positively. However, it is uncertain how the market will react to the news that ETH can now be withdrawn.
Following the implementation of the Shapella upgrade, Ethereum’s value has slightly increased. At the time of writing, ETH was trading at $1,920, up 2.9% for the day. Additionally, the asset is almost at its highest point in eight months, which it reached earlier this week.
If Bitcoin (BTC-USD) fails to break its resistance level of $30,000, Ethereum’s price may also decrease. The cryptocurrency market is expected to experience a correction soon after sustained gains in the past month.
On the date of publication, Chris MacDonald has a position in ETH. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.