Ethereum Shapella

Exploring Ethereum’s Shapella upgrade: What you need to know


Shapella update is the first major upgrade after The Merge for Ethereum. The Shapella update was finalized last Wednesday.

With the Shapella update, the validators of the Ethereum blockchain can unstake the ether they have staked in the Ethereum network if they want to. This has not been possible before.

In this recap, we’ll delve deeper into what Ethereum’s Shapella update brings.

The Ethereum network is updating

The previous major update of the Ethereum network was The Merge, where the Ethereum network moved away from the Proof-of-Work operating model. The main goal of The Merge was to reduce the tokenomics of the Ethereum network, resulting in the network’s energy consumption decrease.

The Merge update went as expected, and most Ethereum network users were satisfied. The only problem The Merge didn’t fix was the unstaking of the ether staked in the network by the validators.

This problem is finally fixed with the Shapella update.

Shapella upgrade

During the Shapella update, the Ethereum network experienced two different updates. These upgrades were the Shanghai update and the Capella upgrade. When you combine the names of those upgrades, you get Shapella.

The Shanghai and Capella updates took place on the Ethereum network simultaneously. These updates updated the code on Ethereum’s two main network layers: the consensus layer and the execution layer.

Since The Merge update, staking ether into the Ethereum network has been a one-way system. This means that you can stake ether into the Ethereum network, but you cannot unstake it.

The Shapella update aims to fix this and give the validators of the Ethereum network as well as other users of the network, the opportunity to unstake the ethers staked in the network. With the update, users of the Ethereum network will have access to approximately 18 million ethers that were previously locked in the network.

The main feature of the Shapella upgrade is the ability to unstake network-locked ether. Officially, the feature in question is called Ethereum Improvement Proposal (EIP) 4895. The developers have also planned more minor updates in Shapella so that certain functions of the network and transaction fees can be optimized more efficiently.

Ethereum developers have been successfully testing the Shapella upgrade on the public testnet for several months.

Partial and full withdrawals

Now, after the Shapella update, Ethereum network users, as well as validators, can perform two types of withdrawals: partial and full withdrawals.

With a partial withdrawal, a validator on the Ethereum network can withdraw the rewards accumulated by the ether they have staked into the network but not the original 32 ether that served as payment for establishing the validator node.

A full withdrawal is more significant than a partial withdrawal because it allows validators to withdraw all the ether they’ve staked in the Ethereum network. This means that the validator can withdraw the 32 ethers required to establish a validator node and all the block rewards accumulated by that amount.

When the validators complete a full withdrawal, they also shut down their validator node. By leaving the chain, the validator stops participating in the block validation process, potentially negatively affecting the network’s security.

Full withdrawals do not happen automatically, so validators who wish to complete a full withdrawal must send a message to the blockchain to be added to the queue.

(How much Ether commercial operators have staked into the Ethereum network)

Why does the unstaking opportunity only come months after The Merge?

There are several reasons why the ability to withdraw network-locked ether was unavailable when The Merge happened.

The main reason is that The Merge was Ethereum’s first significant upgrade. Because of this, the developers of the Ethereum network assumed that the upgrade would be a complex process that required careful planning and execution.

The Merge merged the Ethereum network with the Beacon Chain. Previously, the Beacon Chain and the Ethereum network operated side by side.

If the network developers had allowed users to withdraw ethers locked in the Ethereum network already during the transition, it could have caused unexpected problems and unnecessary risks to an already challenging upgrade.

By splitting the changes into two parts, the developers of the Ethereum network had more time to test the updates that took place in The Merge and verify their functionality.

Additionally, the Ethereum network relies on a sufficient amount of ether locked in the network to guarantee the network’s security and maintain the proof-of-stake consensus mechanism.

By delaying the unstaking, the developers created a more controlled environment, allowing a smoother transition to the proof-of-stake consensus mechanism.

What’s next for Ethereum?

Withdrawing earlier locked ether permits users to use previously locked funds, offering them more flexibility in allocating them. In the short term, the ability to use these previously locked funds could lead to volatility in Ethereum’s price.

However, it is good to note that the price of Ethereum is currently lower than when many users staked their funds in the network. For this reason, it is likely that these validators will not want to unstake the funds they have locked in the network, at least not directly for selling purposes.

Users who have staked their funds into the Ethereum network are likely to monitor withdrawals and may overreact in the short term if there is significant demand for Ethereum or if they notice signals that point to large Ethereum liquidations.

Once the short-term volatility has leveled out, the outcome will likely be neutral, as this upgrade has already factored into Ethereum’s market value for some time.

In addition, the difference between the price of network-locked Ethereum derivatives such as stETH and their nominal value (the value of ether represented by each derivative) may decrease as arbitrage opportunities open up.

At the time of writing, Ethereum has seen an increase in value of more than 10% in the last seven days.

Read more: Everything you should understand about Ethereum

Ethereum’s Shapella update — F.A.Q

What does the Shapella upgrade do?

The Shapella upgrade enables the withdrawal of funds staked in the Ethereum network. This has not been possible before. This update is welcome, as it brings more flexibility to the Ethereum network and its validators.

Will the Ethereum network become more insecure now?

The Ethereum network will not become significantly less secure due to the upgrade. For the security of the Ethereum network to suffer greatly, many validators would have to perform a full withdrawal of the staked funds and close the validator node.

This is not likely, as most of the validators had staked their ether into the Ethereum network when the price of Ethereum was higher than it is now.

How will the Shapella update affect the price of Ethereum?

In the short term, the price of Ethereum may see volatility as validators attempt to interpret sell signals for their unstaked ethers.

However, price changes are expected to be flat in the long term. This is primarily because the changes brought by the Shapella upgrade have already been included in the current market value of Ethereum for a more extended period.

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