Summary Ethereum's Shanghai upgrade is complete. ETH can now be withdrawn from stake as of Wednesday evening. The early action has been mixed. With the initial reaction being net positive staking flow. As of Friday afternoon, the net flow is negative. ETH has rallied 8% since Wednesday and could be signaling that the rest of the crypto market is about to catch up to Bitcoin's recent gains. When I last covered Ethereum ( ETH-USD ) for Seeking Alpha in early January , it was a preview of what to expect for the "Shanghai Upgrade" to the network. This upgrade is an important one because it allows for ETH withdrawals from stake. To quickly recap why this is necessary Ethereum launched as a proof of work blockchain. The core developers of Ethereum have long wanted to transition the network to a proof of stake blockchain in part because it's a far more energy efficient consensus mechanism. Rather than the miner validation that is required for proof of work, proof of stake validation is done by those who deposit the network's native currency in the system. I've actually written more deeply about staking as a concept for Seeking Alpha and you can read that here : When a user stakes their crypto assets, they're essentially pledging those coins to the blockchain to help secure the network. In return for pledging their coins for network security, the user receives a staking reward that is generated from the fees that validators earn from confirming transactions. To transition from proof of work to proof of stake, Ethereum had to have a robust network of staking validators before making the change. Otherwise, the network could have ground to a halt. What the Ethereum developers did was launch a second Ethereum chain called "Beacon" that worked alongside Ethereum's proof of work Mainnet network. Stakers could put ETH into stake on Beacon as early as 2020 - they just couldn't get it out. It wasn't until last year when Beacon was "merged" with the PoW Mainnet and Ethereum officially became a proof of stake blockchain. Despite the success of "The Merge," staking withdrawals still weren't enabled yet. That changed this week with the successful implementation of the Shanghai upgrade. The Shanghai Effect There has been a theory in some crypto circles that Shanghai would be a "sell the news" event just as The Merge was back in September. The rationale behind that theory was that staking withdrawals would create a large outflow of ETH from stake. And that newly unlocked ETH would end up getting sold. When I first covered Shanghai in January, I saw the opposite scenario as more likely: Enabling ETH withdrawal from stake following Shanghai does raise a key question; could un-staking put sell pressure on Ethereum as funds come out of lock? Possibly. But I think there might be a greater chance that the ability to un-stake could actually bring more ETH into stake rather than out of stake. I take this view because I think there are potential staking participants on the sidelines who have been waiting to see how the merge and subsequent network upgrades go before locking funds without an ability to withdraw. We're only two days since Shanghai was completed and early indications were that the de-risked theory was holding up as the staking flow on ETH was positive on Thursday. As of Friday, the net ETH staking flow has turned slightly negative with net flow currently around -137K ETH: Token Unlocks Since Shanghai, there has also been a slight decline in total validators. That figure has declined by about 0.3% over the last week: ETH Validators (StakingRewards) Because Ethereum's minimum staking figure is 32 ETH, smaller holders have generally have to go through staking protocols like Lido Finance ( LDO-USD ) and we're not seeing a reduction in the usage there so far: Lido Finance (DeFi Llama) Another way users can stake on ETH indirectly is through staking pools. We have seen growth there also as staking pool services have gone from 12.3% share of stake during the merge to 13.3% share of stake today. Risks To Consider Going Forward We know that Kraken is shutting down its staking as a service business after conflict with the Securities and Exchange Commission earlier this year. Since Kraken accounts for nearly 7% of the ETH in stake, I'd say it's a near certainty that the 1.25 million ETH staked through Kraken is going to see a move elsewhere. Where that ETH goes is the question. It could get sold. Or it could get moved back into stake through a different provider. Coinbase ( COIN ) could theoretically be a winner there because that company looks poised to fight the SEC on just about any front and might appeal to Kraken users for staking simplicity's sake. It's far easier from the user's perspective to stake through a centralized exchange than it is to stake directly on the network. But there are also other on-chain ETH staking tools that appear to have platform tokens that I would personally be very cautious about buying. I went into detail on one such coin with BlockChain Reaction subscribers Friday morning. Summary It's still very early to truly assess what the successful Shanghai upgrade means for Ethereum longer term. I'm not surprised staking net flow was positive at one point yesterday. I'm a bit more surprised that ETH has rallied 8% from Wednesday's close of $1,917. But a "buy the news" event in ETH does make some sense with the benefit of hindsight. Ethereum is a network. And that network requires a fee structure to pay for transactions. Those fees are paid with ETH. The more ETH that is locked up in stake, the better for ETH's price provided there is demand for transaction validation on the Ethereum network. Bitcoin ( BTC-USD ) has been eating most of the coins in the crypto market for the last several weeks. Don't be surprised if ETH is now going to take a turn leading the market higher.
