NEST Roundtable 25: Ethereum Shanghai upgrade note

Participants

Host

Hana from NEST Protocol

Cohost

iPollo

Acty from Whale Coin Talk

Guest

Chainbase, Jiahui, Chainbase Ecosystem Lead

Metablox, Bo, Head of China Business Development

ViaBTC Capital, MeKC, ViaBTC Capital Researcher

Shield, 0xChaotic，head of content at Shield

PolkaNameSystem, catslovefish, PNS researcher

Balancer, Gleb, Balancer Contributor

Clipper, Mark Lurie, CEO of Shipyard Software

Conference recording

https://twitter.com/i/spaces/1ypKddLQkALKW?s=20

Highlights

Hana: Nearly 5 months ago, the Ethereum blockchain successfully completed, what was at the time a very complicated end year market update, called the merge. Actually, the merge allowed the blockchain to move from validating transactions using computers that took a lot of energy to run through proof of stake model. The switch cut Ethereum’s power consumption by more than 99%. The price of ETH experienced raise a bit but has since loss some around 13 to 15%. Now software developers who worked on Ethereum are gearing up for a new upgrade called Shanghai upgrade, and today we will talk about it. Shanghai upgrade has been allowed the tokens been used for the transactions on the blockchain to be withdrawal. Right now, all those tokens are tied up in staking wallets.

Session 1: Questions from Host

1. What is Ethereum staking?

Acty: The Ethereum staking has been around for 2 years now and basically what it allows people to take a portion of their tokens and set it up as a validator and then in turn they would get extra tokens as rewards. The thing with staking with shanghaies upgrade, nobody has been able to unstake their tokens so people have been earning rewards but nobody has been able to actually get those reward out now. What people are most concerned with the upgrade is what will happen, because now everybody can just take all these tokens out and gone, but I think there is a few misconceptions there. There’s only a small percentage compared to other protocols out there has been staked. The withdrawal process will work in two ways, you can either just take out the interest on your stage which is going to be done automatically on a one-week base kind of thing, or you can take out the entire stake and this is what people are concerned. But at the moment you can only get about 1500 validators that can exit per day which is about 50,000 each so about 80 million or so at the current price and people are concerned about that 80 million is going to get dumped. And I do not know if this would drive a price movement down. But I am bullish for Ethereum because there are a lot of people that have been sitting on the sideline waiting for the upgrade to see how it all works, and once these validators do exit you got to remember that staking rewards adjust upward so there’s the incentives there for new people to come in.

MeKC: Since the December 2020, users can deposit ETH to become a validator and get rewards. Then after the merge of 2022, the consensus of Ethereum is changed to proof of stake instead of proof of work. The data position, translation and adding new blocks keep Ethereum secure for everyone. Now there are over 16 million ETH locked which is equivalent to over 26 billion dollars. That’s what Ethereum staking.

2. What is Ethereum Shanghai update?

Gleb: If you have a Ethereum stake, you cannot withdraw it, but the Shanghai upgrade makes it possible for building the control to the stake, which is something that we have been looking forward to. You can stake and unstake which is why it is important and shows that ecosystem is growing.

3. How will the update affect users like us?

Jiahui: I am not a person who pays high attention on the token price up and down, so I would want to know more on the potential impact of the Shanghai update to me. If I am a user of Ethereum, there are many stakers, and for them they can stake and unstake. But if I am not a staker and just an ordinary user, it will incentivize me to participate in this staking as well. So, I think what would be the impact is would just be the incentivized to participate in the stake and unstake process and get staking rewards.

0xChaotic: As a normal user like small retail user, we do not have 32 Ethereum to stake to be a validator. So, the key drive for us is the price fluctuation. After the withdrawal is enacted, there will be a long queue that you cannot really withdraw everything all at once given the depth of the market. I think it can sustain the price or absorb the price down.

Mark: I think the risk-free cost capital raising is an important one. If we can get 5% from staking ETH for example and that’s essentially pretty much as close to risk-free as you can get on the Ethereum network, then it is now clear why you would still be providing liquidity to various pools in defi, I mean a lot of them do not yield that much in real terms. So, I think it will make a lot of defi farmers and liquidity farmers change their behavior and maybe reallocate their funds to staking rather than doing a lot of the farming and defi that they are doing now and that obviously has secondary macro implications but ii think it is a decision a lot of people will start facing.

Hana: From pure economic view, there is a lot of trust when the whole concept of staking started because you are putting a lot of trust in the Ethereum. But something might not happen as we are not all rational players.

Catslovefish: We can just consider it as an index like how many people want to get this risk-free or how many people go to higher risk market, this could help us to make decisions. Also, it might cause some problems like defi. You can stake to yourself, but you can also use platforms like Lido and get even higher rewards. It might cause concentration problems that people do not want to be validator, they just use platforms. I feel like this might make it not as decentralized as now.

Gleb: We might see more liquidity flow into the ecosystem and I think that’s going to benefit as well at the end of the day, because the more trust to raise, the multiple address the better. It is for everyone involved.

Mark: I am surprised that you think this is going to be a positive development for Balancer. Now 70% of trade volume in defi is between ETH/USD pairs, and so if there’s liquidity flight from those pools because you can get more yield from ETH staking and from US treasuries are coming on chain, which are also around 5% yielding, then why are people going to still stake in the ETH/USD pairs on Uniswap or Balancer.

Gleb: I personally do not think there’s going to be a flight of the liquidity, I do think there’s going to be more liquidity or we are not going to see a lot of changes. I do think there are going to be more opportunities so it would drive more attentions to the ecosystem and bring in more users. Balancers care a lot more than just those pools.

Mark: I agree, but it is 70% of their volume. I think this is going to be the biggest shift that comes out of Shanghai.

Jiahui: Actually, we are talking about the price and the liquidity staking things related to defi, but none of us mentioned how the update will increase the defi ecosystem developers of Ethereum. It is not just like EIP 4895, there are other EIPs as well, like that help developers to shorten the code that they have to insert into specific smart contracts so that they can deploy one contract instead of multiple contracts regarding one protocol so that will improve incentive more developers even from web2.

0xChaotic: Why do people stake? Because people want to secure the network, and use it. Compared to Solana, what makes Ethereum ecosystem interesting is that you can do a lot more than staking. Mark thinks the Shanghai update is going to have a negative impact on the defi as the defi ecosystem only has currently a very limited usage, but in the future, if there are more diverse and more interesting things to do on, there’s going to be surely other interesting chances more than staking.

Jiahua: All the previous merge, upgrade or updates are for decentralization and lower the threshold for people to participating in securing the whole network.

4. What can we expect in short terms of users’ behavior?

Mekc: I think there must be uncertainty or market volatility, especially in the first few days, here might be some pressures on the price, and some users might decide to restore their stake or reward after this update. This could potentially increase the supply and put downward pressures on its price in the short term.

5. What can we expect with a number of investors/ and investments with the update?

Catslovefish: You can stake yourself or stake through Lido or stake on Lido first. So, I think it’s more about the share of liquidity. it might push some people out to more traditional Bitcoin.

Mark: In the traditional economy when rates rise, it attracts more capital into the country, and it also makes those investors a bit more conservative because they have another risk adjusted option, so the valuation have dropped for venture startups. So, I would not be surprised if it becomes harder to raise capital in crypto again.

0xChaotic: It is going to definitely wash out some hot money, because before, a lot of institutional money wanted to flow into the space they have to go through venture capitals, but now like Ethereum, 5% compared to traditional ventures, that’s a quite lucrative and risk-free composability is going to work out in the future.

iPollo: The heart of the update is EIP4895, that unlock about 16.4billions locked in the network. The other EIPs would help to improve performance like reduce the gas fees etc, which would make Ethereum network better.

6. How will the update affect the blockchain?

Gleb: Honestly, we will not notice anything just like with the merge ideally, if everything just continues to work the way it is supposed to, that’s going to be the best outcome.

Catslovefish: I am quite positive because the yield for staking is dynamic, so it will be a dynamic balance between like high risk pursue investment and low risk people. The update is important because it will be a really core stall for the next stage, like we know about layer2, and it will really scaling the whole book which make it possible for the real world to use it. Otherwise like it is just too slow for social platform or daily payment. It really needs a very large scale.

MeKC: I think the update will especially to enhance the security of the Ethereum network and facilitate its long-term development. And this update can lead to an increase in the total amount of stake. Currently the percentage of stake is less than 15%, so if the percentage increase, then the rate is going to decrease.

Bo: JP Morgan thinks the update would bring more capital to the network because assuming that staking rate converges over the time, and the number of validators goes from 0.5 million to 2.2 million, the annual year in ETH could just follow up from 7.4% to 5%. And for the blockchain part, the EOF really includes a bunch of complex technical improvement such like EIP3540. It the time permitting, I think 3670 is going to be included as well. In general, it is really a bog technical update.

0xChaotic: Crypto trading and building are two very different parts. Shanghai update adds another fundamental yield to the ecosystem which is going to definitely help the whole defi and consistent growth,