Market Byte: A Pivotal Upgrade for Ethereum

Zhao B&W
Michael Zhao
Maximo B&W
Matt Maximo
Last Update 04/14/2023
April 12, 2023 marked a significant milestone for Ethereum (ETH), as the long-awaited Shanghai upgrade (“Shanghai”) was successfully implemented. The Shanghai upgrade proved to be a positive catalyst for Ethereum, helping drive it to a new yearly high of $2,100.1

The upgrade enabled the withdrawal of ETH, which for some has been locked and accruing rewards since December 2020. Initial analysis predicted that a considerable portion of the roughly 18 million staked ETH would be withdrawn, which could have created selling pressure in the market. However, at the time of this writing, the withdrawals thus far have turned out to be slower than anticipated.

So far, the Shanghai upgrade has positively impacted ETH’s price, with ETH gaining 10.66% since April 12 and Bitcoin (BTC) remaining flat with a slight 1.17% increase during this same period (Figure 1); this reality is a stark contrast to the massive sell-off that was initially anticipated. Although withdrawals might continue to grow in the near term, withdrawals do not necessarily signal selling, as users could be rotating validators2 or switching to staking providers that offer higher yields. Interestingly, ETH’s volatility has also decreased by 6% during the same period, indicating that price stability has increased despite ongoing withdrawals.3 As additional withdrawals continue to enter the market, we’ll be watching how this trend develops.

Figure 1: ETH and BTC Price Returns

Figure 1: ETH and BTC Price Returns

Source: Grayscale Research, as of 4/12/2023 0:00 ET to 4/14/2023 9:25 ET

We believe that the short-term price impact from the Shanghai upgrade will be less severe than initially anticipated, attributable to the lower number of ETH withdrawals and full exits. Validators who wish to withdraw their funds will have to initiate the unstaking process, which can be completed in as few as 27 hours, so future price volatility is still possible. Looking ahead, we think this is a bullish event for Ethereum, as reducing staking risks could boost the baseline demand for ETH. As a result, we also expect Liquid Staking Derivatives (LSD) protocols to see an even greater surge in demand, since LSDs offer exposure to both ETH and its yield while keeping DeFi functionality (for example serving as a collateral asset).

Unstaking Process

Stakers and validators wishing to unstake and withdraw their assets have two options: Full and Partial withdrawals. The withdrawal cycle, however, varies based on the type of withdrawal, and therefore the time it takes to receive the assets varies.

Partial withdrawals involve withdrawing balances in excess of 32 ETH, which consist of earned rewards. These balances are sent to an Ethereum address and can be spent immediately. In this scenario, the validator continues to be a part of the network and carries on with validation. Partial withdrawals are faster than full withdrawals, as they do not need to enter the exit queue.

Full withdrawals, on the other hand, involve the validator exiting and stopping their participation in securing the network. The entire balance, including the 32 ETH principal and any rewards, is unlocked and becomes available for spending after the exit and withdrawal queues are complete.

Withdrawal Cycle

    1. Exit Queue – The minimum exit time is 5 epochs or approximately 32 minutes, however, due to network congestion, exits are likely to take longer.
      • Only Full Withdrawals 
    1. Withdrawal Queue – The withdrawal queue has a minimum buffer of 256 epochs or approximately 27 hours.
      • Both Full and Partial Withdrawals
Who is Withdrawing ETH?

As of April 13, 2023, a majority (68.5%) of the ~830K ETH (~$1.6bn) waiting for withdrawal belongs to larger players in the crypto ecosystem, like Kraken — which closed its staking platform earlier this year due to regulatory action (Figure 2). Other centralized exchanges, like Coinbase and Huobi, also represent a large portion of ETH waiting to be withdrawn. It is worth noting that certain LSD protocols, like Lido and Rocket Pool which comprise ~30% of total ETH staked, have not enabled withdrawals yet.

Figure 2: Total ETH Withdrawn

Figure 2: Total ETH Withdrawn

Source: Nansen, as of 4/13/2023

The velocity of validator exits seems to confirm that a majority of validator flows are due to concentrated players. The number of validators awaiting exit ramped up at 6:00 PM on April 12, 2023, eventually slowing down near the 15,000 validator mark (Figure 3).

Figure 3: ETH validators awaiting exit

Figure 3: ETH validators awaiting exit

Source: Parsec Finance, as of 4/13/2023

However, we have already seen from ETH’s positive price action that withdrawals do not necessarily equate to meaningful sell pressure. In comparison to its average daily trading volume — which has ranged between $6 – 13bn over the last two weeks — the 830K ETH currently being unstaked represents ~$1.6bn, or 25% of the lowest volume day within that period.

Potential Longer-Term Impacts on Ethereum
The successful implementation of the Shanghai upgrade on April 12, 2023, has proved to be a pivotal moment for the Ethereum network. Despite initial concerns about a massive sell-off, the market has shown resilience, with ETH’s price increasing and volatility decreasing in the wake of the upgrade. While approximately $1.6bn of ETH being withdrawn from the staking pool, it is important to note that these do not directly correlate with selling pressure. We believe the long-term outlook for Ethereum remains bullish as the reduction in staking risks is expected to boost demand for ETH, and Liquid Staking Derivatives (LSD) protocols will likely see a surge in interest due to their unique advantages. We anticipate a surge in the percentage of the Ethereum supply being staked, closing the gap with Solana and Avalanche, both of which have more than 60% of their circulating supply staked.4 As the withdrawal process continues to unfold, it will be crucial to monitor how these trends develop and shape the Ethereum ecosystem.

1. TradingView as of 4/14/2023

2. An Ethereum validator is a network participant who stakes a minimum of 32 ETH to help secure the Ethereum blockchain, validate transactions, and create new blocks in the Ethereum Proof-of-Stake (PoS) consensus model.

3. Glassnode 4/12/2023 – 4/14/2023

4. as of 4/14/2023

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