In 2022, the amount of ETH staked has soared by 77.9%, including a 14.4% increase since the ETH merger. The main catalyst behind the surge in the staking rate is the Shanghai network upgrade.

First of all, many new friends may be curious why it is called “Shanghai Upgrade”?

Previously, someone suggested naming it after the city where the Devcon Ethereum Developer Conference was held, and this suggestion was adopted, so there were the Berlin upgrade, the London upgrade, and the next Shanghai upgrade, including the merge upgrade in September last year, also called the Paris upgrade.

On September 15, 2022, the Ethereum merger completed the transition of the Ethereum network from Proof of Work (POW) to Proof of Stake (POS). All mainnet activities are packaged into "beacon blocks", which are published and verified by Proof of Stake validators. The beacon chain, which was launched on December 1, 2020, has been running for two years. Before the merger, the validator accounts on the beacon chain and the accounts we use on the Ethereum mainnet were independent of each other and did not interfere with each other. However, after the beacon chain was launched, it was already possible to stake to generate rewards, but the staked ETH and rewards would be locked and could not be withdrawn. After the Shanghai upgrade, if users wish, they will be able to withdraw their rewards and stakes.

For ordinary investors, in addition to a series of technological innovations, the more eye-catching upgrade of the Shanghai upgrade is the unlocking of pledges. Since the birth of the ETH PoS pledge mechanism, a huge amount of ETH has been pledged and locked. How will these ETH impact the market after being unlocked in the future? Which tracks will usher in an explosion?

Where is ETH staked?

The Shanghai upgrade is the first major upgrade of the Ethereum network after the merger. In addition to the announcement of four EIPs that will be activated, the main task of this upgrade is to introduce beacon chain withdrawals for stakers, also known as EIP-4895. As of the time of writing, the total number of ETH staked is approximately 16.08 million ETH, accounting for approximately 13% of the total ETH, with a total number of active validators of 502,000 and an annualized interest rate of 5.2%.

The amount of ETH staked has surged 77.9% in 2022, including a 14.4% increase since the September merger. The main catalyst for accelerating this staking rate is the Shanghai network upgrade, which will reduce staking risk by enabling users to withdraw their deposits.

Most ETH staking is done through third-party platforms, and the entities most likely to benefit from the Shanghai upgrade are liquidity staking service providers. Dune Analytics statistics show that about one-third of ETH staking comes from liquidity staking service providers, while centralized exchanges account for 28.5%, ranking second. In addition, the amount of ETH pledged independently by whales should not be underestimated, accounting for one-fifth of the share.

LSD Liquidity Staking Track

Next, let’s focus on the liquidity staking track.

There are four staking modes on the ETH official website: native staking, staking as a service stSaaS, joint staking, and centralized exchanges. Liquidity staking service providers belong to joint staking. By issuing liquidity staking derivatives (LSD), they eliminate the opportunity cost of staking and find a clear product-market fit. LSD is an ERC-20 Token that represents a claim on the staked ETH and allows its holders to deploy their assets in DeFi while receiving rewards. For example, if you stake ETH in Lido, you will get the corresponding stETH, and you can also stake stETH to aave to obtain secondary returns.

Why will Shanghai’s upgrade promote a huge explosion in the liquidity pledge track?

Compared with the token pledge ratios of many other large public chains, Ethereum's pledge ratio is relatively low. The pledge ratios of many public chains are mostly distributed around 60%-80%. Ethereum's pledge ratio still has a lot of room for improvement. In my opinion, if more people will pledge ETH after the Shanghai upgrade, most people will choose liquidity pledge derivatives. Because the LSD issued by the liquidity pledge service provider can be used throughout DeFi, and at the same time will not give up the pledge income.

Leading projects worth paying attention to in the Ethereum liquidity staking track include Lido, Rocket Pool, StakeWise, SSV and FXS.

MEV track may become a new outlet for the next bull market

After Ethereum switched to POS consensus, the participants in the division of MEV on the chain changed from the original single miner group to major Layer 2, CEX, Lido, verification node hosting providers, etc. The participation of multiple parties also made the MEV problem of ETH 2.0 more complicated. The MEV track has also become an important track after Shanghai's upgrade, and is expected to become a very important outlet for the next bull market.

Will there be selling pressure after Shanghai upgrades?

It is generally believed that the Shanghai upgrade will not lead to a large amount of selling pressure on the Ethereum network due to the support for withdrawing collateralized ETH? Because validators can now withdraw their ETH and may choose to sell them in a bear market. According to the information collected so far, there is a high probability that there will be no selling pressure.

1. ETH will not be unlocked in the market at once: The total number of ETH staked is currently about 16.08 million ETH, accounting for about 13% of the total ETH. The current rules allow a maximum of 55,000 ETH to be withdrawn per day (256 ETH per epoch), and the impact on the price of Ethereum seems to be negligible.

2. Long-term supporters of Ethereum: Those who are willing to take greater risks and uncertainties to enter the ETH staking market in the early stage are user groups with greater risk appetite. Most of them are relatively long-term and firm supporters of Ethereum. In the current bear market, these people are relatively less willing to sell.

3. Staking users who wish to withdraw have already withdrawn: Most staking participants use Lido or CEX, and some have already completed their withdrawals. For example, users who pledge through the Lido protocol can exchange their stETH for ETH through Curve, and do not need to wait until Shanghai upgrades to unlock withdrawals. From the data, stETH had a good discount for many times last year. In other words, some users who want to withdraw sold their stETH for ETH. This also includes some institutions that have completed their stETH withdrawals due to the impact of some thunderstorms.

4. The opening of unlocking is more attractive to institutions and large investors: With the opening of pledge unlocking, it is likely to attract more institutions or large investors to enter.

First, this function itself brings confidence to more users;

Second, it can provide these users with a better exit channel without having to worry about issues such as exit liquidity or discounted exits;

Third, these users also have the demand to obtain relatively stable returns in a bear market (currently the annualized return on ETH currency can reach 5.1%. Although it cannot be compared with DeFi during the bull market, given the current market conditions, this rate of return is still attractive for long-term supporters).

Overall, the activation of staking withdrawals will be a notable event not only because of its technical implications, but also because of its impact on ETH market dynamics in the short term.