Ethereum Shanghai Upgrade: What You Need to Know

Ethereum is one of the largest and most popular blockchain platforms in the world, known for enabling the creation of smart contracts and decentralized applications (dApps). To keep up with the demands of its growing user base and address technical issues, Ethereum undergoes regular upgrades.

What is the Shanghai upgrade and how does it impact Ethereum?

One of the latest updates to the Ethereum network is known as Shanghai, which is expected to launch in mid-late March. The Shanghai upgrade is named after the Devcon 6 conference that was planned to take place in Shanghai, China, in 2021 but was canceled due to the COVID-19 pandemic. The upgrade includes several important changes to the Ethereum network that are designed to improve its security, scalability, and usability.

Expected enhancements include:

• Unstaking ETH: Investors will be able to unstake and withdraw staked Ether (ETH) that had previously been locked up on the Ethereum blockchain during the transition from Proof-of-Work (PoW) to Proof-of-Stake (PoS).
• Lower Gas fees: Investors may notice improved network performance and reduced gas fees, making it easier and more affordable to use the Ethereum network.

What do these upgrades mean for ETH investors?

Most importantly, ETH investors will be able to stake and withdraw ETH to help secure the network and earn staking rewards. Investors have been able to stake ETH since 2020, but haven’t been able to withdraw staked ETH or earned staking rewards.

• Now that investors will be able to withdraw staked assets and staking rewards, staking is expected to become a much more attractive investment strategy for ETH investors.
• Staking will become an eligible strategy for ETPs for the first time.

What is the expected return on staking ETH?

As of February 15, 2023, the expected return on ETH staking is approximately 4% APY with an expected unstaking period around 6-8 days. Though, it should be noted that rewards earned from staking ETH do not necessarily reflect the entire return on investment, given the potential incorporation of fees and other costs.

What does the Shanghai upgrade mean for 21Shares ETPs that hold ETH?

• 21Shares Ethereum Core ETP (AETH): ETH staking has been introduced since the completion of the Shanghai upgrade. Staking proceeds will be reinvested into the ETP’s NAV, allowing investors to receive additional rewards (coin entitlement) that are independent of market performance.
• 21Shares Staking Basket Index ETP (STAKE): Once ETH becomes eligible under index guidelines, it will be considered for inclusion at the next rebalancing date. Rebalancings occur twice per year: in March and September. The first opportunity for ETH to be considered for inclusion will be in September 2023. Eligibility is contingent on having institutional support for staking.

Timeline: ETH and 21Shares ETPs

• September 15, 2022: “The Merge” - Ethereum moved from a Proof-of-Work (PoW) to a Proof-of-Stake (PoS) consensus mechanism
• February 1, 2023: Zhejiang - Launched the testnet for users to trial unstaking their ETH and identify any potential issues before Shanghai goes live.
• Expected - February 28, 2023: Sepolia - Second testnet for staked ETH withdrawals ahead of next month’s Shanghai hard fork.
• Expected - March 2023 - Goerli: The third, largest, and final public ETH testnet before the Shanghai upgrade.
• Expected - March 2023: Shanghai upgrade - Allowing staked ETH withdrawals
• Expected as soon as feasible after Shanghai upgrade: Introduction of ETH staking for 21Shares Ethereum Core ETP
• Expected - September 2023: Introduction of ETH staking for 21Shares Staking Basket Index ETP

The Shanghai upgrade also includes changes to the Ethereum Virtual Machine (EVM), which is the virtual machine that executes smart contracts on the Ethereum network. These changes are designed to improve the EVM’s efficiency and security.

In addition to these technical changes, the Shanghai upgrade also includes a change to the Ethereum Improvement Proposal (EIP) process itself. EIP-3554 aims to introduce an expiry date for some of the EIPs that are submitted for the Ethereum network. This is designed to prevent obsolete proposals from cluttering up the EIP repository and making it difficult to find timely and relevant proposals.

The significance of the Shanghai upgrade can’t be overstated. The changes it introduces are expected to improve the Ethereum network’s security, scalability, and usability. The implementation of EIP-1559 is expected to make transaction fees more predictable and less expensive, which will make it easier for developers to build dApps on the network. The changes to the EVM are expected to make the execution of smart contracts more efficient and secure. Finally, the changes to the EIP process are expected to make it easier for developers to find relevant proposals and contribute to the Ethereum network’s ongoing development.

In conclusion, the Shanghai upgrade is a significant milestone in the ongoing development of the Ethereum network. Its technical changes are expected to improve the security, scalability, and usability of the network, while its changes to the EIP process are expected to make it easier for developers to contribute to the ongoing development of the network. As such, the Shanghai upgrade is an important step forward in the evolution of the Ethereum network and is something that users, developers, and investors should keep an eye on in the coming months.