Many people are excited about the future of Ethereum staking. Things will look very different following the upcoming Shanghai upgrade. However, it remains to be seen whether the network can sustain its hundreds of thousands of validators.
What Shanghai Means For Staking
Since its transition to proof-of-stake, people have been able to commit funds to the dedicated Ethereum staking contract. However, no one has been able to claim any rewards or remove their liquidity. That ensures a healthy portion of the circulating ETH supply remains locked up indefinitely, although that will change soon. In addition, users could opt to retain liquidity through liquid staking. It has proven to be a powerful solution for many people, although those providers might see a liquidity crunch too.
Shanghai’s launch remains in the air, even if progress has been made. A public testnet version of the upgrade had yet to be released, which should happen in the next month or two. Following that phase, there will be at least a month of thorough testing to iron out any kinks. The activation of EIP-4895 on the mainnet has no official launch date. However, the developers are confident it will happen sometime in March 2023.
Regaining Locked Staking Liquidity
The first change Shanghai introduces is the option to withdraw funds from the dedicated smart contract or other staking providers. Users who committed 32 ETH – or multiples of that amount – will finally be able to unstake. That means over 13% of the ETH supply could become liquid again, which may negatively impact market prices. However, given ETH’s price performance in 2022 and early 2023, it seems unlikely most people want to sell at a [steep] loss.
While users can reclaim their liquidity, it remains to be seen if anyone wants to. Keeping funds in the contract or staking provider ensures ongoing rewards. In addition, the overall staked amount may increase as ANYONE can stake directly without third parties or smart contracts. However, remember that more staking leads to lower overall network rewards for all participants. There are lots of calculations to make in the coming months.
Claiming Staking Rewards
Another crucial change following Shanghai is the option to claim Ethereum staking rewards. Until now, no one has claimed any rewards as they cannot do so. That has been a concern for some people, although everyone knew that would be a trade-off from day one. The developers made it clear rewards wouldn’t be accessible until a future major network upgrade.
There are a lot of rewards waiting to be collected by the supporters. For instance, Ethereum has over 500,000 validators. That is quite a lot, and these users should all have between 5% and 10% APR in rewards waiting for them. It has been possible to stake ETH for a while now, so there will be close to 18 months of rewards to collect. Many people will get a nice payday despite the low ETH price.
What Will Liquid Staking Providers Do?
Although 2023 might be a good year for liquid staking derivatives, that isn’t necessarily guaranteed. Once everyone can stake ETH directly, liquid staking is no longer needed. That is unless the providers come up with new incentives to entice users. If staking directly is more appealing and rewarding, users will opt for something other than an alternative solution that costs them money.
It will be up to liquid staking providers to devise an action plan. Projects like Lido stand to lose tremendous liquidity and market share. In addition, liquid staking tokens, like stETH, may face a severe liquidity crunch. That would affect their performance across decentralized finance and exchanges alike. Exciting times are ahead following the Shanghai upgrade, although the landscape may differ greatly.
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