In September 2022, Ethereum went through its most critical moment ever — the Merge, which transitioned the network from PoW to PoS upon its successful completion. Moreover, the adoption of the EIP1559 mechanism made ETH deflationary. According to ultrasound.money, as of April 10, the total ETH supply has decreased by approximately 0.068% since the Merge. Now, as the first major Ethereum upgrade after the Merge, what kind of changes will the Shapella upgrade bring to the industry?
The rising confidence among ETH holders
The Shapella upgrade mainly covers four main EIPs, among which EIP-3651, EIP-3855, and EIP-3860 are all related to reducing gas consumption. Additionally, EIP-3860 also involves increasing the size limit of smart contracts, and the most anticipated EIP-4895 activates the staking withdrawal function on the Beacon Chain.
The Shapella upgrade is clearly great news for developers, users, and stakers: expanded size limit of smart contracts allows developers to create more imaginative Ethereum applications; lower gas consumption reduces the usage cost and entry barriers for users; the withdrawal feature enables stakers to withdraw their ETH staked and the staking rewards.
Some worry that ETH will face a sell-off after withdrawal is activated. However, liquidity staking tokens (LSTs) now account for 48% of the total ETH staked, and this part of the locked liquidity has already been released. At the same time, early investors who locked up their ETH before the Shapella upgrade are bullish on the long-term development of ETH and unlikely to sell their holdings at the current price level. Furthermore, once the withdrawal feature is enabled, a limit will be set on the amount of ETH that can be withdrawn from the Beacon Chain each day, meaning that a massive sell-off is unlikely to happen.
Let’s turn to the price trend. Since Ethereum developers confirmed the activation of the Shapella upgrade in January 2023, the ETH price has risen by over 40% in the past 90 days, as of April 10, according to CoinEx. There is no doubt that the upgrade has once again improved investor confidence in Ethereum.
A new opportunity for staking service providers
The upcoming withdrawal feature represents a significant positive for staking service providers. Before the Shapella upgrade, stakers cannot withdraw the ETH staked, which is a huge risk that prevented some prudent institutions, whales, and risk-averse investors from joining ETH staking. This is also why Ethereum’s staking rate only stands at 15.07%, lower than the figure of many other PoS coins.
The Shapella upgrade provides users with a definite exit channel. In the meantime, investors will no longer have to worry about the depreciation of LSTs in extreme scenarios or the risk of not being able to withdraw ETH staked for the long term. Therefore, more long-term investors may into ETH staking for stable annual returns (the APY is currently over 4%).
Major Ethereum staking service providers include liquid staking protocols, centralized exchanges, and traditional mining pools, with market shares of 33.3%, 27.3%, and 17%, respectively, according to Dune. Following the Shapella upgrade, these platforms are likely to embrace new growth opportunities.
LSD: A new space for imagination
In addition to more opportunities for staking service providers, LSTs issued by liquid staking protocols are also expected to become stabler. In June 2022, platforms including Celsius and Alameda sold large amounts of stETH to cover funding gaps, which exhausted the liquidity of stETH/ETH. This led to a stETH de-peg, with a maximum discount rate of 6.5%, i.e., one stETH for just 0.935 ETH.
stETH is the largest LST by TVL, accounting for more than 70% of the market share. In addition, stETH also offers superior liquidity, but it could still de-peg in extreme cases. However, the Shapella upgrade will minimize the risk of LSTs de-pegs thanks to the activation of withdrawal. According to the relevant statistics, the value of stETH has gradually rebounded as the Shapella upgrade approaches.
The stable value of LSTs such as stETH, coupled with the growing TVL of the LSD ( Liquid Staking Derivatives) category, will create more growth opportunities for derivatives. Besides, this will also trigger the appearance of more DeFi products, boosting the yield and capital efficiency of LSTs. By then, more imaginative mechanisms may emerge in liquidity staking and its derivatives.
As a focus of the crypto space, the Shapella upgrade will surely have an impact on the market landscape, especially for Ethereum and related ecosystems. Moreover, the boom of the LSD category driven by Ethereum may influence other PoS public chains as well. ETH staking is also expected to become a new choice for long-term investors seeking stable returns. Additionally, after the Shapella upgrade, Cancun, the next Ethereum upgrade, will continue to implement Ethereum’s scaling plan and lay the groundwork for the development of Layer2. Ethereum is one step closer to its goal of becoming the “world computer”. The success of the Shapella upgrade will be a positive signal for both Ethereum and the crypto industry, benefiting investors, developers, and users alike.