Ethereum’s focus on innovation is well known in the crypto sphere, enabling the development of an ever-expanding ecosystem of diverse use cases ranging from decentralized applications (dApps) to decentralized finance (DeFi), and non-fungible tokens (NFTs).
Now Binance.com is back in the news due to the Shanghai upgrade, the latest technical revamp in a long series of improvements that the network has undergone over the years. In the weeks prior to the upgrade, there were a lot of concerns and speculations regarding how the change might affect the Ethereum price in the short and long run and how this would reverberate throughout the market.
While it is difficult to gauge the long-term implications, the immediate effects are already visible. The upgrade led to a stunning inflow of staked Ether in just one week, with a total of 571,950 ETH tokens being deposited into staking contracts. This is the biggest amount of staked Ether ever registered in the course of one week since staking began back in December 2020, with the launch of the Beacon Chain, as the platform was preparing for the biggest overhaul since its inception, known as the Merge, which implied a switch from the proof-of-work mechanism underpinned by miners to a proof-of-stake protocol based on validators.
The long road to the Shanghai Upgrade
With the introduction of staking, Ether holders have been able to lock their coins into staking contracts in order to become validators. That meant they could process transactions and add new blocks of data onto the blockchain without having to compete in the energy-intensive proof-of-work method. The required amount for achieving validator status is 32 ETH, but users can also invest less.
The incentive for staking and running validator software is the possibility to earn Ether rewards, participate in enhancing the security of the network and make the platform a lot more sustainable as staking requires considerably less energy consumption than the proof-of-work consensus mechanism.
Since staking was enabled, users have deposited over 17 million Ether worth approximately $36 billion to the Beacon Chain. The Merge saw Ethereum combine its original PoW execution layer with the PoS Beacon chain, switching from miners to validators, but it did not provide withdrawal functionality for the staked ether.
As a result, almost 15% of the total circulating Ethereum supply was frozen in staking accounts. The Shanghai or Shapella, which was successfully completed on April 12, at 22:27 UTC, marked the final step in the platform’s transition from PoW to POS, allowing users to access the tokens that were locked up in staked contracts.
Due to the large number of tokens that were on the line, analysts were worried that the newly-introduced withdrawal feature would lead to en mass selling and dumping of Ether holdings causing the Ethereum price to crash. Fortunately, this pessimistic prediction didn’t come true. On the contrary, Ethereum rallied in the first days after the completion of the Shanghai upgrade, itching above the $2,100 mark for the first time in 11 months.
Although short-lived, this sudden price surge helped ease some of the concerns regarding a potential Ethereum collapse. What’s more, two weeks after the Shanghai upgrade, Ethereum staking rates seem to be on par with withdrawal rates, ensuring a healthy balance for the network.
The factors behind the record-breaking influx of staked ETH deposits
Analysts are now looking at the factors that have led to the record rate of staked Ether. According to the latest data, institutional staking has had the biggest contribution to the increase in Ethereum staking activities. In the wake of the Shanghai upgrade, the five largest staking service providers, Bitcoin Suisse, Kiln Figment, Staked.us, and Stakefish, deposited 235,330 ETH worth approximately $450 million at the time into staking accounts.
That represents almost half of the total amount of staked Ethereum registered in a one-week time span. It seems like the Shanghai upgrade had a positive impact on Ethereum staking demand at an institutional level, as more firms have been jumping on the bandwagon.
Also, now that the network is processing staked Ether withdrawals, concerns over liquidity issues associated with staking have finally been put to rest. The removal of withdrawal barriers and the increased liquidity it brings to the market is likely to encourage more investors to stake their ETH funds in order to increase their profits.
However, major institutional investors are not the only factors that have led to the record inflow of staked Ether. It appears that the reinvesting of withdrawn rewards also played an important role in the phenomenon. Figures show that following the upgrade, investors unlocked and withdrew a large number of staked rewards amounting to approximately 900,000 ETH. At the same time, a total of over 660, 000 ETH were staked on the network. This proves that most investors chose not to sell or hold onto the withdrawn rewards but decided to restake them.
Looking at the number of tokens that goes in and out of the Ethereum network, without taking rewards into account, the inflows top the outflows. There’s a reason why reward withdrawals are left out of the equation when doing the math and analyzing the dynamics of the network. In order to activate validator software and earn rewards, investors have to stake a fixed amount of 32 ETH or more.
However, once the validator receives rewards for their contribution, keeping them locked up in staking deposits brings them no benefits in terms of increasing returns. Therefore, it makes perfect sense for users to withdraw these rewards and then restake them to continue the cycle and earn new ones.
This withdrawal and restacking trends prove that Ethereum is slowly but surely regaining investors’ trust and interest, which is crucial for the further development of the network, enhancing resilience and stability. With the market making its way out of the most recent crypto winter, Ethereum’s upgrade brings much-needed hope to validators and the crypto community as a whole.