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Is ETH’s fall inevitable after the Shanghai? Our analysis of the most likely scenario

Igor Grigorchenko

News editor

Feb 1, 2023 at 04:41

The Ethereum network will see a Shanghai upgrade in March that will add new functionality to this popular blockchain. One of the most hotly debated innovations is the unblocking of ETH withdrawals, which will potentially bring huge amounts of this cryptocurrency onto the market. But calmly, this scenario was foreseen by the creators of the network; now we will tell you what happens next.


What’s the problem?

In the 2022 update of The Merge, Ethereum switched from a PoW to the new PoS consensus. While in the PoW case block miners earned the network’s service reward, in the PoS variant it now goes to validators, holders of large amounts of ETH. This is the largest update in Ethereum history.

Even before the move to PoS, investors could reserve ETH for rewards by entering staking mode. However, the condition was that a minimum of 32 ETH had to be frozen and could not be accessed until the next update. And now a major Shanghai update is approaching, which is scheduled for March of this year. After its activation, free withdrawal of previously frozen ETH will be unblocked. By the way, right now, Ethereum developers are testing exactly mass withdrawals in the test version of the Shanghai update.

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Logic suggests that this will create a lot of pressure from sellers in the market, so it is no wonder that many traders are now preparing to short Ethereum. For example, this source reports concern and fears in the Ethereum community that large investors may throw their ETH into the market and crash Ethereum’s price with it. 

This behavior is very likely, considering the current market growth after the prolonged crypto winter, when profit taking at the current Ethereum peak price looks very logical (e.g., Ethereum is up 32.7% this January).

But, no matter how obvious this logical chain seems (and the consequent danger of Ethereum’s price collapsing), the blockchain’s developers have foreseen everything. This is most likely how things will unfold after Shanghai is activated.


How unstaking works

When analyzing the situation in the crypto world, it is very important to consider the technical aspect of what is happening as well. The main problem in this situation is that traders often don’t understand how the queue to exit the staking works. We will use the explanations of the technical expert, Westie. You can read his original thread on Twitter for an accurate understanding. 

The withdrawal period in Ethereum works dynamically and is not static like in other PoS networks. For example, on the Cosmos blockchain, the withdrawal period is exactly 21 days. In Ethereum, it is not so simple; the exit period here depends on many factors, such as how many validators (network nodes) drop out at the same time at a certain point in time.

To put it simply, there is a very good chance that if a lot of people try to exit at once, the queue “will be very long at first, 70 days or more, because there is recycling of validators”. The network simply will not allow everyone to exit at once, it will automatically stretch it over a long period of time.

Key takeaways

Let’s make short practical conclusions from the information received:

  • When trying to exit staking in bulk, the network will balance withdrawal limits in such a way that full withdrawal will take 2-3 months.
  • In the worst scenario, the sellers’ pressure on the market will increase very smoothly, so Shanghai will most likely have no (or little) effect on Ethereum price.

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