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The Merge was successfully shipped in September 2022 - this has been the most significant upgrade since the creation of Ethereum (if you missed out, here is a full article about it).
Given this level of complication, Ethereum’s developers decided to maximize their focus on a successful Merge of the two chains and transition to proof of stake. In order to do this, the trade off was to exclude certain anticipated features.
These features were therefore postponed to a separate upgrade to follow. And yes, you guessed it. This is what we are here to talk about.
In the midst of the banking crisis, crypto crackdown, and other not-so-great news, let’s zoom out a bit and focus on those who continue to build and are here for the long term.
First things first - a recap on the Merge
Ethereum had 2 chains - the Mainnet, and the Beacon Chain. The Merge simply refers to when these two chains cane together, merging into one (hence, the name “merge).
The main output of this is the full transition of Ethereum’s network from a Proof of Work (PoW) blockchain, to a Proof of Stake (PoS) consensus mechanism.
From an economic standpoint, the Merge also puts ETH on track to becoming a deflationary asset by introducing the fee burn mechanism, as well as the considerable issuance drop of ETH.
I’ve always heard about the Shanghai Upgrade, how come you are referring to it as “Shapella”?
You are right, people more commonly talk about the Shanghai upgrade, and technically, it is not wrong to call it this way.
However, the Ethereum protocol is made up of two layers:
The Execution Layer, which will undergo the Shanghai upgrade,
The Consensus Layer, which will undergo the Capella upgrade.
The upgrades need to happen simultaneously in both layers, and given that it goes by different names on each layer, developers have started to refer it as “Shapella Upgrade” in order to ensure they are including both layers.
When is the Shapella Upgrade expected to happen?
Originally it was scheduled for March, but the latest update confirmed it’s been delayed to mid April.
This date should be final, as developers have completed the deployment in all the testnets.
Introducing the highly expected ETH withdrawal.
The Beacon chain was launched back in 2020, and users have been staking ETH ever since in order to help secure the chain.
Thanks to the Merge and the successful transition of Ethereum to Proof of Stake, users could then stake ETH to earn rewards in exchange.
Currently, there are over 17 Million ETH staked in the network, which at the current value of around $1,800, we are talking about over $30B worth of ETH.
Now, the caveat here is that the withdrawal feature of rewards and staked ETH is not yet available, and the biggest upgrade that Shapella is supposed to bring is this exact feature to enable withdrawals, which is why there has been so much hype around it.
What other upgrades are included?
There are in total 5 EIPs (Ethereum Improvement Proposal) included in this upgrade.
If we exclude EIP-4895 which refers to the withdrawal feature we already mentioned above, the other ones are:
Without going into the technical details of what each EIP entails, the key takeaway here is that they are mostly aimed at reducing costs for Ethereum developers and getting ready for the next big phase in the roadmap which is Sharding.
Sharding will essentially expand Ethereum’s capacity to store data, scale throughput and reduce network fees - so this will be highly critical for users.
What are some of the concerns around this upgrade?
Well - most people speculate about 2 things:
Massive withdrawal once the feature is enabled:
Because there is so much staked ETH, people worry about everyone unstaking at once and therefore have too much ETH supply that might cause a price drop, and worst case scenario, trigger a sell-off.
However, considering that people have been staking ETH since 2020 (long before there was any staking rewards), and subsequently, with the Merge (before there was any unstaking option), it seems like these are ETH holders that have very strong confidence and here for the long run, so does not seem like the majority will go for complete withdrawals.
Of course, given the macro situation, there will definitely be people and validators exiting the network due to the need to do pay the bill.
But let’s not forget about all those institutional investors and other users that have been waiting for the withdrawal feature to be launched to have the confidence to stake their ETH and earn some rewards.
The possibility of ETH being considered a security by the SEC
It’s no secret that the SEC has been openly hostile towards crypto, and the chairman Gary Gensler himself stated on the date of the successful launch of the Merge that any Proof of Stake consensus mechanism-based crypto is considered a security based on the Howey Test (which is the criteria used to determine whether an asset is a security or not).
This is relevant because if the US considers ETH a security, then it will fall under the same category as a stock and be demanded to follow the same kind of regulations. Which of course, makes no sense for the crypto users.
Final Thoughts
Vitalik famously said that with the Merge, Ethereum is only 55% complete.
This means there is a lot more coming, and while the larger macro environment seems pretty dark, it is great to zoom out and see key players like Ethereum continue to build and move toward their roadmap.
With this final note - I’ll leave a bonus track: Ethereum has quietly launched Account Abstraction, which will have a huge effect on enabling mass adoption.
Let me cover this in one of the upcoming articles. If you want to know what it’s all about, don’t forget to sign up and stay tuned!
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