Why Didn’t You Sell the News of Ethereum’s Shanghai Upgrade?

There was not a mass unlock of staked ETH, as some predicted, boding well for Ethereum and liquid staking derivatives.

AccessTimeIconApr 13, 2023 at 5:14 p.m. UTC
Updated Apr 14, 2023 at 6:41 p.m. UTC
AccessTimeIconApr 13, 2023 at 5:14 p.m. UTCUpdated Apr 14, 2023 at 6:41 p.m. UTC
AccessTimeIconApr 13, 2023 at 5:14 p.m. UTCUpdated Apr 14, 2023 at 6:41 p.m. UTC

Going by the numbers, it seems like many ether (ETH) stakers have decided to hold onto their coins. Although several analysts predicted the just-completed Ethereum Shanghai hard fork (along with the separate Capella upgrade, together known as “Shapella”) would be a “sell-the-news” moment, ETH has actually climbed to eight-month highs. The second-largest crypto by market capitalization was trading above $2,000 for the first time since last summer, after gaining ~3% during trading hours in Asia.

What this says about the viability of Ethereum and the outlook for the price of ETH is an open question. Shanghai, the backwards-incompatible hard fork, unlocked the ability for Ethereum stakers to withdraw tokens they pledged to the Ethereum deposit contract used to validate the proof-of-stake network as well as the token payments they received for doing so. Many stakers initially pledged 32 ETH to become validators in 2020, and haven’t really had access to their coins since.

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So the 18 million-plus ETH currently staked (worth about $33 billion) has not led to a torrent of sales. Loyal CoinDesk readers likely knew the “selling pressure” on ETH was overstated. As Amphibian Capital CEO James Hodges wrote on Monday, the vast majority of ETH validators were in the red leading up to the event, making it unlikely they’d cash out at a loss. Now that crypto prices are rising, led in particular by bitcoin, which broke the important $30,000 psychological threshold this week, fortunes may reverse.

What’s most interesting for many is not how ETH tokens trade, but their synthetic counterparts known as “liquid staking derivatives.” These LSDs, as they’re often called (not to be confused with the entheogen) are essentially bearer instruments for staked ETH that allow users to trade an ETH proxy while still earning staking rewards. The biggest offerings from Lido, Rocket Pool, Frax and Stakewise all hit the market relatively recently. The question post-Shanghai is what role these assets will play.

LSDs still have tremendous value by allowing users to essentially double their holdings, for a fee. Put up ETH in a noncustodial platform and it’s still yours, along with a shiny new stETH or rETH or Coinbase’s cbETH. This makes these assets critical for creating and maintaining ETH liquidity (as well as part of the validation process). However, actual ETH has generally traded above the price of particular LSDs, in a similar way that you often see price discrepancy between a managed investment trust and its underlying assets (due to increased risk and fees).

The Shanghai update shows that Ethereum developers are continuing to successfully build out a network in real-time. Basic infrastructure is still being built on the main network, leaving opportunities for free-market alternatives to spring up in the wake. Initially allowing ETH stakers to participate in decentralized finance (DeFi), the total value locked in LSDs actually surpassed decentralized lending last month. The whole pie seems to be growing, which is good news.

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Daniel Kuhn

Daniel Kuhn is a deputy managing editor for Consensus Magazine. He owns minor amounts of BTC and ETH.