The analysts say investors’ fear the enhancement will send prices tumbling by flooding the market with ETH are misplaced. They say the volume of ETH outflows will be less significant than many observers are predicting.
“I believe withdrawals and inflows from new stakers will be netted out,” Nick Hotz, vice president of research at digital asset investment firm Arca, told CoinDesk.
Crypto markets are eagerly anticipating the Shanghai tech upgrade, the next major development, scheduled for April, since last year's Merge. It will allow investors to unlock and withdraw ETH tokens from staking for the first time since December 2020, when staking commenced on Ethereum’s proof-of-stake Beacon Chain.
Many crypto investors worry the event could potentially create a significant overhang for ETH’s price, which trades at $1,645 currently, research firm Bernstein and others noted recently. They think long-time stakers may opt for unlocking a large part of the 17.5 million ETH, worth $28.8 billion, in staking contracts and dump it on the market to realize profits.
Yet, Arca’s Hotz said the impact of ETH outflows will not be immediate because withdrawals will have to endure a so-called queue. “This means only 10% of the total amount of staked ETH can be removed from the pool in a month,” he said. “So, you will have a churn.”
John “Omakase” Lo, head of digital assets at investment firm Recharge Capital, said people will not rush to exit staking as they will need time to understand how Shanghai works. “There will be a period while investors will digest how withdrawals work,” he said.
Rich Falk-Wallace, chief executive of institutional crypto data platform Arcana, said the key driver of ETH price action will be what narrative the market creates about the long-term outlook based on the short-term behavior.
“If stakers steadily withdraw and do not show interest in validating the network, that would be bearish,” he said. “If ETH staking percentage continues to grow post-Shanghai, that is a net positive.”
Limited selling pressure
Many market observers do not appreciate how severely Ethereum’s withdrawal system limits the amount of ETH withdrawn at a time, Falk-Wallace said.
Ethereum’s Shanghai upgrade will deploy a two-tier withdrawal system. Partial withdrawals, amounts above 32 ETH, will be usually executed immediately but initially Arcana expects them to be distributed within three days due to the queue. Full withdrawals, which is the minimum staking amount of 32 ETH, will take more time and be released gradually.
There’s $1.2 billion of ETH in the partial withdrawal bucket, according to Arcana’s analysis, implying that in the worst-case scenario only 6% of the average daily ETH trading volume could hit the market in each of the first three days after allowing withdrawals. Later, the maximum daily amount of ETH potentially dumped on the market will decrease below 1% of the daily trading volume in the next six months.
In a report published Thursday, crypto research firm CryptoQuant forecast modest selling pressure for ETH from staking withdrawals. According to the report, some 60% of all ETH staked are currently in loss at current prices relative to the price at the moment each token was staked.
“Selling pressure emerges when market participants are sitting on extreme profits, which is not the case right now,” CryptoQuant said.
Liquid staking derivatives
Most investors stake ETH using liquid staking platforms such as Lido or Coinbase, Hotz said. Thus they don’t need to withdraw and sell to get liquidity.
“Those who stake privately and run their own validator nodes are diehard fans,” he added. “Pulling out once withdrawals are allowed is probably not the first thing in their mind.”
ETH staking will grow
Arcana’s Falk-Wallace expects that Ethereum’s staking ratio will converge on other proof-of-stake blockchains after Shanghai as new stakers come online, outpacing withdrawers.
“We think ETH staking [percentage] is likely to increase secularly from 14% today into the 30%-50% range over the next 18 months to get closer to parity with other proof-of-stake blockchains,” he said.
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