CryptoSlate’s latest market report dives deep into on-chain metrics before and after the Shanghai upgrade to see whether it could be inconsequential or mark a turning point for the Ethereum network.
Ethereum’s long-awaited Shanghai upgrade took place on April 12 at 10:27 p.m. UTC. The hard fork brought several changes to the Ethereum protocol, the biggest and most notable being EIP-4896. While other smaller EIPs aim at reducing gas fees to benefit developers, EIP-4896 enables validators to withdraw their staked tokens.
The importance of EIP-4896 lies in its ability to drastically alter Ethereum’s validator landscape and affect ETH’s price.
Validators have been depositing ETH as early as November 2020, well before the launch of the Beacon chain. The implementation of EIP-4896 now enables validators to access their staked ETH and the staking rewards they accumulated for the first time.
It also enables validators to exit the validator pool voluntarily.
And while the scale of the Shanghai upgrade is much smaller than last year’s Merge, its effect on Ethereum’s price could be much more significant. With approximately 18 million ETH staked, there has been a growing concern over the consequences of unlocking such a considerable portion of Ethereum’s supply.
Many have been concerned that the unlock will flood the market with additional ETH, increasing the selling pressure that will inevitably lead to extreme price volatility. A steep decline in ETH’s price could then lead to increased volatility in the DeFi sector, wiping out billions in value from DeFi protocols and threatening DEX liquidity.
Others believe that Ethereum’s sheer size and market dominance will be able to absorb most of the impact of the Shanghai upgrade. Estimates are that potential price volatility will quickly resolve, and the network will stabilize within weeks, further cementing Ethereum’s market position.
In this report, CryptoSlate dives deep into on-chain metrics before and after the Shanghai upgrade to determine the scope of its effect on the Ethereum network.
While Shanghai has been one of the most anticipated Ethereum upgrades in a while, it wasn’t until a week before the upgrade that the market began showing signs of anxiety.
This was evident in several on-chain metrics, which spelled trouble for the network.
The voluntary exit count, showing the total number of validators that have requested to exit the validator pool, spiked in the days preceding the upgrade.
The two days preceding the upgrade saw the first back-to-back negative change in the number of active validators.
There could be several factors that contributed to the increasing number of validators that requested to exit the pool. Firstly, the estimated annual issuance ROI per validator has been gradually decreasing since the launch of the Beacon Chain and currently stands at just over 4.26%. This means that validators can now expect a 4.26% ETH-denominated yearly return on a stake of 32 ETH.
While this return might seem attractive, especially for institutional depositors looking for relatively stable returns, it’s not enough to cover the unrealized losses most depositors suffered on their stakes.
Ethereum’s realized price, representing the average price at which ETH last moved on-chain, stood at just over $1,400 before the upgrade. The realized price for Beacon Chain depositors stood at $2,136, representing an unrealized loss of around 13% for the majority of the staked ETH.
Taking a deeper look at the realized price for the largest staking providers on Ethereum shows a notable difference across providers. The average cost basis for ETH staked through Coinbase and Lido was roughly 50% higher than ETH’s spot price before the upgrade. Kraken and Binance were around a break-even level, while Staked was in profit.
A research report from Glassnode preceding the upgrade presented three potential outcomes to Ethereum’s price in the days after Shanghai. The first, most extreme case, estimates that if the maximum amount of stake and all of the accumulated rewards were to be sold, the market could see over 1.54 million ETH becoming liquid. At the time, the dollar-denominated value of the stake was approximately $2.93 billion.
The second, more realistic estimate, assumed that only certain validators receiving staking rewards would exit the pool and sell, which would see around 312,000 ETH becoming liquid in the week after the upgrade.
Finally, the third scenario presented the most conservative estimate, where only around 170,000 ETH would be sold in the week following Shanghai. It assumes depositor conviction will remain high and most would wait for better profitability to exit the pool.
While both Ethereum and Bitcoin managed to stand their ground and retain the $1,900 and $30,000 ahead of the upgrade, liquid staking tokens took a beating.
CryptoSlate data showed that liquid staking was among the worst-performing crypto sectors on April 12 after declining over 6%. All seven projects in the sector fell by more than 2%, with Lido (LDO), Rocket Pool (RPL), and pSTAKE Finance (PSTAKE) dropping by over 6%.
The majority of this sell pressure came from Blockchain Capital, which profited over $2 million from selling 1.5 million LDO tokens and over 65,000 RPL. Other LDO whales like MakerDAO founder Rune Christensen and Dragon Fly also sold over 500,000 units of the token on April 10, CryptoSlate reported.
All of the liquid staking protocols saw their tokens lose a significant amount of value in the week preceding the upgrade as well. CryptoSlate data showed the sector dropped by 13%, indicating the market has been gearing up for the upgrade for a while.
In the hours preceding the Shanghai upgrade, Ethereum’s price experienced minor volatility. ETH saw its price drop by just over 3% during the upgrade, but the dip below $1,900 was short-lived.
Ethereum quickly corrected the losses and then continued to rise, posting a 6.5% increase in less than 12 hours following the upgrade.
Graph showing Ethereum’s price in the hours before and after the Shanghai upgrade on April 12.
Ethereum’s recovering price seems to be an indicator of validator retention.
Data from Token Unlocks showed that the exit queue has been steadily increasing since the upgrade. Around 12 hours after the upgrade, over 860,500 ETH was pending withdrawal, with approximately 296,280 validators waiting in the queue. However, out of all the validators in the queue, only 17,000 were waiting for a full withdrawal.
This means that the majority of the ETH withdrawn in the first wave and all of the pending withdrawals were made up of staking rewards, rather than the staking principal.
The total amount of ETH deposited for staking had reduced by almost 3% in the 12 hours following the upgrade, standing at 17.48 million on April 13.
Over 116,000 staked ETH has been withdrawn from the Ethereum network following the upgrade. However, as around 40,100 ETH was deposited during the same period, the net staking balance decreased by approximately 75,900 ETH.
Research from Arkham Intelligence found that most withdrawals were made by Lido. Out of the 116,000 ETH that was withdrawn from Ethereum in the 12 hours following the upgrade, 71,800 ETH was withdrawn by Lido.
On Friday, April 14, the Ethereum network began experiencing a much heavier impact from the upgrade.
The total amount of ETH pending withdrawal rose to 1.1 million, with over 385,280 validators waiting in the queue.
Depositors couldn’t keep up with the rate of withdrawals and withdrawals outpaced deposits for the first time. Data from Token Unlocks showed that the net staking balance on Ethereum decreased by over 155,600 ETH — while 271,000 ETH was withdrawn, only 116,000 was deposited.
The Ethereum balance on exchanges also experienced a notable increase, with the amount of ETH across centralized exchanges reaching 18.17 million on April 14.
Open interest in ETH futures also saw a notable increase on April 14, reaching 3.47 million contracts.
With the overwhelming majority of withdrawn ETH made up of staking rewards, the market’s worries about a massive decrease in the amount of staked ETH seem unfounded.
However, it could take several days and even weeks before we could see more validators queue for full withdrawals. Ethereum’s rally past the majority of depositors’ realized staking price could lead more of them to exit and sell their ETH.
There hasn’t been a significant increase in exchange inflows for Ethereum on the first day following the upgrade, indicating that the ETH withdrawn between April 13 and April 14 hasn’t diluted the market. Data from DeFi Llama confirmed this trend with decentralized exchanges as well.
Overall, the Shanghai upgrade has been a blip in Ethereum’s market position. The volatility preceding the upgrade shows that the market priced it well before it was executed, with calm seas following the hard fork.
However, the technical difficulties in withdrawing principal stakes could mean that it could be weeks before all of the queued ETH becomes liquid. If ETH’s price continues to flatline, there might not be any significant market movements, as it’s likely that the depositors that have fully withdrawn their stake will wait for at least a break-even price before liquidating.
A rally that pushes ETH’s price past $2,500 could trigger a much bigger sell-off which might cause a steep correction.
The increase in open interest on Ethereum futures, as well as a growing balance on exchanges, indicate that the full effects of the upgrade are yet to be felt.
