What Is the Ethereum Blockchain’s Shanghai Hard Fork, and Why Does It Matter?

In March, Ethereum will undergo its first big upgrade – also known as a "hard fork" – since its shift to a proof-of-stake system in September. Once Ethereum’s upcoming “Shanghai” upgrade completes, 16 million staked ether (ETH) will finally become withdrawable by the validators that help operate the network.

Although the main focus of Shanghai will be implementing Ethereum Improvement Proposal-4895 – the change that unlocks validator withdrawals – the update’s full roster of changes has just been finalized, and it includes additional upgrades that are sure to be noticed by Ethereum app developers and many of the chain’s users.

What is EIP-4895?

The star of Shanghai is EIP-4895, which will free up validators to withdraw the 16 million ETH that they have thus far “staked” to help secure the network.

When Ethereum changed its consensus mechanism from proof-of-work (PoW) to proof-of-stake (PoS) in its last big upgrade, dubbed the Merge, the network began using validators instead of miners to add blocks to the blockchain. Validators must stake 32 ETH with the chain in order to participate in the block validation process. Each staked ETH acts like a kind of lottery ticket: The more ETH a validator stakes, the more likely they will be selected to “propose” the next block of Ethereum transactions and earn some network rewards.

Before validators agreed to participate on the PoS blockchain, they were made aware that their staked ETH and any accrued rewards would remain locked up until a subsequent update to the chain. Validators have been staking ETH and accruing rewards since December 2020, when Ethereum released its PoS “Beacon Chain” in its first step towards the Merge. Now, those validators will finally be able to cash out their stake.

What is the importance of the Shanghai hard fork?

EIP-4895 is the main focus for the upgrade, given that stakers may want to start cashing out any rewards they’ve earned over the past two years – or simply get more control over their funds, given the uncertainty in crypto markets over the past year.

But in addition to accessing locked up funds, the PoS blockchain has not been fully featured ever since it went live. Even though the blockchain functions properly today, stakers have had to commit to keeping their funds locked in order to keep Ethereum running. Now with the mechanism that will unlock staked ETH, the full operation of a proof-of-stake blockchain will come to life, meaning that stakers can finally have control over their funds and decide what they want to do with their rewards.

Read more: Ethereum in 2023: Here’s What to Look Forward To

How can a validator unstake its ETH?

If you are running a validator, there are two options for unstaking your ETH once Shanghai goes live. The first is setting up a “withdrawal credential,” which will automatically unstake the accrued rewards you’ve earned from your validator. The second option is to fully exit the Beacon Chain and unstake all 32 ETH, by having your validator voluntarily send a message that it is removing itself from the blockchain.

As for how soon you can access the ETH you want to unstake, “it depends on how many people will unstake at a time,” Marius Van Der Wijden, a developer at the Ethereum Foundation, told CoinDesk. Only 16 partial withdrawal requests can be put into a slot (which happens every 12 seconds), and there is a single queue for both full and partial withdrawals on the blockchain. But the likelihood of all validators choosing to exit the blockchain is slim, given that staking will enable a new chapter for Ethereum and those that trade on top of it.

Are crypto traders rushing to sell their ETH?

As a new era of unlocked ETH begins, crypto traders are paying attention to how the market may move. Some traders believe that there will be some sell pressure once staked ETH is unlocked, while other traders say Shanghai will only encourage more staking.

Currently, there’s about 1 million ETH of accrued rewards that is available to be withdrawn immediately once Shanghai is live. Traders will be watching whether the unlocked ETH will be instantly cashed out and if it pushes the price of ETH down.

Read More: Crypto Traders Are Already Placing Bets on Ethereum’s 'Shanghai Hard Fork'

What else is in the Shanghai hard fork?

The four smaller EIPs included in Shanghai relate to gas fees – a kind of tax that users pay to transact on the Ethereum blockchain. Gas fees can be expensive during times of high activity, and Ethereum developers are aiming to add in mechanisms that will reduce high gas fees for those building on the blockchain.

EIP-3651 proposes to access the “COINBASE” address, a software used by validators and block builders, at a lower gas cost. (Aside: This is totally unrelated to the crypto exchange Coinbase.) The code change could improve Maximal Extractable Value (MEV) payments as well as other user-experiences according to Matt Nelson, a Product Manager at ConsenSys.

“This EIP corrects a previous oversight on the cost to access the COINBASE address and gives some added benefits to users and developers that open up new use-cases,” Nelson told CoinDesk.

Other EIPs in the package are:

• EIP-3855 – creates a code dubbed “Push0” that will lower gas costs for developers
• EIP-3860 – puts a cap on the gas cost for developers when interacting with ‘initcode’ (a code used by developers for smart contracts)
• EIP-6049 – will notify developers of the depreciation of a code known as “SELFDESTRUCT,” which also relates to reducing gas fees

What’s next for Ethereum after the Shanghai hard fork

Developers decided to keep the scope of Shanghai relatively small, mainly so that staked ETH withdrawals would be released as soon as possible. As a result, some other big changes to the Ethereum protocol were pushed back from Shanghai to the third quarter of 2023.

Those include “proto-danksharding,” an admittedly ominous-sounding term that simply refers to a method of making the blockchain more scalable by splitting up the network across several chains, or “shards.”

Also on the horizon are changes to EVM Object Format (EOF), which includes several small upgrades to improve the Ethereum Virtual Machine.

This article originally appeared in Valid Points, CoinDesk’s weekly newsletter breaking down Ethereum’s evolution and its impact on crypto markets. Subscribe to get it in your inbox every Wednesday.