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Just 4 months later, the Ethereum merge seems like a distant memory after the events of the 2022’s final quarter. It went off so smoothly that the success of the network upgrade has seemed a forgone conclusion. But we won’t forget the trading drama that lead up to Ethereum’s most important fork yet.
Now another fork is on the horizon, and this one could be even more important than the merge.
That’s right, the Shanghai fork is on the development schedule, and it will be the next major upgrade to the Ethereum network.
What is the Shanghai Fork?
The Shanghai fork is the next planned hard fork of the Ethereum blockchain and will enable the withdraw of staked ETH. The fork will allow users to queue for withdraws, moving their staked ETH from the beacon chain and realizing the validator rewards from the consensus layer.
When will the Shanghai fork happen?
While there is not a fixed date yet, Ethereum lead developers are tentatively scheduling the Shanghai fork for early 2023, even as early as March.
How will staked ETH withdraws work?
A withdrawal queue is used to manage the process of withdrawing staked ETH. When a validator wants to withdraw their staked ETH, they will first have to initiate a “withdrawal request” which will place them in queue with other validators who have also requested to withdraw their staked ETH. Once their turn arrives the staked ETH will be returned to their wallet after the completion of an unstaking period (usually around 3-4 weeks).
The length of time a validator has to wait in the withdrawal queue depends on the total number of validators requesting withdrawals at the same time and the total amount of ETH that is being withdrawn. During the waiting period, the validator will not be able to participate in the consensus and will not earn rewards.
With over 15 million ETH staked by more than 400,000 validators, there is a lot of ETH that could get activated with the release of withdraws.
Even if all of the staked ETH currently in the beacon chain were to request a withdraw, it would take over a year before all of the ETH would be withdrawn. These limits help secure the chain and prevent selling pressure from withdraws.
How are people trading the Shanghai Fork?
There are a few points that traders are keeping in mind while positioning ahead of the Shanghai fork.
Traders will be watching the withdrawal queue and staking rate closely. Withdraws could result in an increase in the supply of ETH on the market, as validators who withdraw will be able to sell the previously staked ETH and any rewards. On the other hand, the ability to withdraw may make staking more attractive and draw in ETH from users that are waiting for this functionality.
The ETH staking yield staking rate will be another data point to keep an eye on. The yield rate changes based on the amount and proportion of ETH staked out of the total supply. Withdraws could push up the staking yield rate and make it more attractive for people to stake their ETH
Traders will also be watching the peg of various liquid staking derivatives like stETH. One of the most popular trades has been leveraging stETH against ETH to get a boosted yield. As a result, we saw lots of drama play out around the stETH peg in the lead up to the Merge. Expect similar volatility in the peg around Shanghai. Unwinding these leveraged bets would lead to a lot of selling of stETH, and could push the token price lower.
Beyond betting on the price of ETH and its staking derivatives, trades in tokens that might benefit from the Shanghai fork have also become popular. Bets on the protocol tokens for the LSD products have taken off since the beginning of the year. LDO and its competitor tokens like RPL, and SWISE have all seen large gains this year.
While we wait with anticipation, traders are already positioning to take advantage of the narratives and price action around the Shanghai fork. How will you trade the next upgrade of the Ethereum network?
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