Ethereum Shanghai Upgrade: What You Should Know
Background
Implemented in September 2022, the Merge was the most recent major upgrade to the Ethereum blockchain (read article).
We also recommended a follow-up article, which addresses how Max Extractable Value (MEV) plays an important role in Ethereum block production post-Merge.
If Proof of Stake (PoS) is a new concept to you, we highly recommend that you check out the Intro to Staking blog, along with the two articles mentioned above, since the Shanghai Upgrade builds upon Ethereum’s current staking capabilities.
Ethereum PoS Withdrawals
The next highly anticipated Ethereum upgrade is the Shanghai Upgrade, since it introduces the ability to withdraw staked ether tokens. According to Ethereum.org, in February 2023, over 16.664 million ether were staked equal to about $28 billion USD, providing stakers with an APR of 5.1%. The staked ether supports Ethereum’s PoS consensus mechanism and secures the blockchain through decentralized validator nodes.
For the first time since the transition to PoS, the Shanghai Upgrade will introduce the ability to withdraw staked ether. The economic impact of bringing withdrawal, aka unstaking, capabilities to $28 billion worth of ether is unknown. The maximum amount that can be immediately withdrawn is about 1 million ether, which represents the total staking rewards accumulated over the past two years. It’s equivalent to roughly 6% of total staked ether.
Banking giant JP Morgan predicts staking levels will increase following the Shanghai Upgrade. The prediction references the fact that other PoS blockchains have about 60% of the total circulating coin supply staked, on average, whereas Ethereum only has about 14% of circulating ether currently staked. A move towards the average staked supply of 60% would mean a lot more ether would get staked and effectively take those coins out of circulation. Additionally, due to the mechanics of Ethereum staking rewards, the Ethereum staking APR would decrease if there is an increase in staked ether.
Other Content in Shanghai Upgrade
Below are four other Ethereum Improvement Proposals (EIPs) included in the Shanghai Upgrade:
EIP-3651: This EIP adds the address returned by the COINBASE call to the list of accessed addresses during transaction execution. The list of accessed addresses, aka warm addresses, incurs a relatively smaller gas fee when accessing those addresses throughout a transaction. On the contrary, referencing addresses not included in the access list, aka cold addresses, results in relatively higher gas fees.
The address returned by the COINBASE call is becoming commonplace, so EIP-3651 attempts to lower the total gas fees of many transactions by adding COINBASE to the list of accessed addresses, along with existing tx.sender and tx.to addresses. Note that the COINBASE instruction is in no way related to the Coinbase centralized exchange service.
EIP-3860: This EIP builds upon size limitations of new objects added to the Ethereum blockchain, which was initially implemented by EIP-170 in 2016. It also reduces gas costs associated with the initialization of transactions by charging gas that is linearly proportional to the size of the contract being initialized.
EIP-3855: This EIP aims to reduce transaction gas fees by optimizing a common instruction input that provides an address offset value. More specifically, a PUSH0 instruction will be introduced, which should lower the gas fees associated with push instructions from 3 to 2 gwei, impacting about 11.5% of all push instructions based on historical analyses performed by the Ethereum development community.
EIP-6049: This EIP changes the existing self-destruct functionality to deactivate an account rather than destroy it. Aside from changing the instruction call from self-destruct to deactivate, one of the main changes is that the instruction will no longer delete keys and will leave the account intact.
When Is the Upgrade Happening?
The first of three testnets for the Shanghai Upgrade is called the Zhejiang testnet, which launched on February 1, 2023. It was backed by 61,000 validators and withdrawals were successfully processed; however, testing uncovered a deficiency related to processing empty L2 block submittals, also known as zero blobs. These links transparently detail the Zhejiang testnet. A fix was identified and was included in the Sepolia testnet, the second of three testnets, which launched on February 28, 2023. Lastly, Goerli is the third testnet, scheduled to launch in mid-March 2023, leading to a mainnet launch in late March or early April. The final testnet and mainnet dates have yet to be solidified, so the final mainnet date could shift.
What’s Next on the Ethereum Roadmap?
While a specific timeline does not yet exist, there is much chatter around the next Ethereum upgrade called Cancun. It includes the implementation of EIP-4844. This EIP will add Proto-Danksharding to the Ethereum blockchain, which is a major step closer to sharding that enables Layer 2 rollups to grow in capacity. The concept of shards is introduced in our overview of Ethereum Layer 1 and Layer 2 improvements.
Shards can be thought of as splitting the Ethereum chain across multiple smaller chains, and there are many benefits that we will cover in a future blog.
