Within weeks, Ethereum’s Shanghai update will begin the process of unlocking 17.5 million staked ether (ETH) worth $28 billion. Unavailable for withdrawal and unable to be sold currently, this supply will be slowly reintroduced to public markets and affect Ethereum’s price.
Since late 2020, staking into Ethereum’s Beacon Chain hasn’t allowed withdrawals of staked ETH.
To compensate stakers for their multi-month commitment to not sell, Ethereum promised a variable 3-12% annualized yield for participating in its proof-of-stake validation. That high yield has attracted over 17.5 million ETH into self-hosted or staking-as-a-service validators.
Bracing for market impact of Shanghai withdrawals
Many investors could be bracing for ETH withdrawals en masse, negatively affecting price or lowering the security of Ethereum’s blockchain.
However, the new upgrade includes rules which rate-limit users from withdrawing staked ETH all at once.
Ethereum’s Shanghai upgrade differentiates staking rewards from the original 32 ETH minimum required to activate Proof-of-Stake validator keys. In short, validators’ rewards are far easier and faster to withdraw than the larger 32 ETH sum from activating the validator activation. Full withdrawals of both rewards and the original 32 ETH will take over 18 months to complete in full.
The post-Shanghai system will allow approximately 1,800 validators per day to make a full withdrawal of their original deposit plus rewards. This feature will cleverly limit the amount of ETH withdrawn daily.
Ethereum gives no technical reason for its arbitrary selection of 1,800; the quota is simply eight full withdrawals per epoch and is intended to limit ETH sell pressure.
Partial withdrawals: Larger (yes, larger) than full withdrawals
The only exception to the above is an allowance for so-called partial withdrawals.
- In the topsy-turvy world of Ethereum, partial withdrawals are larger than full withdrawals.
- Partial withdrawals will saturate the early days of post-Shanghai Ethereum, taking up most of the five initial days of withdrawals. Partial withdrawals accommodate immediate requests by major players like Kraken, Lido, and Coinbase.
- Ethereum will process partial withdrawals at a rate of 16 partial withdrawals per ~12 second “slot.” There are about 7,200 slots per day, which allows partial withdrawals for around 110,000 validators per day.
- With approximately half a million validators, partial withdrawals will take about five days with over $350 million dollars per day worth of withdrawals.
More rules to make it difficult to sell
Ethereum developers made staking easy and withdrawing difficult. In order to withdraw, validators will need to update their credential prefixes to 0x01 before withdrawing, rather than the generally favored 0x00 prefix.
- Validators must ensure to set a withdrawal address manually — for some reason, it’s only possible to set this once. Any mistake could permanently limit a validator’s ability to withdraw.
- Withdrawals will happen only when the validator has a withdrawal address set and it becomes eligible for withdrawal in the lengthy queue.
- Ethereum’s Shanghai upgrade will finally allow withdrawals of staked ETH. It places limits on the amount of ETH available for withdrawal.
In fact, even when Shanghai activates, less than 60,000 ETH will be eligible for withdrawal per day. The full amount of staked ETH would take over 18 months to fully withdraw and sell. This feature will prevent 17.5 million currently staked ETH from being dumped on the market all at once.