Ethereum unlock in March worth tens of billions of dollars

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A massive tranche of ether (ETH) is unlocking soon. During a meeting on December 8, Ethereum developers decided to make staked ETH on Ethereum’s Beacon Chain available for withdrawal with the Shanghai update as early as March 2023. The meeting was ratified last week.

The Beacon Chain holds $21 billion (over 15.9 million ETH) staked within Ethereum’s Proof-of-Stake (PoS) system. Additional ETH is voluntarily staked into the Beacon Chain daily and cannot be withdrawn until Shanghai activates. So, by the time March arrives, the Beacon Chain will far exceed 16 million ETH.

The Shanghai update will include five Ethereum Improvement Proposals (EIPs): EIP 3540, EIP 3670, EIP 4200, EIP 4570, and EIP 5450. These proposals describe updates to the Ethereum Virtual Machine (EVM) that will enable withdrawals of staked ether.

Ethereum 2 stakes to unlock after Shanghai allows withdrawals

The PoS Beacon Chain activated on the Ethereum mainnet with the Merge on September 15, 2022. It originally ran on a parallel blockchain and had no role in securing Ethereum’s Proof-of-Work (PoW) blockchain that operated since 2015. Activating the Beacon Chain switched Ethereum to a purely PoS algorithm giving stakers a direct role in confirming transactions.

Ethereum founder Vitalik Buterin claimed that Ethereum’s switch to PoS reduced worldwide energy consumption by 0.2%. (Nic Carter contested that figure, arguing that the switch saved a de minimus amount at least lower than 0.07%.)

The enormity of this Ethereum unlock can’t be overstated with only five crypto assets among thousands having a larger market cap than this tranche.

Currently, no ETH in the Beacon Chain can be sold but, subject to any withdrawal queues, Beacon Chain funds could become unrestricted for trading shortly after the Shanghai upgrade.

Read more: Here’s why Ethereum 2 staking is risky and increases centralization

The Merge didn’t include any protocols for withdrawing staked ether from the Beacon Chain. Investors interested in staking had to choose between accepting proxy staking tokens like stETH or cbETH for depositing their ETH into a liquid staking pool. Or they could simply wait for their staked ETH to be unlocked via Shanghai.

Even if a user was wealthy enough to stake the 32 ETH required to activate a solo set of validator keys, that user still wouldn’t have the ability to withdraw ETH from the Beacon Chain. Since its inception, the Beacon Chain has been deposit-only.

Liquid staking pools like Lido theoretically keep their ‘staked ETH’ liquid tokens pegged to ETH. Lido’s Staked ETH token, stETH, typically does a fair job of staying within a few dollars of ETH’s value.

Sharding and Ethereum Virtual Machine Object Format delayed

During their December meeting, Ethereum developers also discussed the possibility of activating EIP-3540, which would have introduced Ethereum Virtual Machine Object Format (EOF). The EIP describes EOF as “an extensible and versioned container format for EVM bytecode.” 

They agreed to push it back; it seemed too complicated to be ready by March. During their January 5, 2023 meeting, Ethereum core developers agreed to remove EIP-3540 from the Shanghai update and save it for a later upgrade.

Proposed post-Shanghai upgrades also include sharding which will increase Ethereum’s scalability by dividing up the blockchain into more manageable pieces. Ethereum developers say sharding will improve the performance of some data-extensive operations like Layer 2 rollups. One proposal, EIP-4844, will introduce proto-danksharding as a way to handle more efficient data ‘blobs.’

In summary, the Shanghai update will activate as early as March 2023. It will enable withdrawals of tens of billions of dollars worth of staked ETH from the Beacon Chain, something that Ethereum stakers have long anticipated. Time will tell how much of this Ethereum unlock will actually be withdrawn by users and offered for sale on the order books of the world’s exchanges.

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