All You Need to Know About The Ethereum Shapella Upgrade

In the world of cryptocurrencies, upgrades are always eagerly awaited by investors, traders, and developers alike. Ethereum, the second-largest cryptocurrency by market capitalization, has just the most significant upgrades yet with the introduction of the Shapella upgrade. So, it’s not surprising that it has dominated the headlines recently.

The highly-anticipated Shapella Upgrade enables users and validators to withdraw their staked ETH on the network. Market analysts expect the milestone event to impact the Ethereum price and other critical areas of the broader crypto industry. Including the price of other cryptocurrencies, demand for DeFi products, and potential government regulations.

You’ll learn all of that and more in this article. First, let’s start by understanding why it is often called “Shanghai Upgrade” sometimes, and “Shappella Upgrade” other times.

Which is it: Ethereum Shanghai Upgrade or Shapella Upgrade? 

Ethereum’s Shanghai upgrade is arguably one of the most widely-discussed events in the global crypto industry in 2023.

Before we dive into the details, do you know why it is often commonly referred to as the Ethereum Shapella upgrade? The name is a portmanteau of two words, Shanghai – the city-host of the Devcon 2 conference, and Capella – the name of the brightest star in the northern constellation of Auriga.

As we know, the Ethereum 2.0 network has two layers – the Execution layer, and the Consensus layer. The former used to be the main one that Ethereum ran on before The Merge, which occurred last September, while the Consensus layer is known as the Beacon Chain.

With that in mind, the upgrade took place on both layers. Shanghai happened on the execution layer, while Capella – was on the consensus one. Combining both names gives us “Shapella.”

However, Shappella has gained prevalence in the media recently, so for the sake of simplicity, we will use that in this article going forward.

What is the Shapella Upgrade?

The Shapella upgrade, also known as the Ethereum Improvement Proposal (EIP) 1559, is set to be implemented in mid-2022. This upgrade aims to address some of the long-standing issues on the Ethereum network, including high transaction fees and the slow confirmation times that plague the platform.

EIP 1559 is a part of a larger upgrade called Ethereum 2.0, which aims to transition the network from its current proof-of-work (PoW) consensus algorithm to a more energy-efficient proof-of-stake (PoS) algorithm.

The Shapella Upgrade is the final step that marks the completion of Ethereum’s Proof of Stake transition cycle. The hard fork has implemented Ethereum Improvement Proposal (EIP) 4895, thereby allowing users and validators to withdraw their staked ether (ETH) on the network.

The upgrade took place just before 6:30 p.m. ET, and released on the mainnet at block height (or slot number) 6209536 —-marking the end of the Proof of Stake transition process that began with The Merge last September.

This event marks a significant change for Ethereum due to its potential impact on the ecosystem, including the unlocking of previously inaccessible funds. Now that withdrawals have been enabled, the network has completed the proof-of-stake transition cycle.

However, Ethereum developers will be monitoring for any potential issues with the upgrade’s completion, as noted in the official YouTube stream.

Impact of the Shapella Upgrade on the Ethereum Network and ETH Price

At a glance, these are the two biggest impacts that the Shappella Upgrade will have on the Ethereum Network:

Withdrawals Enabled

Enables investors who staked ETH coins on the network during The Merge, to make withdrawal.

With the withdrawal mechanism enabled, Ethereum is expected to provide users with greater asset management flexibility.

However, the release of ETH could result in short-term price fluctuations. Nonetheless, not all of the 18 million ETH ($33 billion) staked on the network will be available for withdrawal all at once due to limits on the amount that can be withdrawn.

The Shapella upgrade has introduced two types of withdrawals for staked ETH: partial and full. Partial withdrawals will automatically distribute ETH to validators, ensuring their balance remains at the necessary 32 ETH to maintain validator status. Full withdrawals, on the other hand, involve shutting down the validator and withdrawing the entire staked balance.

In the short term, the ability to access these previously locked funds could lead to fluctuations in the price of Ether (ETH). Yet with ether at a lower price now than when many users staked their funds, it’s possible that these holders wouldn’t want to sell at a loss. But that remains to be seen.

The introduction of the Shapella upgrade is likely to have a significant impact on the price of Ethereum. The reduction in transaction fees and improved transaction processing times will make Ethereum more attractive to users, leading to an increase in demand for the cryptocurrency. This increase in demand is likely to drive up the price of Ethereum, as we have seen with previous upgrades to the network.

However, the impact on the price of Ethereum is likely to be temporary, as the market adjusts to the new fee structure. In the long term, the impact on the price of Ethereum will depend on the success of the Ethereum 2.0 upgrade and the network’s ability to attract new users.

“Most ETH holders are underwater at the current market price, and most of these holders are committed to Ethereum long-term. We think the majority of withdrawn ETH may be restaked to new validators to compound rewards,” said Alexander Esin, CEO of staking firm P2P.org, about the potential market impact.

Optimized Gas Fees

One of the significant changes brought about by the Shapella upgrade is the way Ethereum withdrawals will work. Currently, Ethereum users have to bid for transaction fees to get their transactions processed quickly. This bidding process can lead to very high transaction fees during times of high network congestion, making the Ethereum network inaccessible to small-time investors.

The Shapella upgrade introduces a new fee structure where users will pay a base fee that will be burned after each transaction. This fee structure will reduce the complexity of the bidding process, making the network more accessible to small-time investors. This new fee structure will also help to stabilize transaction fees, making them more predictable and preventing network congestion.

Impact on Other Cryptocurrencies

The Shapella upgrade is likely to have an impact on other cryptocurrencies, particularly those that rely on Ethereum’s network. Ethereum is a popular platform for developers to build decentralized applications (dApps), and the improved transaction processing times and lower fees will make it even more attractive to developers.

The increased demand for Ethereum is likely to lead to an increase in demand for other cryptocurrencies that rely on the Ethereum network, such as ERC-20 tokens. However, the impact on other cryptocurrencies will depend on the success of the Ethereum 2.0 upgrade and the network’s ability to attract new users.

Impact on the Global DeFi Ecosystem

Decentralized Finance (DeFi) is one of the most promising areas of the cryptocurrency ecosystem, and Ethereum is the most popular platform for building DeFi applications. The Shapella upgrade is likely to have a significant impact on the DeFi space, making it more accessible to small-time investors and reducing transaction fees.

The reduced transaction fees will make it more economical for DeFi users to make smaller transactions, leading to increased adoption of DeFi applications. The improved transaction processing times will also make it possible to build more complex and sophisticated DeFi applications, leading to increased innovation

Another possible implication is the potential reshuffling of the Ethereum card deck as investors look to redistribute their previously locked-up assets.

With Ether holders now able to easily un-stake their coins, decentralized exchanges could become beneficiaries of this shakeup. Likewise, more Ethereum assets could now flow into various decentralized finance (DeFi) protocols for collateralized lending.

Final Words

How the Markets Have Reacted So Far 

Ethereum soared above $2,000 last week as markets reacted to the successful completion of the much-anticipated network upgrade. Ethereum’s core developers have implemented the Shapella upgrade through a hard fork.

A positive reaction has been observed within the DeFi ecosystem After the successful completion of this week’s Shapella upgrade.

Prior to the latest Etheruem network upgrade, some had speculated that a mass selloff of staked ETH would negatively affect its market price.

But in the end, the opposite actually happened. Despite large volumes of ETH being unstaked on Thursday and Friday, its Ethereum price remained buoyant to hit $2,000 for the first time in 11 months.

Similarly, the price of critical DeFi tokens like Uniswap (UNI) and AAVE.com (AAVE) have also emphasized that the market reaction to the Shapella upgrade has been largely positive. Both UNI & AVI assets hosted on the Ethereum network, saw their price rise alongside ETH in the past week.

Despite the positive initial reaction, it is important to note that the crypto industry is highly-dynamic. And the global Web3.0 ecosystem will continue to adapt to the new changes. We’ll be sure to keep you updated.