Shanghai & Capella upgrades| ETH withdrawals | ETH staking via an LSD | Upcoming Ethereum improvements to watch
It’s been more than two years since the Beacon Chain (Phase 0) began on Ethereum’s network, which marked the beginning of its transition to a proof-of-stake system (Ethereum Merge).
This major shift from the original proof-of-work blockchain to a more energy-efficient PoS chain also brought about an entirely different system of earning new ETH:
You need to hold the coin and stake it instead of having the machinery and program to mine it, which was historically the case.
However, unlike other PoS ecosystems (Cardano, BNB, Tezos, Polkadot), ETH sent to a stake pool was locked up indefinitely…until now.
Enter “Shapella”
The Shanghai and Capella upgrades, a.k.a. “Shapella”, are expected to deploy on 12 April on the mainnet.
The former (a.k.a. EIP-4895) will finally allow withdrawals for staked ETH. I made an article about this topic in January; I will refrain from repeating too much information.
A concurrent upgrade to the Beacon Chain is also required for this to proceed, which refers to Capella.
A helpful side-by-side comparison of the two Ethereum upgrades (alongside other relevant details and FAQs) is available here through Ethereum’s official website.
The biggest beneficiaries will be those who have been locking up for ETH since 2020, with a generous amount of staking rewards, particularly the earliest adopters that exploited rewards of up to 20% APY (albeit briefly) at the inception of ETH staking.
Alternatives to locking up your ETH
For those deterred by the idea of locking up their ETH in a stake pool with (up until recently) no defined date to be able to re-access coins, two alternatives were available to circumvent this; rather, one broad category — Liquid staking.
These usually come in liquid staking derivatives (LSDs) — “synthetic assets” or tokens created by a protocol such as Lido DAO, Rocket Pool, Frax Finance, etc.
Each protocol issues its LSD that should be “pegged” 1:1 with ETH (fluctuating ± 0.02 ETH, but typically equal to ETH). In return for this process, token holders gradually accumulate staking rewards in that token (e.g., 1 à ~1.05 units after a year of active staking).
Why this process? It permits token holders to switch from that LSD (e.g., stETH) to native ETH on demand at any time, thus bypassing the ETH withholding period to date.
I provide a detailed overview of what this entails in a related piece about Rocket Pool (RPL), so check that out for more details.
The second alternative is essentially another form of liquid staking, but this time, you’re going through a centralised exchange that offers this service. Having said this, double-check which ones allow for something similar to liquid staking; some exchanges (e.g., Bitstamp; I know from personal experience) also uphold the waiting period required for native ETH staking.
Image by sweeann on Shutterstock
I prefer going via a liquid staking protocol than a centralised exchange as the former provides you with the opportunity to hold your ETH and LSDs on your own (non-custodial wallet) — Ledger is a convenient option, and you can now stake ETH using a Trezor wallet via Metamask; more info in this tutorial.
Despite withdrawals of ETH being allowed as of next week, I believe these protocols will remain relevant and still have room for growth, especially as the current staked amount accounts for only 16% of eligible ETH.
It is worth remembering that some liquid staking providers provide other benefits currently unavailable through conventional ETH staking. A notable example is Rocket Pool’s significantly lower prerequisites to run a solo staking node — 16 ETH minimum versus 32 ETH when solo staking or staking as a service (SaaS) directly through Ethereum.
This is highly advantageous as it encourages more staking node operators, further decentralising staking operations.
Moreover, these protocols can branch out and operate stake pools for other PoS assets; Lido DAO also caters for node operators interested in Polygon (MATIC) and Solana (SOL).
Upcoming Ethereum improvements to watch
Rollups and Danksharding:
Rollups are a type of Layer 2 scaling solution on Ethereum. These work by bunching hundreds of transactions into a single on the Ethereum base chain (layer 1/L1). By opting for this, L1 transaction costs can be divided between those involved in the rollup, thus significantly lowering the costs per network user, 10 – 20x less on average, vs going through Ethereum directly.
I discussed L2s back in February and have recently written a piece about another significant player in this L2 space, Arbitrum.
Two broad categories of rollups exist on Ethereum — optimistic and zero-knowledge. I will expand on these in a future piece.
Danksharding takes rollup scalability to the next level by overhauling how much rollup data is posted and saved onto the Ethereum chain, leading to even faster and cheaper rollups than what’s available.
How? Only important “droplets” of information are attached to the data blocks on Ethereum, and only temporarily (for up to three months). This further reduces congestion on the network, saving time and money for network users.
Proto-Danksharding (a.k.a. EIP-4844: Shard Blob Transactions) is one of the processes along the way to help Ethereum achieve its full potential (once Danksharding is fully rolled out) in terms of insane throughput of over 100,000 transactions per second, with each one costing less than a penny — a fraction of what it costs now.
I am aware that these are simplified descriptions, but I encourage you to read the attached sources in the hyperlinks if you’d like an in-depth analysis.
When will this become a reality? A few renowned crypto sources expect danksharding to be up and running later this year. However, as was the case with the Merge, let alone major upgrades for other networks, this EIP could take longer than expected.
Ways to stay in the loop with Ethereum
– Official website
– Whitepaper
– Twitter and Vitalik Buterin’s page
– Ethereum Foundation blog
– YouTube (Ethereum Foundation)
– Reddit
– Telegram
– Discord
– Ethereum GitHub
Please double-check the veracity of all these websites before interacting with anyone featured on these Filecoin/FIL pages and channels. I don’t use Reddit and Telegram, so I am going off what appear to be legitimate sources.
Disclaimers
N.B. None of this is financial or legal advice, and I am neither a financial advisor nor a lawyer. You are solely responsible for crypto investments and how you interpret the information provided in this piece.
The opinions expressed within this piece are my own and might not reflect those behind Ethereum or any entity featured here.
Before investing in any cryptos, staking, liquid staking protocols and their LSDs, and other product affiliated with this space, please do your research.
Statistics and prices included herein are correct at the time of writing and are based on the included links/sources.
I acknowledge that ETH accounts for about 18-20% of my overall crypto portfolio.
I received no incentive from companies or entities listed throughout this article to discuss their product.
Featured image by FlashMovie on Shutterstock.