ETH withdrawals after the Shanghai upgrade: What to expect?
Ethereum is about to get a major upgrade in April called the “Shanghai Update”. Vitalik Buterin and his team are working hard to revamp the infrastructure and unlock frozen ETH. But what does this mean for stakers and Web3’s future?
What makes stakers eagerly await the Shanghai update?
The Ethereum community is counting down the days until the much-anticipated Shanghai/Capella update in April. Renewal includes both the network's consensus and execution layers, making it doubly exciting. But what's the most exciting part? A freeze has been in place on staked ETH since December 2022. As a result of the upgrade, the ice will finally melt. Validators are eagerly anticipating the release of their staked ETH as teens wait for their first date with their first love.
The upcoming Ethereum upgrade is expected to bring about a significant change for stakers as it will allow for the withdrawal of ETH from the network's consensus level to a regular wallet address. This feature has not been available since the Beacon Chain launch in December 2020, which enabled coin staking.
Stakers will now have full control over their assets and can utilize third-party staking services. They will evaluate competitor platforms based on key factors such as:
- Maximizing rewards;
- Blockchain performance;
- User-friendly interface;
- Fee rates.
CEX exchanges are actively integrating with the liquid staking protocol ahead of the upcoming Shanghai upgrade. This will unlock staked ETH liquidity. It's possible that some validators will choose to stake their newly freed-up liquidity rather than locking it in, indicating a level of trust in the work of Buterin's team. The Ethereum community remains optimistic about the long-term prospects and investment potential of the project, despite criticism over the timing.
ETH unlocking mechanics
Shanghai/Capella will provide three key functions related to fund withdrawals:
- The ability to update Ethereum validator withdrawal credentials from the old type 0x00 (derived from BLS key) to the new type 0x01 (derived from Ethereum address).
- Partial withdrawals or periodic withdrawals of earned rewards from the validator's active balance.
- Full withdrawal or return of the entire validator's “withdrawn” balance.
Without upgrading their withdrawal addresses, stakers will be unable to access their funds, although they will continue to earn interest on their deposits. This means that to transfer their liquidity from the staking pool to their personal wallet address, stakers must obtain a new-format withdrawal account, a task that Capella will accomplish.
It's worthwhile to note that the speed at which account data of type 0x00 can be updated to type 0x01 is limited. Only one account can be processed every 12 seconds (block confirmation time). It's impossible to speed up this process. However, stakers whose turn for the update hasn't come yet will not lose their right to rewards.
This means that users need to realize that the Shanghai upgrade is not a fast and immediate update for all nodes, as is usually the case with soft forks.
Validators whose frozen balances exceed 32 ETH will be the first to have their data updated during the Shanghai upgrade (as of March 1, 2023, the average validator balance is 34.2 ETH). This is because any amount above 32 ETH will be deemed unproductive, as no rewards will be accrued for it. Any excess funds will be available for partial withdrawal and can be redirected to other pools or to the validator's personal address.
The developers believe that partial withdrawals will prevent an excessively long queue and disputes among validators vying for a spot in it. This could destabilize the network. Therefore, it can be said in advance that full withdrawals will take between one and two days. They will also be limited by the length of the queue of those wishing to exit the pool.
Shanghai/Capella's motto:
Withdraw little – exit slowly.
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