The Ethereum Shanghai upgrade, scheduled for the second half of 2023, will be the first update since the Merge of September 2022. Shanghai is less spectacular and less high-risk, but important. The upgrade has 3 main changes:
- People who currently stake their ETH will finally be able to withdraw.
- The transaction fees that builders pay will be lower.
- Layer 2 will get some scalability improvements.
In Ethereum’s roadmap, the Shanghai upgrade would be part of phase 2, the Surge – even though these phases are not precisely sequential. The list of proposals for the Shanghai upgrade are currently (December 2022) slated for a review. So we don’t know the exact list yet. But it’s likely that what will come out will make the following three upgrades possible.
1: Finally Withdrawing Your Staked ETH
Perhaps the most anticipated proposal is EIP 4895, which will allow for those who have Ether staked on the Beacon Chain to withdraw, along with any rewards they have earned over time.
Currently, anyone who staked ETH as part of the validator process on the Beacon Chain has not been able to withdraw their stake or their rewards directly. Instead, the only option was to wait or to get involved in liquid staking, in which case you got a staked ETH token that you could trade – and that mostly but not always traded close to the price of 1 ETH.
Two types of withdrawal unlocks are expected post-Shanghai: partial and full withdrawals.
Partial Withdrawals: Skim Your Staking Yields
After the Ethereum Shanghai upgrade, everyone who has been staking ETH over the past two years, has a good reason to withdraw the staking yield they collected in that period. First of all, simply because they can: they might want to sell some of their ETH. But more importantly because the staking yields pre-Shanghai don’t compound (it’s not compounding interest, so to speak).
Partial withdrawals are often called skimming. As just mentioned, active validators may withdraw their aggregated staking rewards and reduce the balance of their validator down to 32 Ether.
Full Withdrawals: Join the Waiting Line
After the Ethereum Shanghai upgrade, validators on the Beacon chain will in principle be allowed to exit: they can shut down their validator and reclaim their entire 32 ETH stack. Why just ‘in principle’? That’s because not all validators are allowed to exit at once. There will be a maximum rate at which they are allowed to close shop. Because if they indeed would all exit at the same time – (extremely unlikely as this may be) – it would pose security risks to the Ethereum network.
By the way, there will be no gas fees for withdrawals for un-staking ETH. This is a small gesture from the Ethereum Foundation to validators. With withdrawals limited in number, apparently operational costs are low enough to make this gesture possible.
2: Tidying up (Separation of Code and Data)
One of the important proposals for the Ethereum Shanghai upgrade comes from developer Tim Beiko: EIP-3540. It calls for the separation of code and data, with the creation of an Ethereum Virtual Machine Object Format (EOF). This separation will be welcomed by on-chain code validators (like those used by layer-2 scaling tools, such as Optimism or Polygon).
Why is this a welcome upgrade? At the moment, code validators, such as those in Layer-2 scaling solutions like Polygon, have to follow an arduous process to process transactions. The proposed separation would make it easier for developers to code smart contracts into Ethereum apps while lowering gas fees.
Code validators will be able to distinguish between code, which is executable, and data, which is non-executable. This will be a nice feat of housekeeping. It will result in ease of use and big gas savings.
3: Reduced Costs for Traders (Warm Coinbase)
After the Ethereum Shanghai upgrade, the fees that builders pay could drop with an order of magnitude. In the current state of affairs, so-called coinbase payments (not related to the US crypto exchange 🙂 are expensive. They are popular though, as they come with the benefit of cancellation of transactions that would otherwise revert. These kinds of transactions are vital for Flash loans, for example.
With the implementation of ‘warm coinbase’, builders (read more about the role of builders in the Flashbots article) will pay lower fees for accessing the piece of software called coinbase. They access this coinbase to receive new ETH, which will eventually be paid to validators (proposers). Such a transaction may need to interact with the coinbase many times. After the Ethereum Shanghai upgrade, only the first time it accesses the coinbase, it costs more to “warm” the coinbase up. Once it’s warm, it costs less to access it.
The warm coinbase will help make the builders more profitable, which ultimately should benefit everyone who transacts on Ethereum. Some fees that builders pay to the network could drop with an order of magnitude.
Shandong Testnet Live
Ethereum’s Shandong testnet has been live since November 2022. It allows developers to experiment with proposals of the Ethereum Shanghai upgrade. They can try out the potential EIPs and look for issues.
Erik started as a freelance writer around the time Satoshi was brewing on the whitepaper.
As a crypto investor, he is class of 2020. More of a holder than a trader, but never shy to experiment with new protocols.
