In 2022, Ethereum developers pulled off a dramatic upgrade known as the Merge, changing the way transactions are validated on the network. 

Previously, that task was the preserve of thousands of powerful “mining” computers, which checked the authenticity of transactions by way of an energy-intensive process known as Proof of Work. The Merge introduced the greener Proof-of-Stake model, replacing the miners with “validators,” users who have deposited at least 32 units of Ethereum’s cryptocurrency, ETH, on the network. 

That made the network something like 99% more energy-efficient, and around $26 billion has since been locked up on the network by over 520,000 validators. 

But all is not perfect. Though validators are theoretically able to earn rewards on their deposit in the form of newly mined ETH, they still can’t actually redeem these rewards—or their initial deposit. 

Nor has it helped that many of the validators began staking funds in 2020, via an early “testnet” iteration of the staking protocol that was later “merged” with Ethereum proper in 2022. The crypto market has undergone a series of violent swings since then, and a lot of stakers want their money back.

With more than two years having passed since staking was first made possible, it’s safe to say that the upcoming Shanghai Upgrade, which will introduce a withdrawal feature, is a big deal. 

Shanghai Upgrade 

Scheduled for April 2023, the Shanghai Upgrade is arguably the most anticipated network upgrade to Ethereum since the Merge. Though it also includes a number of Ethereum Improvement Proposals (EIP) designed to reduce gas costs (transaction fees), most of the attention is centered on EIP-4895—the holy grail of EIPs, which enables staking withdrawal.

There will be two types of withdrawals that come with Shanghai: partial and full. 

If a validator wants to remain a part of the network, they can then opt for a partial withdrawal, keeping their minimum threshold of 32 ETH on the chain and redeeming the excess to their wallet address.

Under a full withdrawal, the validator is free to withdraw the entirety of their stake, but in doing so would forgo their participation in the chain.

There is one minor caveat. Validators who staked on the 2020 “testnet,” known as the Beacon Chain, were given withdrawal credentials, known as “0x00,” but these are no longer valid. In order to execute a full or partial withdrawal, they will first need to upgrade their credentials to 0x01.

Will Unstaking ETH Trigger a Sell-off?

Not necessarily. To really understand this, we need to look at how many participants are actually “illiquid stakers”—that is, stakers who can’t immediately access their deposits.  

A big part of the staking market constitutes liquid staking participants provided through services like Lido as well as centralized exchanges like Coinbase and Binance. Not everyone has 32 ETH to tuck away in a deposit contract, so many users have participated in ETH staking with a liquid token tied to the value of their deposit. Since they have always had access to liquidity, it’s fair to assume they aren’t looking to sell off their holdings. 

Around 52% of stakers are illiquid, and while the majority of staked ETH is underwater, at least 2 million ETH were sent to the contract when the asset was trading between $400 and $700. This cohort might be looking to sell their ETH, but then again, they did send their tokens to the contract without a timeline for withdrawals and are likely ardent supporters of the cryptocurrency.

Ethereum Impotence Proposal

Before the details around withdrawals were ratified, there was significant controversy over the speed of its implementation. Many developers hoped to make the upgrade compatible with a sleeker, new Ethereum encoding method known as simple serialize (SSZ), which would have delayed its release by a few months. Popular calls to quickly enable withdrawals, however, led to developers tacking the feature onto April’s Shanghai Upgrade—potentially rushing it through and risking technical woes in the future. 

When and How Will Shanghai Be Deployed?

Shanghai was originally scheduled for March 2023 but has been postponed to sometime in April 2023. Developers make the decisions based on their assessment of progress, so this tentative date is subject to change. 

While deployment on the mainnet is still a few weeks away as of the time of writing, some have already begun testing out the withdrawal feature on one of Ethereum’s testnets e.g., Zheijang and Sepolia.