Focus Points After the Ethereum Shanghai Upgrade Era

Ethereum is set to complete the Shanghai upgrade in April, opening the beacon chain's ETH withdrawal feature for staking. This is a hard fork of Ethereum's execution layer, expected to implement 9 EIPs. As of mid-March, approximately 17.5 million ETH has been staked, accounting for 15.25% of the total supply. Validators have averaged over 2 ETH in staking rewards, and after the upgrade, more than 1 million ETH will flow into the market.

This article discusses the withdrawal design and related risks of Ethereum and LSD protocols after the upgrade in Shanghai, as well as the impact on ETH prices and the prices of derivative tokens of the LSD protocol.

Ethereum Official Withdrawal Process

Withdrawals are jointly upgraded by the execution layer and the consensus layer, and are divided into two types: "partial withdrawal" and "full withdrawal". Partial withdrawal only extracts earnings, while full withdrawal exits the validator node and withdraws all funds. Withdrawals must meet necessary conditions, such as possessing 0x01 Credential, etc.

The Beacon Chain strictly limits each block to a maximum of 16 withdrawal requests. Withdrawals are initiated at the consensus layer and do not require gas fees. Based on the current staking amount, it takes about 5 days to complete all withdrawals, but the actual process may take longer.

Ethereum Sell-off Analysis

Early staking users may be eager to withdraw ETH and rewards, but users who staked after February 2021 are relatively at a loss. It is expected that this is mainly due to early players selling off, and the overall selling pressure will not be too severe.

Due to factors such as certification conversions and loss restrictions, significant selling pressure is expected 3-4 days after the upgrade. Some ETH staked by centralized institutions may be unlocked due to regulatory reasons, but they are likely to continue to be deposited into other staking protocols.

LST tokens account for about 65% of the total staking amount. Opening withdrawals is beneficial for its price return but also tests the risk management capabilities of various projects.

Current Status and Withdrawal Design of LSD Protocol

The staking volume of various LSD protocols accounts for nearly 43% of ETH, with Lido alone exceeding 30%. LST tokens have performed well in DeFi protocols, but have previously experienced significant discounts.

Main LSD protocol withdrawal design:

1. Lido:
   • Turbo Mode: Immediately fulfill withdrawal requests when there is enough Ether.
   • Bunker mode: Activated during large-scale penalties, waiting time may exceed 36 days.
   • Use NFT to represent withdrawal queue position, can be traded on the secondary market

2. Rocket Pool:
   • Introduce minipools to lower validator capital requirements
   • Ensuring rETH liquidity through deposit pools and secondary markets
   • Operators can choose whether to withdraw or extract rewards on their own.

3. Frax Finance:
   • frxETH can be redeemed for ETH at a 1:1 ratio, not directly affected by the Shanghai upgrade.
   • The key is whether the protocol can provide enough Ether to meet the redemption demand.

4. StakeWise:
   • Pool mechanism: After the Shanghai upgrade, sETH2 and rETH2 can be destroyed to redeem ETH.
   • Solo mechanism: Voluntary exit before upgrading, exit completion may take a few days after upgrading.

Conclusion and Reflection

The Shanghai upgrade will affect the price of LSD protocol tokens, withdrawal design, and derivative DeFi applications. Users may reconsider their staking methods, and market share will be redistributed. New LSD protocols and staking-based mechanisms may emerge.

It is expected that there will be DeFi applications such as LSD-based index tokens, new derivatives, ETH yield futures, etc. The unlocking of Ethereum staking may also bring incremental benefits to lending protocols. The entire Ethereum ecosystem will usher in a new round of innovation and development.