The New Landscape After the Ethereum Shanghai Upgrade: Opportunities and Challenges Coexist

Ethereum is set to complete the Shanghai upgrade in April, opening the beacon chain staking ETH withdrawal feature. This upgrade is a hard fork of Ethereum's execution layer, and it is 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 accumulated an average of over 2 ETH in staking rewards, and after the Shanghai upgrade, over 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 potential impact on ETH prices and LSD protocol token prices.

Ethereum Official Withdrawal Mechanism

Withdrawals are implemented jointly by the execution layer and the consensus layer, and are divided into "partial withdrawals" and "full withdrawals." The former only extracts earnings, while the latter exits the validator node and withdraws all funds. Withdrawals must meet specific conditions, such as the validator possessing a 0x01 Credential.

Each block can process up to 16 withdrawal requests. Withdrawals are initiated at the consensus layer and do not require gas fees. Based on the current staking amount, it theoretically requires about 5 days to extract all ETH, but the actual process may take longer.

Analysis of ETH Selling Pressure

Early staking users may be eager to withdraw ETH for profit, but users who staked after February 2021 are currently in a state of loss. It is expected that most will be "partial withdrawals," and the selling pressure will not be too severe. Considering the withdrawal condition restrictions and outflow limiting functions, extreme scenarios of total exits are unlikely to occur.

It is expected that there will be significant selling pressure for 3-4 days after the upgrade in Shanghai. Some ETH staked by centralized institutions may be unlocked due to regulatory reasons, but this capital is likely to continue being deposited into other staking protocols.

Current Status of Major LSD Protocols and Withdrawal Design

The LSD protocol accounts for about 65% of the total staking volume, with Lido accounting for over 30%. The collateralized derivative tokens (LST) of various protocols perform well in DeFi. With the Shanghai upgrade approaching, the overall liquidity of LST is good, but it also tests the risk management capabilities of each project.

Major LSD protocols such as Lido, Rocket Pool, and Frax Finance have designed corresponding withdrawal solutions for the Shanghai upgrade, seeking a balance between user experience, operational speed, and security. Each protocol focuses on how to avoid attacks and arbitrage while enhancing user experience.

Conclusion

The Shanghai upgrade will reshape the Ethereum staking landscape. Users may reselect staking protocols, and new LSD projects and staking-based DeFi applications may emerge. The market will pay more attention to factors such as withdrawal design smoothness, staking yields, degree of decentralization, and security.

In the future, innovative products such as LSD-based index tokens, ETH yield futures, and new stablecoins may emerge. The Ethereum ecosystem will usher in a new wave of innovation, with both opportunities and challenges.