The Ethereum Shanghai Upgrade (or “Shapella”) Is Almost Here

The backward-incompatible hard fork will allow users to access some $30 billion worth of ether locked in the network since the tail end of 2020.

The Ethereum blockchain's Shanghai upgrade (or “Shapella”) is almost here. The backward-incompatible hard fork will allow users to access some $30 billion worth of ether locked in the network since the tail end of 2020.

Some observers expect an ether price swoon after the upgrade as users liquidate their holdings, while others believe the expected uptick in the selling pressure is already baked in and the market will bounce after the event in a classic “buy the news” move.

Henry Elder, head of decentralized finance at Wave Digital Assets, sees the upgrade as a clear “sell the news” event for ether and for governance tokens of liquid staking solutions like Lido, which have been rallying since early January in anticipation of the hard fork.

“We should expect the withdrawal queue to fill up immediately, and stay full for several weeks,” Elder said. “This will look like fulfillment of the ‘supply deluge’ narrative and markets will likely sell off.”

Elder added: “Most withdrawals will probably come from early individual stakers who now want to rotate into liquid staking solutions, and early users of now dominant staking solutions who want to rotate into minority staking solutions to increase decentralization.”

While the entire stack of over 18 million coins cannot be withdrawn immediately, partial withdrawals of just over one million coins earned as rewards for staking can be processed right away. That one million ETH represents a potential post-upgrade selling pressure.

According to Laurent Kssis, a crypto trading adviser at CEC Capital, ether has rallied ahead of the event and could come under pressure upon successful implementation of the upgrade.

“Traders have bought the news in advance of the Shanghai event, and if the event is successful they will dump their ETH on the market,” said Kssis. He predicts traders selling their ether following the upgrade in the view that they’ve made money for their locked up time and this will result in a strong supply of ether flooding the market.

Kssis said he sees ether possibly dropping below $1,700 for the first time in two weeks as investors take profits through.

At press time, ether traded near $1,875, representing a 56% year-to-date gain, per CoinDesk data. The LDO governance token of Lido Finance, the largest liquid staking protocol with some $8.4 billion of staked ether on the platform, has gained 26% since the start of the year, while competitor Rocket Pool's RPL has gained 70% since January.

But Sean Farrell, head of digital asset strategy at FundStrat, suggested the market is being overly pessimistic about the supply-side effects of upcoming staking withdrawals.

“Factors such as existing liquidity access for most stakers, withdrawal queue limitations, and a market that has de-risked prior to the Shapella upgrade reduce the risk of a sudden supply overhang,” Farrell said in an interview with CoinDesk.

“With that in mind, it's reasonable to expect an ether-bitcoin [ETH/BTC] rally in the weeks following the completion of the event,” Farrel added.

While ether has charted double-digit gains this year, the cryptocurrency has underperformed market leader bitcoin by a considerable margin. Bitcoin has rallied over 70% this year. The ether-bitcoin ratio has declined 13.6%. That’s contrary to the rise of around 58% in the month before Ethereum implemented a software upgrade called Merge in September last year.

The decline in ether-bitcoin suggests fears of a post-upgrade supply boost have been priced in to some extent. Besides, several industry experts, including Galaxy Digital, have recently said that the selling pressure from partial withdrawals will be distributed over several days.

“We expect 553,650 ETH will be sold. Amortized over 7 days, this amounts to approximately 1% of daily ETH volume (including spot and perpetual futures volume) of selling per day for a week,” analysts at Galaxy Digital said in a note published early this month. “Depending on the risk environment broadly and overall liquidity in ether during the Shanghai upgrade, expected on Wednesday, April 12, we view this amount as ranging from inconsequential to slightly bearish ETH/USD.”