The Impact of Ethereum's Shanghai Upgrade on Index Coop and DeFi Products

What is the Shanghai upgrade?

The Shanghai upgrade introduces a series of modifications to the Ethereum protocol, enabling users to unstake or withdraw their staked ether (ETH) for the first time.

Prior to the Shanghai upgrade, staked ETH was locked within the Ethereum blockchain. This upgrade incorporates a change to the Ethereum protocol, allowing the unlocking of staked ETH.

Shanghai represents the first significant alteration to the Ethereum blockchain since its transition from a proof-of-work to a proof-of-stake consensus mechanism. That transition, known as The Merge, established the technical groundwork for future scalability enhancements on the Ethereum blockchain. Curious about Ethereum's shift from proof-of-work to proof-of-stake? Explore our guide to The Ethereum Merge.

What will the Shanghai upgrade include?

The Shanghai upgrade currently consists of four Ethereum Improvement Proposals (EIPs):

EIP-3651 - Warm COINBASE

EIP-3855 PUSH0 instruction

EIP-3860 Limit and meter initcode

EIP-4895 Beacon Chain withdrawals

EIP-4895 is the most prominent of these changes.

This EIP enables users who have staked their ETH to support Ethereum's innovative proof-of-stake "Beacon Chain" to withdraw or "unstake" their funds for the first time. After the Shanghai upgrade, approximately $33 billion worth of staked ETH could theoretically be withdrawn and sold.

However, the likelihood of a Shanghai-triggered ETH sell-off remains minimal. In fact, a successful Shanghai upgrade is anticipated to encourage even more ETH staking in the upcoming months, further solidifying the network's stability and growth.

This is likely to happen for a few reasons:

• Increased confidence
• A successful upgrade demonstrates the Ethereum developers' ability to implement significant changes to the protocol, fostering trust and confidence in the network's long-term prospects. This confidence may lead existing and new participants to stake more ETH.

• Improved user experience
• The Shanghai upgrade, by enabling users to unstake or withdraw their staked ETH, addresses a key limitation of the current staking system. This enhanced flexibility is likely to attract more users to participate in staking, as they will no longer have to worry about their staked ETH being locked indefinitely.

• Network security and stability
• As more users stake ETH, the security and stability of the Ethereum network will increase, creating a positive feedback loop. A more secure and stable network will attract even more users to stake their ETH, driving further growth in the staking ecosystem.

What is Capella or Shapella?

Alongside Shanghai, a second hard fork called Capella will occur. As a result, you may see "Shanghai/Capella" or "Shapella" mentioned concurrently leading up to the network upgrade.

With Ethereum now operating a proof-of-stake execution chain and a consensus chain (Beacon Chain), new changes can necessitate hard-forking both layers.

In this case, Shanghai refers to the forthcoming execution chain hard fork, while Capella denotes the consensus chain hard fork.

How does the Shanghai upgrade impact Index Coop and our products?

Index Coop has no influence over the Shanghai testnet's success or the timing of the Shanghai upgrade. The expected date of the upgrade is April 12, 2023.

The Shanghai upgrade should reduce risk and improve the safety of Index Coop products, most notably icETH. Since staked ETH and ETH will be exchangeable 1:1, this eliminates the price divergence that led to liquidation concerns and a number of small rebalances during 2022’s Terra/Luna/3 Arrows-induced volatility.