Ethereum on-chain data suggests ETH sell pressure could be a non-event after the Shanghai upgrade

The upcoming Ethereum (ETH) Shanghai hardfork is slated to occur in March 2023 and the upgrade will cap off the network’s move to proof-of-stake (PoS) which started during the “Merge” on Sept. 15, 2022. Once Shanghai is implemented, previously locked Ether will gradually become liquid for the first time since December 2020. 

According to on-chain Etherscan data, over 16.6 million Ether are currently locked in the PoS staking protocol which was valued at $28 billion on Feb. 16, 2023. Ethereum’s move from proof-of-work (PoW) to PoS has started to achieve the original goal which was to make Ether’s supply deflationary. In the 154-days since the merge, over 24,800 Ether have been burned to make the token 0.05% deflationary on a yearly basis.

On. Feb. 16, the total Ether supply sits at 120 million meaning that a little over 10% of the supply will be unlocked with yield rewards starting with the Shanghai update.

Let’s explore what on-chain metrics can help identify what may happen during the Shanghai upgrade.

A portion of locked ETH are liquid thanks to liquid staking derivatives

In order to benefit from yield rewards before the Shanghai update, investors had to lock their Ether and run a reliable node. The minimum staking requirement of 32 locked Ether is entirely illiquid, mean traders had limited utility options for these coins.

Liquid staking derivatives (LSD) allow users to benefit from staked Ether while retaining the ability to sell the derivative token received on the secondary market. The LSD protocols took a fee and locked the native Ether, giving users another token which represents a stake in the pool.

Liquid staking derivatives did not gain prominence until Lido and other protocols began to see a rush of cash flow after the Merge. Since Ether staking began, liquid staking has surpassed illiquid staking. As of Feb. 13, 57% of staked Ether is liquid versus 43% illiquid.

Since a majority of the locked Ether is through LSD, investors currently have access to liquidity which could reduce sell pressure post-Shanghai.

Very few stakers are in profit

Back in December 2020 when Ethereum staking opened, the price of Ether ranged from $400 to $700. Conversely, many investors began staking when Ether was near its all-time high of $4,200. According to Binance:

“We note a sizable amount of ETH (around 2M) was staked at prices in the US $400 – 700 range…