Shanghai Upgrade – How It Could Affect Ethereum and LSD Tokens

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On April 12, 2023, the Ethereum chain rolled out the Shanghai upgrade.

The update implemented a series of proposals, namely EIP 3651, also known as ‘Warm Coinbase,’ that decreased the gas fees for transactions that go through the Coinbase address, EIP 6049, proposing an improvement of security and reliability to the smart contract and the much-anticipated EIP 4895 that enabled staking withdrawals on Ethereum.

In the piece below, we will explore how the upgrade may affect the price of Ethereum and LSD (liquid staking derivatives) projects and tokens in the long run.

Exploring the background

To better understand the upgrade, we begin by closely examining the problem it aims to solve.

In December 2020, Ethereum went through an upgrade from the PoW (proof-of-work) system to PoS (proof-of-stake) consensus mechanism in an event better known as ‘The Merge.’

Ethereum has achieved relative scalability with its consensus mechanism, as it no longer employs time consuming problem-solving consensus mechanisms such as Bitcoin’s proof-of-work.

Still, the chain had a downside – stakers couldn’t withdraw their staked Ethereum tokens until a designated deposit period was over.

To solve this issue, some projects have created protocols allowing users to stake Ethereum and benefit from liquidity. These protocols utilize a type of token pegged with Ethereum, called liquid staking derivatives.

Shanghai update – impact on the Ethereum price

The impact of the Shanghai upgrade on the price of Ethereum remains uncertain, and two possible scenarios may occur.

For those bearish on Ethereum, there are concerns about the pressure from the US government towards US-based protocols and cryptocurrency exchanges that offer Ethereum SaaS (staking-as-a-service).

Most recently, Kraken’s announcement on the unstaking of all their Ethereum after being sued by the SEC has set a negative precedent for cryptocurrency exchanges and protocols providing SaaS in the United States.

Additionally, some investors are looking to withdraw their Ethereum and exchange it with fiat currencies to offset the costs and losses from 2022.

Inversely, for those bullish on Ethereum, the Shanghai upgrade is expected to potentially bring significant improvements to the Ethereum network, including faster transaction processing times and reduced fees.

These improvements may attract more users to the network, increasing the demand for Ethereum and driving…