- The Ethereum Shanghai upgrade is imminent, meaning stakers will finally be able to unstake their ETH, some of which has been locked up since 2021
- 17.7 million is ETH is staked, equivalent to 14.8% of the entire supply
- This is just below the amount of ETH on exchanges, which is 18.3 million ETH, equivalent to 15.2% of the supply
- Price effects of upgrade are likely already priced in, but this amount of supply being released is nonetheless notable
The Ethereum Shanghai upgrade is slated to occur in mid-April. While not as seismic a shift as the Merge event which took place last September, it is nonetheless an important moment for the world’s second-largest cryptocurrency.
The most impactful consequence will be around Ethereum stakers. For the first time, those with staked ETH will be allowed to unstake their holdings.
How much Ethereum is staked?
And that is a lot of ETH. Currently, there is 17.7 million Ether locked up in staking contracts, equivalent to 14.8% of the total supply.
Once the upgrade goes live, this ETH will finally be eligible to hit the market. That may sound like a scary proposition, but in reality, there have been many liquid staking alternatives available throughout the staking period, which kicked off in late November.
In such a way, stakers have received back liquid “tokens” which can be traded in place of ETH. These tokens can then be redeemed for actual ETH once the upgrade goes live – which we now know is imminent.
Nonetheless, there may be some elevated selling pressure in the immediate aftermath of the event. The liquid tokens have traded for (usually small) discounts compared to ETH, while it will also now be more intuitive and simpler for people to sell.
Despite all this, concluding that this will dent ETH’s price would be naive. The market knows this is coming and that same old concept of “priced in” is gain relevant. Remember, many hypothesised that the Merge would drive a massive price increase, but it came and went with only minor volatility.
If the Shanghai upgrade goes smoothly, it would not be a surprise to see the same happen here.
Could the Ethereum staking yield be DeFi’s risk-free rate?
One thing I have wondered about is what the yield on staked ETH will look like going forward.
One theory is that, if Ethereum continues to act as the base layer for decentralised finance, the staking yield could look like some sort of risk-free yield in the space. In such a way, it could be used as a benchmark to value investments in the space, much like the risk-free rate in traditional finance is used.
Then again, with the way DeFi has gone over the last couple of years, maybe it won’t. The space has seen a flood of capital flee the space as the bear market has ravaged cryptocurrency as a whole.
Where is the rest of ETH held?
With 15% of the ETH supply locked up in staking contracts, and the number steadily rising from when staking opened up in late 2020, the balance on exchanges has done the opposite.
There is currently 18.3 million ETH on exchanges, equivalent to 15.2% of the supply, slightly above the 14.8% that is staked.
The 18.3 million ETH on exchanges represents the lowest figure since June 2018, at the depths of the previous crypto winter.
The chart shows that the balance has been falling steadily since ETH staking came online.
Of course, the above charts are in native units. When flipping the denominated unit to the dollar value of ETH instead, you get a much wackier pattern. Nonetheless, the dollar value on exchanges is still above what it was until the first quarter of 2021.
As cryptocurrency markets as a whole rally off the back of renewed hope that the Federal Reserve will pivot off high interest rate policy sooner than previously anticipated, Ethereum has followed, trading at $1,800, its highest price since last September – right when the Merge occurred.
Macro will continue to drive the price going forward, but the Shanghai upgrade is nonetheless an important moment as Ethereum solidifies its long process of switching from a proof-of-work blockchain to proof-of stake.