Ethereum's March Shanghai Network Upgrade Explained for Non-Techies
The rumors about the next Ethereum upgrade are that, like the pandemic, it’s not of great quality (made in China). Will users sell their ETH, resulting in a massive price drop, causing Ethereum to be forsaken by everyone? Will the network explode your PC? Are all cryptos doomed? Let’s find out
By the way, no-one is enticing Shanghai to march anywhere. It’s an upgrade that just happens to be named after Shanghai, and it’s happening in March, theoretically around the 14th. Just saying.
When the Shanghai update is complete, developers will be able to concentrate on the next update stages, including those designed to improve the network’s performance and scalability.
These will increase transaction speeds, lower transaction costs, and allow more transactions to be processed per second. They will also improve the privacy and security of transactions on the network, as well as make the platform easier to use.
The next upgrades will introduce new features such as sharding, which allows for multiple blockchains to run in parallel and can help increase the throughput of the network. Ultimately, this will make Ethereum more attractive to developers and users, encouraging more adoption.
All transactions on the Ethereum network are stored in a public ledger known as the blockchain. This ledger records every transaction that has ever occurred on the network, allowing anyone to view past transactions and verify ownership of assets.
A real-life illustration
Have you ever felt the irritation of having to look for little things for 20 minutes? How does that time you spent looking for your keys and socks add up? Think about Ethereum as a system that brings you all things you ever wanted, anytime you wanted them, if only you whistle. That’s what the Ethereum blockchain does for financial transactions.
Having a huge ledger of 100% verifiable transactions is really helpful, and companies around the world are quickly catching on, making Ethereum more and more popular.
Read more about crypto wallet types
In return, its constantly upgrading, making itself better and better and users happier and happier (hopefully).
A very quick intro to staking
Staking is a process by which users can earn rewards for helping secure the Ethereum network. To participate, users must “stake” their Ether (ETH) on the network. Staking rewards are given to participants in the form of additional ETH. It’s basically the same as giving your money to banks so they can play with it, and you get dividends.
The Ethereum Shanghai upgrade will introduce a new staking mechanism to the network called 'proof-of-stake', which is designed to make staking more efficient and secure. This will result in faster transactions and increased rewards for stakers.
The most important part of this update is the transition from POW to SOS POS, which means going from Proof of Work to Proof of Stake respectively (you can read about the differences between Proof of Work and Proof of Stake in this article).
What is the purpose of the Shanghai network upgrade?
Ethereum allowed users to stake their funds but not withdraw them before the Shanghai update happened.
The Ethereum Shanghai network upgrade will focus on giving users access to their staked funds. Of which there are over $20 Bn. Which is a lot. So the worry is all these assets will be quickly sold off, resulting in a massive price drop.
Users, who at this point have been pouring their stakes into the system but coudn’t withdraw them (as well as their staking rewards) will (maybe) massively withdraw their assets and sell them. Will that actually happen though? Very unlikely.
There is actually evidence of people who have been investing in the new system being in a difficult financial situation, so it could be that they will be forced to sell. But the Ethereum system is very well thought-through. In brief, there are many caps and checks and balances that will prevent withdrawals and sales so massive that Ethereum’s price will massively drop.
In fact, it’s more likely the opposite will happen: Ethereum will continue to provide more value and become easier to use, providing access to more users as well as becoming more valued by the existing crowd.
Food for thought
If we were to doubt Ethereum, we would instead be concentrating on the POS transition, which basically means that the system will become a lot more centralized. Research shows the power will be concentrated between fewer users now. Feeling intrigued? You can find more technical explanations here:
So will users massively sell their Ethereum, resulting in a colossal price drop?
“Will the stakers withdraw all their money as soon as it becomes possible?
ETH liquidity inflow will occur as soon as the Shanghai update becomes active. All stakers will be able to begin the process of withdrawing earned remuneration from staking if they decide to stop supporting the network.
However, there are restrictions. Only a certain number of network validators can withdraw its network support. Such security measures are necessary and guarantee that the Ethereum network will remain efficient.”
The short answer to this question is “probably no”. The Shanghai network upgrade is designed to make Ethereum more secure and efficient, and is unlikely to have a direct impact on the price of the cryptocurrency. For a steep drop and a sudden stop users would have to all sell their assets at the same time using the same exchange, use scaled orders, and generally aim to drop the system on purpose. Which is possible for any network at any time, Shanghai or not.
On the contrary, after this and the next upgrades the overall performance of Ethereum will improve, which ought to lead to a price increase if demand increases.
That being said, there are always risks associated with investing in any type of asset, and the price of Ethereum could go down as well as up. Ultimately, it’s important to do your own research and understand the potential risks before investing.