[Podcast Notes] Unchained Podcast | Ep. 467 | w/ Christine Kim | How Will ETH React to Ethereum’s Shanghai Upgrade?
Notes on Christine Kim’s 60 minutes interview with Unchained Podcast. Readable in <15mins.
Introducing the guest
Christine Kim is VP of Galaxy Digital
Entry to $ETH is through $BTC
Wrote a paper on $BTC price action, which helped her land an internship in Coindesk
Became a crypto journalist, and eventually became a researcher in Coindesk
Left to Galaxy after Coindesk wound down their research arm
What is the Shanghai Update?
Activation of staked $ETH withdrawals on Ethereum
Staking went live in Ethereum on Dec 2020
If Shanghai on Goerli testnet goes well, the upgrade could be implemented as early as April
What is the Capella Update?
Capella is the changes on the Beacon Chain, which is the consensus layer of Ethereum
Shanghai is the changes on the execution layer of Ethereum
Withdrawing staked $ETH means withdrawing $ETH from the Beacon Chain and moving it to an address where you can interact with on the execution layer
Both layers must be updated to enable staked $ETH withdrawals
Withdrawal projections
What are the staked $ETH withdrawal projections post-Shanghai?
Large amount of withdrawals will stress test:
Network limitations (queue only allowing a certain amount of withdrawals per block per epoch)
Dynamic incentive mechanisms (network rewards will increase to incentivize validator participation)
Low chance of negative impact on security via decrease in number of validators
What is the most probable $ETH withdrawal scenarios?
Two types of $ETH withdrawals: partial withdrawals (automatic initiation, only accumulated rewards is withdrawn) and full withdrawals (manual initiation, both rewards and underlying principal is withdrawn)
Network can only process 16 withdrawals per block (12s per block)
Assuming there are 500,000 active validators, the partial withdrawals will be completed every ~100 hours
~1M $ETH have accumulated since beacon chain went live in Dec 2020
Validators she have spoken to have indicated they will sell 30%-50% of the rewards
Full withdrawal highly unlikely; validators could have obtained needed liquidity through liquid staked derivatives
Decline in $ETH prices means there are limited gains to realize currently; node operators may want to restake
Uncertainty around stake withdrawal limited user participation; with unstaking allowed, staking will garner greater interest
How long will it take for validators to exit the network post-Shanghai?
It will take a full year to process full withdrawal of all validators
Partial and full withdrawals is processed in the same withdrawal queue
Maximum of 1 week to process all partial withdrawals
~2 weeks to process a full withdrawal depending on how many validators are exiting at the same time
With $ETH withdrawal available, the general user and institutions in U.S. may have less reservations about staking their products
There are also external efforts to onboard institutions to staking through the Liquid Collective
Do you have any expectations on $ETH price or yield?
Higher price will ensure better chain security, more expensive to become a malicious actor
Yield will decrease, as issuance remain the same but is shared between more stakeholders
$ETH and ultrasound money is hot topics
If staking increases to a certain point while transaction activity decreases, then inflation rate may become positive as opposed to currently being deflationary
What is the net effect of withdrawals and increased staking on price?
No big impact on price
30%-50% of $ETH rewards is assumed to be sold, but impact from inflow of $ETH staking will be greater
Staked $ETH supply may double by year end, largely due to institutions being onboarded
LSDs allows exposure to staking rewards but still maintain liquidity on-chain
Liquid staking
What is the reason $ETH staking ratio is low?
Firstly, there is uncertainty of being able to unstake $ETH
Secondly, there are multiple significant ways to deploy $ETH
Thirdly, the maturity of liquid staking derivative protocols
What are some changes in LSD providers with Shanghai Upgrade?
Lido V2 will allow redemptions of $stETH for $ETH, stabilising $stETH / $ETH peg
Allow for increased participation in validator nodes
RocketPool lower barriers to running validator nodes, allowing 8 $ETH staking from the previous 16 $ETH
Opinion on Lido potentially centralizing Ethereum governance
If other LSD protocols can grab market share, then the centralization risk will be reduced
Will need to do more analysis, but Lido still represents a potential threat to decentralization
Are there any changes or concerns in staking regulations?
No major changes in staking offerings
But is still keeping an eye on centralized institutional entities offering staking services
After Shanghai, Cancun is next. What will happen in the Cancun Upgrade?
Cancun will solve Ethereum’s scalability issues
Activates EIP4844 (aka proto-danksharding), which introduces a new transaction type called blobs
Designed so that L2 can submit information to L1 at a cheaper rate
Ethereum is trying to scale through layers, and move execution of transaction activities to L2 roll-ups
Proto-danksharding
Refers to the early stage of danksharding
Make Ethereum an optimized data availability layer for L2 roll-ups
Ethereum as a monolithic blockchain creates bandwidth constraints that makes scaling difficult
Solution is to process some transactions on L2s
Danksharding is optimizing Ethereum for the modular future
Before danksharding, sharding was thought to be the final solution, where Ethereum is split to multiple chains that computes transactions in parallel
Developers moved on to the modular design when they realized the complexity of sharding
Danksharding was named after an Ethereum developer
Ethereum’s roadmap
After the Merge, the Surge fully focuses on the scalability of Ethereum through modularity
The Verge changes data structure from Merkle Patricia trees to Verkle trees, which is a more efficient yet still provable way of storing data
The Purge remove complexity from Ethereum’s protocol, purging archaic code from their contracts
All these will happen in tandem
Ethereum’s governance
Governance is important for long-term success of Ethereum
Number of stakeholders have greatly increased; previously consists of just core Ethereum developers, but currently there are many different interest groups
Governance on Ethereum has been extremely hard to navigate due to increased diversification of stakeholders
Is $ETH a security?
Opinion on New York Attorney General Letitia James’ claim that $ETH is a security
$ETH is not a security
$ETH is much less a security than when it was in the ICO days as it has become much more decentralized
Ethereum’s roadmap, while dependant on developers, is not spearheaded by a centralized group of developers
Multiple developmental aspects of Ethereum is spearheaded by different teams without coordination
This is part of what makes governing Ethereum so difficult
Currently there are no concerned responses from the community, just memes and off-hand responses to the “$ETH is a security” notice
Hopes this will make people more concerned about the decentralization of Ethereum
Is Ethereum becoming more decentralized even though most Ethereum developers are employed by Ethereum Foundation?
Some developers are funded by external grants
The Geth team employed by Ethereum Foundation represents a small minority of developers working on Ethereum
There is a diversity of developers working on the different ‘spokes’ of Ethereum tech
Even if there is no more Ethereum upgrades, there is still a vibrant community building on top of the blockchain
ZK-EVMs
ZK-EVM is a L2 roll-up that cryptographically verify and compress data in an efficient method
Difficult to apply ZK tech, and there is no privacy benefits of using ZK tech on blockchains
Real challenge is to integrate tech that has all the benefits of ZK tech yet is EVM compatible
Still in research phase, but there is much excitement surrounding the tech
Closing note
In Cancun Upgrade, developers may upgrade the EVM to improve user transactions on Ethereum itself (EOF implementation)