Follow points after Ethereum Shanghai upgrade

Ethereum will complete the Shanghai upgrade in April, opening the staking ETH withdrawal feature for the Beacon Chain. This upgrade is a hard fork of the Ethereum execution layer, with 9 EIPs expected to be implemented. As of mid-March, approximately 17.5 million ETH have been staked, accounting for 15.25% of the total supply. Validators have averaged over 2 ETH in staking rewards, and after the upgrade, over 1 million ETH will flow into the market.

This article discusses the withdrawal design and related risks of Ethereum and LSD protocols after the upgrade in Shanghai, as well as their impact on ETH prices and LSD protocol token prices.

Ethereum Official Withdrawal Process

Withdrawals are jointly upgraded by the execution layer and the consensus layer, divided into two rules: "partial withdrawal" and "full withdrawal." Partial withdrawal only extracts the earnings portion, while full withdrawal exits the validator node and extracts all ETH. There is no priority difference between the two withdrawal methods; they will be automatically executed as long as the conditions are met.

The necessary condition for withdrawal is that the validator possesses a 0x01 Credential. Some withdrawals require the validator to be in Active status and have a balance greater than 32 Ether. All withdrawals require the validator to be in Withdrawable status.

Ethereum can process a maximum of 16 withdrawal requests per block. After validators meet the withdrawal conditions and apply, a withdrawal list will be created, listing the withdrawal order, recipient addresses, and amounts. Withdrawals are initiated at the consensus layer and do not require gas fees.

Will there be an Ethereum sell-off?

As of mid-March, the Beacon Chain has staked approximately 17.57 million Ether. A maximum of 3.6864 million Ether can be withdrawn each day, theoretically allowing for a complete withdrawal within 5 days. However, in practice, executing the withdrawal takes time, and validators exiting must wait at least 27.3 hours before they can withdraw.

Most withdrawal requests may be "partial withdrawals". Early staking users may be eager to withdraw ETH and rewards, but users who staked after February 2021 are currently in a loss position. It is expected that after withdrawals are opened, the selling pressure of ETH will not be too severe, mainly due to the sell-off by early players.

Some validators who do not meet the criteria cannot withdraw immediately, especially those with only 0x00 Credential, which need to be converted to 0x01 Credential first. This conversion can only have 16 requests per block. In extreme cases, it is unlikely that all validator nodes will exit, as the staking protocol has a loss limit.

It is expected that after the upgrade in Shanghai, there will be significant selling pressure for 3-4 days. Regulatory reasons may lead to the unlocking of ETH staked by some centralized institutions, but this ETH is likely to continue being deposited into other staking protocols.

Current Status and Withdrawal Design of LSD Protocol

Currently, the ETH staking amount of the LSD protocol accounts for 42.97% of the total staking amount, with the Lido protocol accounting for over 30%. The derivative token LST of LSD has performed well in terms of yield in DeFi, accounting for about 65% of the total staking amount. The Shanghai upgrade is favorable for the return of LST prices, but it also tests the risk management capabilities of various projects.

Design of Withdrawal for Major LSD Protocols:

1. Lido: Designed two modes, Turbo and Bunker, to establish a withdrawal buffer. Users can receive NFTs that represent their position in the queue.

2. Rocket Pool: Introducing minipools to lower validator capital requirements. Withdrawals can be made from the deposit pool and partial withdrawals to obtain ETH, and operators can choose whether to exit or not.

3. Frax Finance: frxETH can be redeemed for ETH at a 1:1 ratio, and only sfrxETH can earn staking rewards. The key is whether the protocol can provide enough ETH for redemption.

4. StakeWise: There are two mechanisms, Pool and Solo. After the Shanghai upgrade, Pool users can destroy tokens within the protocol to redeem ETH, while Solo users can choose to exit voluntarily.

Conclusion

The Shanghai upgrade will affect the price of LSD protocol tokens, withdrawal designs, and derivative DeFi applications. Users may reselect their staking methods, and market share will be redistributed. Protocols like Rocket Pool may rise quickly.

In the future, there may be DeFi applications such as index tokens based on LSD, new derivatives, and stablecoin projects. The unlocking of Ethereum staking may also bring incremental benefits to lending protocols.