Ethereum is dropping its next big update called “Shanghai” by March. This update’s gonna let stakers cash out their ETH that’s been locked since December 2020 on the beacon chain.

They’ve already run some tests, so once it’s live in March, stakers can withdraw either part or all of their staked ETH. If they withdraw partially, they can only take out their accrued rewards and still gotta validate transactions on the Ethereum network.

But if they go for a full withdrawal, they’re outta there and no longer part of the Ethereum network. To get their withdrawals, all validators gotta update their credentials before the upgrade. Sounds like a lot of them haven’t done it yet — around 60% of the half-million validators.

Ready up Your Game for Shanghai

For validators who’ve already updated their credentials, their accrued rewards will be automatically sent to their withdrawal address. If they want to bounce from the network entirely, they’ll need to manually request a full exit.

The beacon chain can only handle seven validator exits per epoch, which is about every 6.4 minutes. So that means a max of 1600 validators can bounce per day. But if lots of validators try to leave at once, it could take months to complete depending on how many want to head out.

In simpler terms, it’s gonna be tough for validators to leave the network quickly, so it’s likely that liquidations in the short term will only involve the accrued rewards, which are about one million ether. This should keep any downside in check for the time being.

From Staking to Trading: The Exciting Rise of Liquid Staking

It looks like the Shanghai upgrade is gonna push up Ethereum’s staking ratio in the medium term, bringing it in line with other proof-of-stake networks. Plus, as more people start staking, a big chunk of it is expected to head over to liquid staking protocols.

Liquid staking protocols like Lido offer a way for ether holders to stake without the hassle of running a validator node. The ether is pooled together, so even if you’ve got less than the minimum threshold of 32 ETH, you can still get in on the action. Plus, these protocols give you liquidity for staked assets, which are normally locked in staking contracts. Basically, you can trade the same amount of derivative tokens (in Lido’s case, stETH) for the staked ether you’ve got, which is pretty sweet.

So, in the past, the derivative tokens from liquid staking protocols have been a bit cheaper than actual ether. But now that we’re getting closer to the upgrade, they’re starting to even out in price. Basically, if they didn’t match up, it would create a chance for people to make some easy money through arbitrage.

The DeFi Kingmakers: Liquid Staking Protocols Will Shape the Future of Ethereum

Some people might say that the usefulness of liquid staking protocols will decrease as we get closer to the Shanghai upgrade. But the other side of that argument is that these protocols are more than just a way to provide liquidity. They can also act as a middleman for regular folks who don’t have 32 ETH lying around to stake.

Liquid staking protocols have become some of the biggest players in the DeFi game. In fact, earlier this year, Lido had even surpassed MakerDAO in terms of total value locked (TVL), making it the biggest protocol in the DeFi world in terms of TVL.

It’s true that the increasing popularity of Lido and other liquid staking protocols since the Merge has sparked concerns about network centralization. That being said, the Merge last September did bring a host of benefits to the Ethereum network, including a massive reduction in power consumption by over 99%, as well as a drop in ether’s inflation rate by more than four percentage points.

The rise of Lido and other liquid staking protocols following the Merge has caused some to worry about network centralization. While the Merge delivered big perks such as a significant reduction in power consumption and a decrease in ether’s inflation rate, it also resulted in more centralization. A small number of entities, including liquidity staking protocols, now control most of the staked ether, giving them ultimate control over validation and network security.

For instance, Lido, the largest liquidity provider for staked ether and other tokens of proof of stake blockchains, presently holds over 30% of the market share in staked ether and an even more significant portion of the overall liquid staking landscape.

So what’s up with the Shanghai upgrade and Ethereum staking yield? As of now, the total yield for staking is sitting pretty at 7.4% for anyone running a validator node with 32 ETH. Keep in mind that there are other rewards beyond the usual block rewards given out by the Ethereum network, such as variable rewards from transaction fees, tips, and MEV.

These extra rewards are like a box of chocolates, you never know what you’re going to get. They’re all over the place, depending on how much users are paying in transaction fees, how much tips validators are receiving, or even when the orders of the transactions get shuffled around like a deck of cards. It’s like a game of chance, but with the potential to earn some serious ETH.

So, compared to other staking networks like Avalanche, BNB, Cardano, Polkadot, and Solana, Ethereum’s staking ratio is pretty low, only sitting at about 14% right now. Meanwhile, the other networks are crushing it with a 60% average staking ratio. Looks like Ethereum’s got some catching up to do!

But there’s good news! With the upcoming Shanghai upgrade, the staking ratio could jump up big time. If Ethereum’s staking ratio creeps up to the average of those other networks, we could see the number of validators surge from 0.5 million to 2.2 million. Sure, that means the yield might dip from 7.4% to around 5%, but hey, it’s a small price to pay for a more secure and decentralized network.

https://medium.com/market-for-ideas/ethereum-shanghai-upgrade-revving-up-staking-rewards-1935b64c5af5