In September 2022, Ethereum transitioned from proof-of-work to proof-of-stake in an event known as the merge. The proof-of-stake framework allows Ether holders to verify transactions in the role of being a staker. Nearly two years before the merge, on the 1st of December 2020, the staking contract launched, allowing holders to stake Ether by that time. Until this day, staking has been a one-way street, so stakers have not been able to withdraw from staking to make their Ether accessible again, not even following the merge. From a total supply of nearly 120.5mn, almost 19.2mn Ether is in the staking contract, of which some have been staked since the 1st of December 2020, effectively locked for about 2.5 years.
Shanghai makes stakers non-stakers
However, the one-way street turned into a two-way street this evening, as the highly anticipated Ethereum hard fork called Shanghai – or Shapella – was successfully implemented. Among other minor advances, the most noted addition was the technological possibility to unstake Ether, slowly opening the floodgates to the 19.2mn staked Ether worth over $38bn.
The 19.2mn Ether is not instantly withdrawable from staking, though. About 1,800 validators of 32 Ether each may exit staking daily. This totals 57,600 Ether of the nearly 18.2mn originally staked Ether. To ensure a maximum of 1,800 validators exit per day, there is a queue called the exit queue in which validators wait on a first-come, first-served basis. When a validator successfully exits this queue, it has to wait at least a couple of days in another queue known as the withdrawal queue before the Ether is accessible. On the contrary, the slightly more than 1mn total staking reward of the past nearly 2.5 years can be completely withdrawn in the coming few days.
Although the Ether is only slowly withdrawable from staking, the day of the Shanghai hard fork has long been feared by the market worrying that many stakers would liquidate Ether as soon as they were able to due to the multiple-year lockup.
Few are unstaking
In January, we published our view on this matter. We argued that the Ethereum market would mostly be negatively driven by the sentiment leading up to the hard fork, rather than by heavy selling pressure from unstaked Ether following the hard fork, considering that most stakers are long-term holders fully aware of the multiple-year lockup, whereas stakers willing to sell would likely already have hedged their portfolio by shorting futures. Likewise, the modest daily limit to withdraw staked Ether causes potential selling pressure to be evenly distributed over a long period to better be aligned with buyers.The past slightly more than 12 hours since the Shanghai hard fork has so far confirmed this view. Although the exit queue has been open prior to the hard fork, it currently only has 18,000 validators and the withdrawal queue has 5,100 validators compared to about 560,000 active validators. The first of these validators is expected to be fully accessible sometime tomorrow, so it is too early to conclude whether these are about to hit the market. It is, though, clear that not every unstaked Ether will hit the market, as some validators have more or less been forced to unstake. This includes the crypto exchange Kraken. The latter is undisputed the largest entity to unstake, which is largely done due to a settlement with the Securities and Exchange Commission (SEC) in the US earlier this year, forcing the exchange to end staking services to US clients. Nonetheless, it appears that the market expected a much greater unstaking queue, as Ethereum is up by nearly 5% in the last 24 hours while being up by 3% relative to Bitcoin. Ethereum crossed $2,000 for the first time since August 2022 earlier today.