The Ethereum Shanghai Upgrade Is Here!
... and the market did not crash. A quick guide on the Shanghai Update and how to benefit from it.
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Market Review
What a week. Ethereum went above 2,000$ again - the first time since May 2022. And Bitcoin broke 30,000$ as well. Both more or less 2x-ed since the lows - you just had to buy and hold and you would have outperformed basically all other major asset classes. Sometimes it’s that simple. Bitcoin is trading now at 30,409$ and Ethereum is at 2,002$.
Thirty-four million US Dollars. 34. Billion. US. Dollars. That is the amount of Ethereum that got unlocked today - and the price actually went up. It’s probably one of the most surprising ‘bullish-unlocks‘ since the OG bullish-unlock of Solana back in 2020. It remains to be seen whether the unlock has no negative impact on Ethereum pricing at all, however, the financial impact might remain limited as some outlets actually predicted.
In the last two days, we broke through the resistance of 30k that we talked about a lot in the last iterations of the newsletter. If Bitcoin manages to establish a few daily closes in this area, we do expect a push further toward 33.5k as mentioned before. If we fail to establish this level, a move back down into the prior range below 28.5k seems likely.
In the mid-term, we continue to expect a retest of the 25k area at some point, however, with even an event like the Shanghai Update being bullish, it doesn’t look like we will turn bearish in the next few weeks. We hope you followed our suggestions of dollar-cost averaging into the markets (and continue to do so), and sit on a nice stack now. If so, the 33.5k area would seem like a nice place to derisk.
What else happened this week:
Aave and YearnFinance got exploited. It seems like the total damage is rather limited at $11 million in comparison to prior hacks.
There were some rumors circulating that Justin Sun, the founder of TRON and prior Ambassador Extraordinary and Plenipotentiary of Granada, got arrested. It turned out to be false, but this remains an interesting case to follow…
The Ethereum Shanghai Upgrade
4 key takeaways
It’s the latest major upgrade after 'The Merge' and went live on April 12th
This upgrade will allow validators to withdraw staked ETH worth over $30 billion, including rewards from the Beacon Chain
Future upgrades are scheduled to improve Ethereum's scalability, security, and sustainability.
With this upgrade, it is expected that Liquid Staking Derivatives (LSD) will likely benefit the most
What is the Shanghai Upgrade?
Ethereum is a network launched in 2015 that can execute smart contracts but became slow and expensive due to its increasing use. Improving its scalability is not simple because it affects decentralization and security, known as "The Blockchain Trilemma".
To solve this problem, Ethereum changed from PoW to PoS. The Ethereum Shanghai upgrade is the next major upgrade that will finalize this transition. PoS allows validators to stake Ethereum and secure the network but requires locking up their funds. The Shanghai upgrade, however, will make it easier for validators to withdraw their staked Ethereum.
How will the Ethereum ecosystem be impacted by the Shanghai Upgrade?
The Ethereum Shanghai Upgrade can make $ETH easier to use, more secure, and able to grow in the future. But the most anticipated feature that comes along with it is the ability to withdraw staked ETH, which could release almost $30B worth of ETH in the near future into the market if validators choose to use it.
In short, the upgrade will allow validators to withdraw their staked ETH and rewards. There will be some limits on the number of withdrawals in each block to avoid chaos. Validators can choose to partially withdraw their rewards or fully withdraw their entire staked balance, including the required 32 ETH.
Will the Shanghai Upgrade impact ETH price?
It's hard to say if the Shanghai Upgrade will make Ethereum's price go up or down. Upgrades usually create excitement and demand, leading to more users and new projects. But some people think that the upgrade could also cause a decrease in price because more Ethereum will become available to sell. However, the amount of Ethereum being staked is relatively low compared to other networks like Solana. We should be careful when predicting how the upgrade will affect the price because it's hard to predict what will happen in the market. One thing we do know is that there will be around 1 million ETH available for withdrawal when the upgrade happens. This could potentially cause some sell pressure, but the amount of ETH being withdrawn is only a small percentage (0.8%) of the total supply and staked deposits which means that a lot of ETH was already on the free market to be bought and sold each day before the upgrade (trading).
Which projects will benefit from this?
Because this upgrade makes it easier for validators to withdraw their staked Ethereum, it grants a huge opportunity for projects that offer Liquid Staking Derivatives (LSD). LSDs are tokens that represent staked Ethereum without requiring users to have the minimum 32 ETH needed to participate in staking. These tokens enable users to join liquidity pools and get ETH staking rewards. Mini validators so to say.
Projects that offer LSD staking
Lido: Offers stETH tokens in exchange for staked Ethereum, freely tradable and transferable. LDO is the governance token for Lido.
Rocket Pool: Offers rETH tokens in exchange for staked Ethereum, freely tradable on exchanges. Decentralized and community-owned.
Stakewise: Offers STETH tokens in exchange for staked Ethereum, freely tradable and low fees. Not as liquid as Lido.
Frax Finance via DefiLlama: Offers frxETH tokens with up to 10% annualized returns on staking. Backed 1:1 with ETH and freely tradable on exchanges.
How can you benefit from this?
ETH has been around for a long time and is likely to stay that way. If you already own some, you can stake both Ethereum and LSD tokens to earn additional yield. You can also potentially use LSD tokens as collateral for borrowing to make more money from the interest rate. LSD tokens are freely tradable on exchanges, making it easy to buy and sell them and take a profit when you want. If you don't have any ETH yet, you might want to consider building a position using a DCA strategy and preparing for the next bull market. You can read more about this in one of our earlier newsletters.
For a deeper understanding of the upgrade and to get into the nitty-gritty details, check out this article that not only explains everything thoroughly but also includes institutional-grade research from Delphi Digital.
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Action for this week
In this section, we will summarise the main actionable items from each newsletter and other posts that are worth reading
Read Arthur Hayes's take on the Shanghai Update
Pick one of the LSD projects mentioned above and deep dive into the projects. This might turn out to be a super interesting area for the next months…
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