The next Ethereum (ETH) hardfork “Shanghai” is scheduled for March 2023 and the upgrade will culminate the network’s shift to proof-of-stake (PoS) that began during The Merge on September 15, 2022. Once Once Shanghai is implemented, previously locked Ether will gradually become liquid for the first time since December 2020.
According to data from on-chain Etherscan, more than 16.6 million Ether is currently locked in the PoS staking protocol, which was valued at $28 billion as of February 16, 2023. Ethereum’s move from proof-of-work ( PoW) to PoS has started to achieve the original goal of making the supply of Ether deflationary. In the 154 days since the Merge update, over 24,800 Ether have been burned to cause the token to deflate 0.05% annually.
As of February 16, the total supply of Ether stands at 120 million tokens, which means just over 10% of the supply will be unlocked with performance rewards starting with the Shanghai update.
Let’s explore which on-chain metrics can help identify what may happen during the Shanghai update.
A portion of locked ETH is liquid thanks to liquid staking derivatives
To benefit from performance rewards before the Shanghai update, investors had to lock up their Ether and run a trusted node. The minimum staking requirement of 32 locked Ether is fully illiquid, meaning users had limited utility options for these coins.
Liquid Staking Derivatives (LSD) allow users to benefit from locked Ether while retaining the ability to sell the received derivative token on the secondary market. LSD protocols charge a fee and lock the native Ether token, giving users another token that represents a share in the pool.
Liquid staking derivatives did not gain prominence until Lido and other protocols began to see a flood of liquidity following the Merge update. Since Ether began to crash, liquid staking has outperformed illiquid solutions. As of February 13, 57% of locked Ether is liquid versus 43% illiquid.
Since most of the Ether locked up is via LSD protocols, investors currently have access to liquidity, which could reduce selling pressure after the arrival of Shanghai.
Very few users who stake are in the profit zone
In December 2020, when Ethereum staking was enabled, the price of Ether ranged from $400 to $700. Rather, many investors started betting when Ether was near its all-time high of $4,200. According to Binance:
“We observed that a considerable amount of ETH (around 2 million) was locked at prices in the range of $400 – $700 – this represents the earliest stakers in December 2020 – a group that is likely illiquid given that liquid stakes They were much less well known at the time.”
Due to Ether’s 69% correction since reaching its all-time high, many of the investors who staked their Ether are currently at unrealized losses.
It is likely that the minority of profit users are firm believers in the Ethereum network, as the date for liquidity was still unknown at that time. With a large number of users in losses and those in gains likely to be long-term investors, the price of Ether may not see a massive drop when the tokens can be released.
Lido has more quota than independent users
On January 2, 2023, Lido officially overtook MakerDAO as the largest TVL in DeFi. Since February 13, Lido is also the entity with the most Ether staked. With over 5 billion Ether tokens locked on Lido, the protocol represents 29.2% of all entities. Notably, almost 30% of all stakers have the current liquidity option through Lido.
Freelance users running nodes risk doing it from home or with a small group. This class of user probably believes that the Ether toke is a go-to currency for the long haul, as nodes come with costs and risks. Independent users currently make up 24.9% of all staking.
With almost 55% of all Ether locked up in the hands of independent or Lido users, the risk of an Ether price crash may be reduced.
Although the on-chain data around the Shanghai fork may be bullish for the Ethereum network, some analysts are still forecasting the possibility of a sharp drop in the price of Ether.
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