Q9 Weekly | The Shapella Show

Q9 Capital
6 min readApr 13, 2023

13 March 2023

  • BTC regains $30k level, ETH at $1.9k
  • Ethereum’s Shanghai and Capella upgrades go live
  • Will unlocked staked ETH impact the market?

Shapella, the first major Ethereum update since the Merge, took place on Wednesday. Shapella is a portmanteau of “Shanghai” and “Capella”, referring to two network upgrades that occurred simultaneously allowing users to unstake their ETH from the network.

  • Shanghai. The upgrade to the execution layer
  • Capella. The upgrade to the consensus layer

The upgrade will allow validators to withdraw staked Ether for the first time. To date, more than 18mn ETH (that’s about $33.6bn worth) has been staked and locked into the Beacon Chain across 564,000 validators. Many predict this event could force major selling pressure on ETH. Others say this is just the impetus Ethereum needs to regain institutional interest.

BTC and ETH Continue Run

Source: TradingView

A Stake Through the Heart

Since The Merge, Ether staking has been a one-way system. You can stake Ether, but you can’t withdraw it. Shapella fixes this and enable users to unstake their Ether on the network for the first time. This crucial upgrade now enables users to access and potentially unstake over 18mn ETH staked on the Beacon Chain, Ethereum’s consensus layer network.

Shapella will activate two types of withdrawals: partial and full withdrawals. Partial withdrawals will allow validators to access their balance over the 32 ETH needed to establish a validator node. In every Ethereum block, 16 validators can make partial withdrawals, and users collect their rewards at the end of each week.

Full withdrawals will be a more significant event to track, as they enable validators to completely exit their stake on the beacon chain, taking their entire ETH balance, including their original 32 ETH and any accrued rewards or penalties each epoch.

However, users cannot unstake or exit all at once, as there will be a limit on the number of validators that can withdraw each day in a queue. According to the Ethereum Foundation, a maximum amount of 16 withdrawals can be processed within a single block, totalling a maximum output of 115,200 per day. The length of the withdrawal queue could result in users having to wait several weeks to withdraw their funds. Coinbase announced that it “may take the protocol weeks to months [to] process unstaking requests”. Lido has said it could be early-to-mid May before it unlocks withdrawals, due to security audits.

Withdrawal Symptoms?

Analysts are split on the market impact of the upgrade.

Some observers expect an Ether price swoon after the upgrade as users liquidate their holdings while others believe the expected uptick in the selling pressure is already baked in and the market will bounce after the event in a classic “buy the news” move.

While the entire stack of over 18mn coins cannot be withdrawn immediately, partial withdrawals of just over one million coins earned as rewards for staking, can now be processed immediately. That one million ETH represents a potential post-upgrade selling pressure.

Staked ETH Withdrawals Permitted for First Time

Source: Nansen

Source: Nansen

Ahead of the event, ETH’s spot volume market share relative to BTC reached a two-year low and the ETH/BTC ratio has declined by 13.6%.

Source: Kaiko

Here is what some institutional investors are saying:

  • Galaxy Digital wrote “We expect 553,650 ETH will be sold. Amortized over 7 days, this amounts to approximately 1% of daily ETH volume (including spot and perpetual futures volume) of selling per day for a week… Depending on the risk environment broadly and overall liquidity in ether during the Shanghai upgrade, expected on Wednesday, April 12, we view this amount as ranging from inconsequential to slightly bearish ETH/USD.”
  • JP Morgan says “ether will likely face some selling pressure from the upgrade as more than one million ether staking rewards become instantly available this week”… “If you add potential additional selling from staked ether balances that belong to “troubled entities,” then the selling pressure may be larger in the coming weeks, analysts led by Nikolaos Panigirtzoglou wrote.
  • Bank of America doesn’t expect the Shanghai liquidity event to directly drive ether selling pressure, but it does expect increased volatility around the event due to lower liquidity, exchange inflows, derivatives activity and price action related to the previous upgrade, the Merge.
  • Glassnode estimates at least $300mn worth of selling pressure after the Shanghai upgrade. “We estimate a total of 170K ETH intended to be sold after the Shanghai upgrade… We project that only 100k ETH ($190mn) of the total accumulated rewards will be withdrawn and sold… “Even in the extreme case where the maximum amount of rewards and stake are withdrawn and sold, the sell-side volume still falls within the range of the average weekly exchange inflow volume. Therefore, we conclude that even the most extreme case will have an acceptable impact on the price of ETH”
  • Amphibian Capital believe “The Shanghai upgrade is a crucial step in that direction, which will likely increase liquidity and trading of ether and possibly attract more institutional capital into the crypto economy… and will democratize the staking process and allow for greater participation in the network, leading to increased security and decentralization of the network”

The withdrawal process is purposely designed to prevent a short-term mass exodus of validators and the resulting security risks. Therefore, the impact on the Ethereum economy is expected to be a lot less dramatic than many have painted it to be. It looks likely that any selling pressure on ETH is either priced in or will be short-lived and spread out over a period of weeks and not days.

In the medium term the upgrade is likely to attract more institutional interest to staking ETH as it provides the necessary certainty around liquidity and withdrawals that they need.

In all, Shapella is really not a major technological upgrade like The Merge (more of a tweak to its economics)… but it acts as a precursor for future upgrades, providing a small step forward for the blockchain. Ethereum’s long-term viability is now dependent on the execution of its development road map and it needs to address issues such as scalability to fend off next-generation blockchains.

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