A Shift Toward Liquid Equity Derivatives Expected After ETH Shanghai Upgrade

The Ethereal (ETH) The Shanghai update will be released in March, allowing beacon chain withdrawals and allowing ETH currently staked in ETH 2.0 validators to be unstaked.

With over 70% of ETH participants currently at a loss with their ETH inaccessible, the Shanghai update will allow stakeholders to access their ETH and decide whether to sell at a loss or hold it long term until they turn a profit again.

Post-ETH merger

In September 2022, the ETH merger took place on the Bellatrix update. In the process, the beacon chain took over block validation completing the transition from Proof-of-Work (POW) to Proof-of-Stake (POS).

The beacon chain is organized by validators who have deposited 32 ETH before they can start trading. Currently, the number of beacon chain validators has reached 500,000, with a recent explosion in new active validators, with a total of more than 16 million ETH staked in the ETH 2.0 deposit contract.

New ETH credential format

Validators wishing to withdraw their staking rewards must ensure that their withdrawal credentials are updated to the new standardized “0x01” format. The same prerequisite exists for validators who wish to stop validating or exit their entire balance.

Currently, approximately 300,000 validators have yet to update their “0x00” credentials, while approximately 200,000 validators have already updated on the beacon chain.

Of the total 500,000 validators, the 16+ million ETH that have been staked represents approximately 13% of the total ETH supply, which will change over time as a result of:

1. Hack — in case of malicious behavior.
2. Income obtained by issuance and commissions.
3. Idle Leak: Whether validators will block or certify.
4. New deposits and, eventually, withdrawals.

Liquid staking derivatives

Due to the nature of ETH staked, it is a non-tradable asset once staked. As such, numerous providers arose that allowed ETH to be staked in exchange for a tradable asset representing a portion of the ETH staked, known as Liquid Staking Derivatives (LSD).

To date, Lido is by far the largest provider of LSD, with a market share of around 5 million ETH. However, currently staking providers like Lido, Coinbase, and Binance control large segments of the ETH market, revealing problems with centralization.

As a decentralization-oriented asset, the ETH stakes accumulated by the aforementioned ETH staking providers lend themselves to the narrative that ETH is becoming too centralized and ultimately controlled by companies with the largest stakes.

With the integration of the upcoming Shanghai update, both investors and ETH validators will prepare to withdraw staked ETH in favor of positions that allow the stake and value of their staked ETH to be returned in the form of LSD.