Brace Yourselves, Shanghai Is Coming

Withdrawals Are (Almost) Here

Do you hear that? That’s the sound of 17M ETH getting ready to be withdrawn from staking, nearly $30B of ETH supply previously locked up coming onto the market ready to be sold.

Or at least, that is what you may think if you’ve wandered into certain parts of crypto Twitter. While it is true that a large portion (15%) of ETH supply will be able to be unstaked from the Beacon Chain for the first time since the end of 2020, the implications are not that simple. There is a lot of nuance to Shanghai; this post will aim to distill it down the best we can.

Note — all $ conversions for ETH in this report use a price of $1,600.

Note 2 — A week after this report was published Lido announced that stETH withdrawals would be delayed ~1 month after Shanghai. This doesn’t change any medium to long-term implications but will have some effect on the short-term.

Partial vs. Full Withdrawals

Shanghai is a hard fork tentatively slated for the second week of April that will enable withdrawals of validators from the Beacon Chain for the first time. The Beacon Chain has been in deposit-only mode since it went live at the end of 2020, and over the past 2+ years has had ~17M ETH deposited (in 32 ETH increments) and ~1M of accrued staking rewards earned. Immediately after the hard fork, this ETH can be unstaked/withdrawn, but with notable caveats.

First, staking rewards and the deposited 32 ETH/validator are considered separately. Staking rewards fall into the “partial” withdrawals bucket. These will be automatically swept to an Ethereum address after Shanghai and be able to be spent as soon as received. Withdrawing the rewards and the 32 ETH balance falls under a “full” withdrawal. These have stricter rate-limiting rules (i.e., churn) on the amount that can exit per day.

Second, ETH can only be withdrawn (both full and partial) if validators have updated their credential prefixes to the 0x01 format from 0x00. The technicals here are not that important for the purposes of this report, but note that most validators have 0x00 and will need to switch. Lido has been the largest adopter of 0x01 and will be prioritized when withdrawals are activated.

Partial rewards will have an immediate impact on ETH’s circulating supply, while full withdrawals will be a more drawn-out process with counteracting forces.

Partial Withdrawals

Breaking down the partial withdrawals, we get:

• 796k ETH ($1.3B) currently non-withdrawable due to 0x00 credentials

• 167k ETH ($0.3B) withdrawable to Lido validators

• 87k ETH ($0.14B) withdrawable to others

Lido has some flexibility with their rewards: they can use them to process stETH redemptions or they can re-loop these into new validators depending on the amount of stETH that wants to exit. For the others that have updated to 0x01, we can expect some selling pressure when they receive rewards. ETH validators cannot compound their stake (i.e., there is no difference in APR if you have 32 or 36 ETH staked) and so this ETH will find its way somewhere rather quickly. Whether that is into liquid staking tokens, stablecoins, or anything else is a guess. As for the largest portion, validators still need to update their credentials. While it’s just a one-time change, the process is important to get correct because there is no changing the address after the fact (seriously, don’t mess this up validators).

Partial withdrawals will be processed at a rate of 16 partial withdrawals/slot (12 seconds), so with 7.2k slots/day, and assuming everyone’s updated to 0x01, we can expect partial withdrawals for ~115k validators/day. To run through the whole validato