The crypto asset class was dominated by controversy for most of 2022 and contrary to popular belief, there actually were some good things that happened. At the top of this list was Ethereum's (ETH -0.28%) successful implementation of The Merge. Arguably one of the most significant events in crypto history, The Merge transitioned Ethereum from a clunky, energy intensive proof-of-work consensus mechanism to the more streamlined and efficient proof-of-stake method.
You could write a book on the details of The Merge and proof-of-work versus proof-of-stake. But of more importance is that Ethereum successfully carried out The Merge and is about to undergo another upgrade, a sign that progress doesn't always have to take years. This time it's referred to as Shanghai -- albeit a smaller upgrade than The Merge, this new update will unlock the funds of users who staked their Ethereum to earn interest before The Merge.
Ethereum developers said that they plan on implementing the Shanghai upgrade sometime in March. Not only is this a bit of refreshing news, but with a successful launch of Shanghai, Ethereum might be able to finally reap some of the benefits that come with switching to proof-of-stake.
Compared to proof-of-work blockchains, in which miners verify transactions by solving complex math problems and earning new coins, proof-of-stake blockchains use validators. These validators "stake" or lock up funds on the network to then earn the right to verify the next block of transactions and receive the reward. As a part of The Merge, Ethereum developers made it so that staked funds would not be able to be withdrawn. That is, until now.
There are differing opinions as to what will happen to Ethereum's price in the short term once users can withdraw their previously locked funds. It could be like the lead up to The Merge -- in classic "buy the rumor, sell the news" fashion, Ethereum nearly doubled from $1,000 to just under $2,000 in just a month. But by mid-August it fell under broad selling pressure as The Merge loomed.
More users, more demand, more value
There are multiple scenarios that could play out over the short term, yet I believe there is one certainty in the long term: More users are likely going to stake their funds on Ethereum now. Until this news was released, staking on Ethereum looked risky because there wasn't really an end in sight as to when users could withdraw their funds.
But now, those looking to stake their funds know they can withdraw at any time. If this were to happen, it should not only benefit the Ethereum network, but also investors. Proof-of-stake blockchains derive their security from the number of people who stake funds. If more people know they can make withdrawals, more people are likely to become participants in the network. This should help Ethereum become further decentralized and more secure in the long run. Both great things.
The additional benefit of the Shanghai upgrade is that Ethereum can now tap into an entire sector of decentralized finance (DeFi) known as liquidity staking pools. With the use of smart contracts, developers have created applications that not only let users stake their Ethereum but also provide them with a token unique to that pool. Users can then use that token for other various DeFi activities. They then get the benefit of earning interest on their staked Ethereum and have the ability to earn profits in other ways.
While at times lucrative, this type of investing is highly speculative and is not recommended. The takeaway here is that once the Shanghai update is unveiled, it will likely allow Ethereum to finally start utilizing some of the perks that come with moving to a proof-of-stake consensus mechanism. This increase in activity could subsequently cause an increase in overall demand -- and hopefully an increase in Ethereum's price.
Barely halfway there
Of most importance to investors is that Ethereum developers continue to push forward with fine-tuning the blockchain to support more use cases. After The Merge, Ethereum co-founder Vitalik Buterin said that the blockchain has only reached 55% of its total development potential. Shanghai is just another one of these upgrades to get the blockchain closer to 100%. But a smooth implementation should provide investors with further confidence that Ethereum has what it takes to meet the demands of its users and fulfill its goal to "grow Ethereum enough until it's powerful enough to help all of humanity."
As Ethereum continues to move toward its final form, milestones like the Shanghai update should be welcomed by investors as they show Ethereum is making progress to support more and more use cases. And as it supports more, its price should increase as well.
