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Preparing for Ethereum’s Shanghai Upgrade

Bloq VP of Engineering John C. Vernaleo is eager to talk about the Ethereum community’s next major upgrade, Shanghai, which also goes by the less-elegant name “Ethereum Improvement Proposal (EIP) 4895.” At the time of publication, this upgrade anticipates an April 2023 activation

Today, about $25 billion worth of ETH sits locked away, staked. Some of it has been hibernating since late 2020, earning a 4% return. The Shanghai upgrade will allow for this staked ETH to be withdrawn. 

“Pre-Merge, being a solo validator seemed like a good idea. Now, that topic gets more complex, and this is where Bloq comes in,” Vernaleo said.

“Years ago,” he continued, “it was both economically favorable and hardware-feasible to set up a validator and stake on your own. Now that’s no longer true, and so it’s a pretty safe bet early validators are going to get out. They locked up funds using low end hardware for their Ethereum-1 client, but around The Merge requirements got a lot higher.”

The Merge, of course, was a consensus shift away from Proof of Work (PoW) and toward fully embracing Proof of Stake (PoS), combining Mainnet with Ethereum’s Beacon Chain into one. In the PoS scheme, “miners” are replaced with “validators.” This dramatic change was remarkable for… well… how decidedly un-dramatic it was.

“Boring in a Good Way”

Considering all that could’ve gone wrong in coordinating such a massive change, The Merge could go down in computer science history as a model of cooperative execution. “I stayed up until 4:00 a.m. to watch over all our nodes,” Vernaleo remembered. “The Merge was boring in a good way. That’s what we wanted.”

It does appear Ethereum devs learned that “boring” lesson from The Merge and applied it to Shanghai. No shiny new things. Just free the funds. 

As for the possibility of a run on, or dump of, staked ETH as a result of Shanghai, Vernaleo points to a Shanghai scenario treatment from Galaxy researcher Christine Kim. “Something close to half of validators essentially cannot immediately cash out. There’s a line, a queue,” Vernaleo explained regarding Kim’s insights. “It really does mean there can’t be a run on it because it’s not enabled to be a fast pull out, which is also good.”  

“Cashing out doesn’t mean validators are done validating,” Verneleo continued. “It might just mean they’re done with their own validator. Previously, they were stuck doing things exactly the same way, unless you wanted to hand over your private keys … which is a bad idea.”

Shanghai could accidentally incentivize moves toward managed validation, as solo validators grapple with future complexity. “It doesn’t mean they don’t want to validate. They probably won’t want to validate by themselves. They’ll want to validate at scale. Bloq is ready for those early solo stakers who might’ve gotten more than they bargained for years later. They can now withdraw, and we are more than happy to do the staking for them. We’re ready to help and absorb any friction.” 

Shanghai + DeFi      

Where the Bloq DeFi team is concerned, lead strategist Zane Huffman sees Shanghai as having a powerful impact on the Vesper Finance and MetronomeDAO projects. “We have situated ourselves pretty closely around this product stack for LSD (Liquid Staking Derivatives),” Huffman stressed. “You can take your ETH staking rewards, receive LSD, and deposit it to Vesper, where you keep those rewards and get extra APY from Vesper going out and fetching additional yield.” 

From there, depositing into Metronome allows users access to cheap loans on productive collateral, to lever up, and mint ETH, loop it through, multiplying that yield on the collateral side (also similar with minting USD). “If and when Shanghai passes successfully, these miscellaneous flavors of LSD should get a massive confidence boost in the market. This means more appetite for converting ETH to these assets, levering up exposure to this yield, and more DeFi yield opportunities on the assets themselves.”

Follow @bloqinc, @vesperfi, and @metronomedao on Twitter. 

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