Ethereum
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Members of the crypto community are watching how the ability to withdraw millions of coins locked in staking will affect the market
March marks the first major event in the Ethereum ecosystem since the network moved to Proof-of-Stake (PoS) last year. After the completion of the upcoming update, tentatively titled Shanghai, the 16 million ETH coins currently locked in staking will be available to network validators for withdrawal to their own wallets. On Wednesday, February 1, the developers launched a test network to simulate the possibility of withdrawing coins from staking.
As part of the update, Ethereum will activate several more useful technical features that developers and advanced users will surely notice. But the main focus of the crypto community is precisely on the possibility of withdrawals by validators and the potential impact of a significant influx of coins on the open market. Validators will have access to both the coins that they initially deposited as collateral, and those that they have accumulated in the form of income for processing transactions on the blockchain.
When the developers of Ethereum switched the network to the Proof-of-Stake consensus mechanism as part of the Merge update (“Merge”), the network began to use validators instead of miners to add new blocks with transactions to the blockchain. According to the rules of the network, validators must contribute at least 32 ETH (more than $50 thousand at the exchange rate at the time of publication) to the contract for staking in order to participate in the process of confirming new blocks.
The principle is simple: the more ETH a validator stakes, the more likely it is that it will be chosen to “offer” the next block of Ethereum transactions and receive rewards from the network when new coins are issued. The status of a validator also implies maintaining the operation of its own node (node) of the Ethereum network.
Unavailable coins
Those who chose to participate in Ethereum staking were aware that their assets, as well as the income generated, would remain locked up indefinitely. The first validators started staking coins back in 2020, when the Beacon Chain parallel network was launched in the Ethereum ecosystem, initially created as a staking contract for the subsequent “merger” with the main Ethereum network.
Last July, analysts at Glassnode estimated that 75% of those who had coins locked in Beacon Chain at that time were at a loss, given the May collapse of the crypto market, but technically could not do anything about it. It is the upcoming Shanghai update that should open access to assets to both early network validators and those who joined after Ethereum switched to PoS.
Liquid staking services have become an alternative for those who were not ready to independently set up equipment to maintain an Ethereum node, deposit 32 ETH and block coins until the upgrade. They allow you to invest any amount in Ethereum staking, in exchange for staking platform derivative tokens that can be traded on the open market, or use them for various income strategies in decentralized finance (DeFi) protocols. The management tokens of such platforms as Lido (LDO) or Rocket Pool (RPL) have grown strongly in price in January and proved to be one of the most successful forms of investment in the crypto market at the beginning of this year.
What is liquid staking. And how to make money on it
After the activation of the Shanghai update, it is likely that many of the network’s validators will begin to withdraw at least what they have earned in two years in transaction processing fees. Obviously, some of them will withdraw the collateral completely for the sake of greater control over their own funds during a period of uncertainty in the crypto market.
In its current form, the Ethereum blockchain, after switching to the PoS algorithm, lacked precisely the key function of withdrawing funds by validators, although the rest of the network is functioning properly. Other stakingable coins like Solana or Cardano didn’t have these restrictions in the first place.
How much can be withdrawn
There are technically two options for the validator to withdraw ETH after Shanghai is activated. The first is to set up details for automatic withdrawal of earned rewards to the wallet. The second option is to completely leave the Beacon Chain and withdraw your 32 ETH by voluntarily removing the validator from the blockchain. The speed of withdrawing coins will depend on how many people will withdraw them at the same time. The process is divided into intervals of 12 seconds, in each of which there are up to 16 requests for a partial withdrawal of funds.
The likelihood that all validators decide to leave the blockchain is extremely small. The process of processing transactions through staking supports the operation of a global ecosystem that serves as a platform for thousands of decentralized applications and crypto assets with a market capitalization of billions of dollars. There is an opinion that access to staking coins, on the contrary, will lead to an increase in those who want to become validators and earn money on transaction confirmation.
On the other hand, immediately after the activation of Shanghai, about 1 million ETH will enter the market, accumulated only in the form of rewards, not counting what is blocked as collateral. This can provoke pressure on the price of coins if their owners start selling assets en masse. According to the official website of the Ethereum Foundation, as of February 1, more than 16.2 million ETH were blocked in staking with more than 500 thousand validators.
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