What Was the Ethereum Shanghai Upgrade?

What Was the Ethereum Shanghai Upgrade?

The Ethereum Shanghai hard fork upgrade in March 2023 was designed to give Ethereum cryptocurrency network users access to their staked ether (ETH) funds for the first time since The Merge, the update that transitioned the blockchain to proof-of-stake in 2022.

Ethereum is a decentralized global software platform powered by blockchain technology that has been advancing at a steady pace since its launch in 2015.

Ethereum Pre-Shanghai History

It’s important to understand the history of events at Ethereum before diving into the Shanghai upgrade. This major upgrade was, after all, one of several sequential updates designed to help developers and the community reach their vision for the network.

Ethereum started with proof-of-work (PoW), where a competition to find a solution to a cryptographic puzzle serves as proof that the work was done to validate transactions. Proof-of-stake (PoS), a mechanic where only users with a stake in the process could become validators, was always part of the long-term plan.

In September 2022, The Merge joined Ethereum’s PoS Beacon Chain with the Ethereum Mainnet to transition the Ethereum blockchain off the legacy PoW system.

The Merge gave birth to a new version of Ethereum that reduced energy consumption by 99.95% and set the groundwork for the team to further scale the ecosystem.

The Shanghai Upgrade

Staker's assets were previously allocated toward Ethereum’s proof-of-stake (PoS) Beacon Chain network. The update allowed ETH holders to stake their tokens without locking them up indefinitely, perform transaction validations, and receive rewards of newly created tokens.

The scheduled March 2023 launch was preceded by the Shandong network test, or testnet, in 2022. Shanghai comprised several upgrades, but the most impactful one allowed ETH stakers to remove their staked ETH and accrue rewards. This was a point of frustration for many Ethereum users and was suggested in Ethereum Improvement Proposal 4895 (EIP-4895).

More than 14 million ETH were staked after The Merge, but by March 2023, there were nearly 18 million staked from about 560,000 validators—which was about 11% of the total circulating supply.

In the Shanghai upgrade, developers imposed a cap of about 43,200 ETH per day for withdrawal amounts after the upgrade so that there wouldn’t be a large migration of validators out of the network.

The Shanghai upgrade also included several other proposals related to the Ethereum Virtual Machine (EVM) Object Format (EOF). This was a software component of all EVM-compatible blockchains that contained more than 120 operation codes, giving decentralized programmability to blockchains that desired compatibility.

What Does the Future Hold for Ethereum?

Ethereum’s future amounts to much more than its switch to proof-of-stake and other upgrades for scalability and performance. The Shanghai upgrade was one of many that will bring the blockchain and ecosystem to the eventual goal of being a global virtual machine that powers the next iteration of the Internet and finances.

Ethereum developers are working on solutions to lower fees and increase transaction approvals. In March 2024, the blockchain hard-forked again in an upgrade that introduced proto-danksharding, a temporary protocol that reduces the costs of second-layer rollups. Proto-danksharding will be replaced by danksharding in a future update. It is believed that this update will allow the blockchain and network to process millions of transactions per second and scale as needed.

The Bottom Line

Ethereum enthusiasts welcomed the changes included in the Shanghai upgrade. It was a relatively small step for the project, but like most Ethereum updates, it paved the way for many more significant adjustments.

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