Possible impact of ETH Shanghai upgrade opening withdrawals

According to the discussions at the most recent Ethereum core developer meeting, the Ethereum Shanghai upgrade is expected to take place at the end of March 2023. This upgrade will open up withdrawals for Ethereum staked on the Beacon Chain.

The main impacts of this withdrawal opening are summarized as follows:

1. There will not be a large amount of selling pressure. Since the liquidity of collateral derivative tokens in the secondary market is very good, the main selling pressure has been digested in advance.

2. It is conducive to the return of the value of de-anchored collateral derivative tokens such as stETH to anchor

3. There may be a wave of Fud market before the upgrade

4. It is beneficial to mortgage derivative projects in the long term and can promote price stability

5. There are currently discounted derivative tokens, some of which have arbitrage opportunities

The following is a detailed analysis of the core content of Shanghai's upgraded open withdrawals:

How withdrawals work

Generally, withdrawal requests can be divided into withdrawing part of the earnings, or exiting the entire transaction (i.e. exiting the validator node).

The Ethereum beacon chain can process up to 16 withdrawal requests per block, and the priority of full/partial withdrawals is the same.

A withdrawal application can be submitted only when the validator node has a balance greater than 32 ETH and is in the withdrawable state.

Based on the validator's withdrawal request, a withdrawal list is created to include all validators who have made withdrawal requests. The list lists the withdrawal order, execution layer receiving address, and withdrawal amount.

Original mechanism: https://tim.mirror.xyz/zLdl8bEiDmobHZ5RlvG2LrlZLWV9c2XvkuKQ-vpljSU

Based on the above withdrawal conditions and processes, it can be estimated that the time required for all ETH to exit the validator node is: 1 block in 12 seconds, 5 blocks per minute, 7200 blocks per day, 16 withdrawal requests per block, including the withdrawal of 32 ETH, and the total daily withdrawal limit is 7200 * 16 * 32 = 3,686,400.

The total amount of ETH pledged is currently 15,703,994, which can be calculated as 15,753,495 / 3,686,400 = 4.27 days. It can also be calculated based on the number of validators: (492282 / 16 ) / 7200 = 4.27. In other words, it will take about 4 days and 6 hours for all ETH to be queued for withdrawal.

Data source: https://beaconcha.in

Will there be a massive sell-off?

Here we first list some Ethereum beacon chain mortgage data to help analyze what may happen more objectively.

The current total beacon chain mortgage ETH is: 15,753,495 (including POS rewards), the actual user mortgage ETH is: 15,703,994, and the average balance is 33.92 ETH.

Among all validator nodes, unidentified ones account for 27%, and the rest are large staking service providers such as Lido, RocketPool, or organizations such as exchanges and mining pools.

Most organizations such as pledge service providers and exchanges have issued pledge derivative tokens, such as stETH, rETH, bETH, cbETH, etc. According to rough estimates, the pledge derivative tokens that have been circulated in the secondary market already account for about 65% of the total pledged amount.

These mortgage derivative tokens have experienced significant discounts in the past two years, and even recently some derivative tokens are still discounted.

The ones with a large discount are usually those that have been hacked or have particularly poor liquidity in the secondary market. Here, we can take stETH out and look at the data in detail, because it is currently the most liquid mortgage derivative token and can more intuitively reflect the mortgagee's exit sentiment.

From the above figure, we can see that the price of stETH/ETH has experienced a large-scale discount between March 2021 and June 2022. It can be seen that the time point of this part of the sale in 2021 is also the high point of the market. Most of these selling users are mortgage users at the end of 2020, and they have made more profits by exiting here.

Through this data, we can roughly estimate that users who pledged ETH at a lower price in the early days have actually withdrawn already and will not wait until Shanghai upgrades withdrawals.

Looking at the large discounts in June and November 2022, the 3AC and FTX events at these two time points caused some institutions to sell a large amount of stETH. Other derivative tokens of the same type, such as bETH, also had large discounts at these time points, which reflects that the actual amount of funds withdrawn from the mortgage is very large, and they will not wait until Shanghai upgrades withdrawals before withdrawing.

Through the above data analysis, my personal analysis concludes that there will not be a large amount of selling pressure after the Shanghai upgrade. The main reason is that the liquidity of mortgage derivative tokens in the secondary market is very good and the selling pressure has been digested in advance.

Since there has been some news about Fud in the market, it is not ruled out that there will be a wave of Fud market before the upgrade. Personally, I think it may be mainly based on derivatives trading, and there is insufficient motivation for spot selling.

Promoting better mortgage services

Since both partial and full withdrawals of the beacon chain need to wait in line, I personally think that most withdrawals will be reward withdrawal (partial withdrawal) requests. If users want to cash out, they do not need to go through the process of withdrawal application, collection and sale, but can directly sell in the secondary market.

stETH is designed to be exchanged for ETH at a 1:1 ratio. Since the ETH pledged and rewarded by the beacon chain cannot be retrieved, it can only be sold through the secondary market, so stETH has always been discounted. Another major reason for the discount is that stETH has good liquidity. Many large investors use it to hold ETH pledge exposure, and the corresponding secondary market exit will lead to large price fluctuations.

After withdrawals are opened, users can withdraw stETH at a 1:1 ratio after waiting for only 4 days and 6 hours at most, which will be very helpful for the price stability of stETH.

Currently, all staking services only have one path, staking, and the exit is through selling in the secondary market. After the withdrawal is opened, each service will improve the exit mechanism, and you can choose to lock the derivative tokens on the official website and wait for a certain period of time before exiting at a 1:1 ratio.

This is beneficial to collateralized derivatives projects in the long run and can promote price stability.

In addition, after withdrawals are opened, the staking income can be fully withdrawn, and the yield of each staking service will increase (compound interest).