The Ethereum Foundation has announced April 12 as the date of deployment of the much-anticipated Shanghai and Capella upgrade, together dubbed as Shapella.
The upgrades will enable withdrawals from Ethereum 2.0 staking contracts. The staking contract was first launched in December 2020. It only accepted one-way deposits of ETH, which will change after the upgrade.
To date, users have deposited over 18 million ETH, worth around $32.5 billion, into the Ethereum staking contract at varying times since December 2020.
Analysts vary on the estimates of ETH sell pressure
Most users opted for liquid staking derivatives on decentralized or centralized exchanges. Because these stakers are already liquid, there will likely be no new reason to sell after the Shapella upgrade.
Decentralized LSD platforms like Lido currently account for around 33.2% of the total ETH deposits on the beacon chain. Out of the rest, around 27.1% is deposited via centralized exchanges like Coinbase, Binance and Kraken. Thus, 60.3% of the staked ETH is deposited via liquid staking mediums.
On the other hand, the illiquid ETH, which is deposited into the contracts directly by setting up nodes or third-party service providers, accounts for around 40% of the total amount. These are most likely to sell after unlocking.
According to analysis from Nansen, around 59% of the illiquid deposits, between 3.62 million and 4 million ETH, are in profit. These users are most likely to go through partial or complete withdrawals after the withdrawals are enabled.
Some of the illiquid stakers might also choose to re-stake and the Nansen report estimated total selling pressure to be somewhere between 1.2 million and 3 million ETH. However, all ETH will not be dumped into the market right away.
Views on daily selling pressure
The Shapella upgrade will implement a two-tier partial and full withdrawal system.
The minimum amount to stake on ETH is 32 ETH. Stakers can withdraw amounts exceeding 32 ETH or completely withdraw the entire 32 ETH, plus additional rewards from the staking contract.
There will not be a situation where stakers rush to withdraw their ETH after the upgrade leading to a spike in gas prices. Ether withdrawals have no gas costs but will be limited to 16 partial or complete withdrawals per block. Thus, there will be a delay in the amount of ETH unlocked and moved to sell.
According to the Nansen report, there will be three phases of ETH selling pressure after the upgrade.
In the first phase, lasting 27 hours after the update, the selling pressure from partial withdrawals will be around 84,000 to 125,000 Ether per day (~$133m – $197m).
The second phase will see maximum selling pressure from partial and full withdrawals, amounting to 136,000 and 173,000 Ether per day (~$218m – $275m) in additional selling pressure. This phase will last between the third and fourth day after the upgrade.
The last phase of selling pressure, with mainly full withdrawals, will last between 19 to 52 days, adding a daily selling pressure of between 48,000 and 53,000 Ether per day.
The 30-day moving average of exchange inflows is 313,533 ETH (worth around $550 million), which means the additional inflows will be between 15% to 55% of the moving average. This could suppress Ether prices until the selling pressure subsides in three to eight weeks.
Another estimate by Arcana Research found that around 1.3 million ETH will be sold in the first ten days due to partial and full withdrawals. The selling pressure will peak in the first three days with around $527 million (adjusted for Ether’s current price of $1,800) daily selling pressure. It accounts for around 6.4% of the ETH daily trading volume.
With less than a fortnight to the upgrade, traders may attempt to front-run the selling pressure by placing short orders in the futures market. So far, the futures market shows no significant uptick in open interest volume or funding rates for short orders.
The beginning of ETH withdrawals will reduce the risk of holding liquid staking derivatives bought via decentralized or centralized exchanges because they will become directly redeemable for ETH. Thus, newfound staking interest among investors sitting on the sidelines would somewhat counter the selling pressure.
The Ethereum staking ratio, i.e., the percentage of staked ETH relative to its total circulating supply, is 14.96%. This is significantly less than the industry average across other Layer-1 blockchains. The ETH staking ratio is also expected to improve in the long run.
Technically, the ETH/USD pair faces resistance from the $1,970 level. Breakout above this resistance can see the pair reach bullish targets around $2,330 and $2,750. In case of a downturn, support lies around $1,569.
The Ethereum network will undergo one of the most extensive upgrades after the Merge in September 2022. ETH withdrawals after the Shapella upgrade are likely to see increased selling in the first few days after deployment, putting short-term pressure on prices. However, as the selling subsides and more users move to stake ETH due to reduced risk and increased yields, the market conditions could start favoring more upside in the long term.
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