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Following the broad estimates of the potential economic consequences resulting from the Shapella update's ETH withdrawals, we will now delve into the actual effects on the 1.55M withdrawn ETH and the redistribution of stake among stakers, staking service providers, and selling pressure.
The Ethereum network experienced a significant upgrade on April 12th, 2023, with the Shanghai/Capella hardfork, allowing for the withdrawal of staked ETH in the Proof-of-Stake consensus mechanism. After over two years, stakers can now collect their rewards, exit their staked positions, or make changes to their staking configurations.
Contrary to common assumptions, the Ethereum market remained stable as these funds became liquid following the upgrade. Value of Ethereum increased to $2,110 in the subsequent week, before settling back to the ETH price of $1,920, likely due to a broader decline in the digital asset market.
This analysis will build on pre-Shanghai predictions and numbers, where the true sell-side pressure was estimated at approximately 170k ETH. Let’s now evaluate the actual events since the upgrade, focusing on withdrawals, deposits, and the entities behind them.
Reevaluating Our Forecasts
Analysts predicted three potential scenarios for the post-Shanghai period, which were based on the general understanding of Proof-of-Stake's technical features and the staking industry's developmental history.
The total amount of unstaked ETH is determined not only by exit demand but also by two technical mechanisms: withdrawal types and the Churn Limit. This analysis reviews both mechanisms.
It was initially estimated that 789.5k ETH would be withdrawn in the week following the Shanghai/Capella update, with 170k ETH likely to be sold. However, most withdrawal estimates were too conservative, as no one could anticipate Kraken's exit of 125,088 ETH within the first week, amid SEC pressure to shut down its US-based staking service.
Actual numbers fall between that estimate and the maximum possible amount. During the first week, 856k ETH rewards and a total of 232k ETH were unstaked. Partial withdrawals made up 80% of the total released ETH.
To determine how much of the withdrawn stake was sold, we can examine the average weekly exchange inflows for the same period. In total, there were up to 1.8M ETH of inflows right after the upgrade. These numbers are relatively small compared to past major sell-side events and align with typical inflow patterns.
Based on this, we can confidently state that the original predictions were actually accurate, as the Shanghai sell-side pressure did not result in a noticeable increase in daily trade volumes.
Withdrawn Stake Surpasses Rewards
Around 300k stakers needed to update their withdrawal credentials to receive staking pool rewards. In the first week, over 70% of the missing credentials were updated, and we are now sitting close to the maximum amount, with 98% of credentials updated.
As a result, the withdrawal process for both partial and full withdrawals now takes closer to the intended 4.5 days, according to the protocol design.
Initially, unstaked ETH primarily consisted of partial withdrawals, as all accumulated rewards were released at once. At the time of writing, 84% of the accumulated staking rewards have been withdrawn, with the remainder being attributed to missing credential updates.
After the upgrade, the withdrawn stake capped at 57,600 ETH. Since April 28th, the cumulative sum of exited stake has surpassed that of withdrawn rewards. This is an interesting development, as many analyses focused primarily on rewards as the main source of ETH sell-side pressure; however, full withdrawals have overtaken partial withdrawals in terms of unstaked volume.
Following the upgrade and the first round of automatic reward withdrawals, the average balance has now declined to 32.39 ETH, where we expect it to remain, as rewards are automatically transferred back to the staker.
Regular skimming and transferring rewards back to the Ethereum mainnet will increase the effectiveness of stake.
Tracking Exited Stake
As of today, a total of 48,341 validators have exited, amounting to 1.55M ETH ($2.93B). Unsurprisingly, the day after the Shanghai/Capella upgrade saw 14,249 validator exits, which remains the largest daily count. After this peak, exit events quickly tapered off, leveling out to between 300 and 700 per day.
There was also an incident where 11 validators were slashed shortly after the update, attributed to human error by one of the node operators of the liquid staking provider, Lido.
On the other side, over 23k validators are waiting in the entry activation queue, while the exit queue has shrunk down to just 1,837. Observing the two different queues, we see that exit events are offset by new deposits, resulting in zero net change in the active validator count.
However, given the tapering off of exits and the persistently high inflow of new staking entrants, we expect a net increase in validator counts in the near future. The high number of new deposits into the staking pool also explains the absence of significant sell pressure.
Upon analyzing the composition of exited stake, excluding slashed exits, we can conclude that the majority of exits came from centralized exchanges offering staking services.
Kraken alone has withdrawn 15,501 validators, representing 496k out of the 1.55M in total exited ETH (32%). Other notable withdrawals were by Figment with 2,514, and Gate.io with 1,000 validators. The remaining exchanges had fewer than 1,000 exits. It should be noted that Lido has not yet enabled withdrawals.
Out of the 48,341 voluntary exits, just 2,561 (6.6%) were initiated by stakers not associated with centralized staking service providers.
Surprisingly, a large number of deposits (15,522 validators) were made by individual stakers. There is also a continuous stream of deposits from Lido, suggesting sustained demand for liquid staking derivative tokens.
Despite the increased activity around newly exiting and deposited validators, the aggregate composition of the Staking Pool has remained almost unchanged.
Liquid staking provider Lido still holds the largest market share, with 33.5% dominance, followed by the staking services of the centralized exchanges Coinbase with 11% and Kraken with 7.1%.
Recap and Conclusion
Since the Shanghai/Capella upgrade, a significant amount of stake has been withdrawn. Besides the one-time event of the accumulated rewards being withdrawn at once, we saw over 48,000 validators leaving the Ethereum Staking Pool, resulting in 1.55 million ETH being withdrawn.
Despite the ability for stakers to withdraw their accumulated rewards and exit their staked positions from the staking pool, this does not seem to have had a significant impact on market prices. This may be attributed, among other factors, to the high demand for deposits seen during this period, offsetting unstaked and distributed ETH. This trend is expected to continue in the near future, resulting in a net positive flow into the staking pool.
Despite increased activity around both exiting and depositing validators, this has not significantly altered the aggregate distribution of stake dominance among staking providers.
Overall, the results of the analysis suggest that the mechanics of Proof-of-Stake for both incoming and exiting validators have played out as intended, with Ethereum's consensus mechanism remaining stable throughout the process. This is likely to de-risk longstanding engineering challenges, with net positive effects for both the security of the network and the economy built upon it.
Disclaimer
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