The Shanghai Update has quickly become one of the most eagerly awaited upgrades to the Ethereum blockchain since the merger last September. While the merge significantly altered the Ethereum network's operations, the Shanghai update could potentially have an equally substantial impact, particularly in light of the vast amount of liquidity that will soon be unstaked.

Post-Merger Updates

Firstly, the Shanghai update is a hard fork on the Ethereum blockchain, which means the entire chain will branch off from its current blockchain using a beacon chain. This change allows for more significant improvements to the blockchain, granting access to liquidity staked on the network since 2020.

Releasing the staked Ether on the blockchain will create a considerable shift in the network. With the switch to a proof-of-stake consensus mechanism, staked liquidity has become increasingly essential for the Ethereum network, as validators require 32 Ether to be staked to function correctly within the network.

Gas Fees and the Shanghai Update

Another primary focus of the upgrade is gas fees. The Ethereum network is infamous for its high gas fees, which can skyrocket during periods of high activity, such as Yuga Labs' Otherside Deeds mint. Lower gas fees paid to validators could lead to a slight resurgence in the Ethereum network, which has lost some users to more accessible networks like Polygon for those with lower liquidity.

However, it is essential to note the absence of EIP-4844, known as sharding. Sharding is a proposed update to the Ethereum network that would improve blockchain scalability, crucial for onboarding new users. Currently, it is not part of the Shanghai update.

Staking and Withdrawals

The Shanghai update's significance cannot be overstated. According to a recent report by BeInCrypto, there is approximately $12 billion worth of staked Ether on the network, meaning a massive amount of liquidity –  worth more than the entirety of Polygon – will soon be released.

The majority of these staked tokens are held on Lido, accounting for nearly 73% of the Ether. Following Lido is Coinbase, with about 14% of staked liquidity. These two staking providers alone possess over $12 billion in staked assets.

Impact on Exchanges

With such a substantial amount of liquidity being released, the Shanghai update will undoubtedly impact the market significantly, unlike the merger, which only changed the Ethereum network's backend.

Now, we will witness the effects of $12 billion being returned to investors from 2020 when the crypto landscape looked entirely different before the bull run and NFT craze. Since then, we've seen major protocols collapse, lending businesses go bankrupt, the fall of FTX, and the fall of Silicon Valley Bank, Signature Bank, and Silvergate.

While we do not predict the price, it is reasonable to assume that there will be significant activity on the Ethereum network following the Shanghai update's completion. Hopefully, it will not trigger a liquidity crisis on exchanges like Coinbase and Binance due to the current financial climate.

As it stands, bitcoin is currently the most active cryptocurrency on the market following SVG’s collapse and it wouldn’t be surprising to see a large portion of Ethereum's staked liquidity being converted to bitcoin as a safety measure. However, this is only speculation. Only time will tell what happens following the Shanghai update.