Weekly SmartPills #3
ETHEREUM AND SHANGAI: A VERY EXPECTED UPDATE
The Ethereum Blockchain: The Road to Scalability and Institutional Adoption:
Since its creation, the Ethereum team has introduced various updates to improve the functionality of its ecosystem. In 2022, after the update called “the Merge,” the Ethereum Blockchain began the transition from a proof-of-work system to a proof-of-stake system. This transition called “Shanghai Fork” or “Shapella,” which is the combination of ‘Shanghai’ and “Capella,” two different components of the upgrade. Ethereum's upgrade to Shanghai is undoubtedly one of the most important events in the cryptocurrency industry in 2023.
This transition was completed last Wednesday, Actually the name comes from the city hosting the Devcon 2 conference and Capella is the brightest star in the northern constellation of Auriga. In 2022, after the update called “the Merge,” the Ethereum Blockchain began the transition from a proof-of-work system to a proof-of-stake system. The network thus has two layers: the execution layer and the consensus layer. The former was the main one on which Ethereum ran before The Merge, while the consensus layer was known as the Beacon Chain. The update takes part in both levels. Shanghai on the execution layer, while Capella is on the consensus layer. Although there are several EIPs (Ethereum Improvement Proposals) within this update, there is one really key one, which is EIP-4895.
What is EIP-4895 and why is it crucial?
The former was the main one on which Ethereum ran before The Merge, while the consensus layer was known as the Beacon Chain. The update takes part in both layers. Shanghai on the execution layer, while Capella is on the consensus layer. Although there are several EIPs (Ethereum Improvement Proposals) within this update, there is one really key one, which is EIP-4895. The Beacon Chain is protected by PoS. To maintain its integrity and proper functioning it needs validators. Therefore those who wanted to participate in the future of Ethereum could “stak” 32 ETH to protect the chain. Before the Shanghai update there were a good 18.1 million ETH blocked. Validators from their account would earn a reward for protecting the network. The only problem was that until last Wednesday these blocked ETH could not be withdrawn except until the Shanghai update with EIP4895. Update in hand now validators will be able to withdraw their ETH making it effectively liquid. There only other enhancements such as EIP-3651 ( reduce gas costs associated with maximum value withdrawable payments when accessing the COINBASE address, not the well-known US marked exchange), EIP-3855, EIP-3860 and so on.
Impact on the DeFi Ecosystem: Stake, Yield Farming, and Liquid Staking.
The Shanghai (Shapella) update is a key development for Ethereum on its path toward achieving security, decentralization, and scalability. Those who will definitely be affected by the update are all the dapps that offer STAKE and YIELD FARMING services. These include LIQUID STAKING platforms as well. We can speculate on the possible consequences by imagining that with the ability to deposit and withdraw at any time, these DAPPs could develop new ways to maximize rewards. In addition, the retail investor would feel more comfortable being able to exit the stake whenever he or she wants, creating a potential inflow into the same. If you think this is how it ended, you are wrong. Ethereum is already a powerful platform, but it is constantly being upgraded. An ambitious series of updates will make continuous changes to the network with the aim of increasing its performance. These updates are defined in a precise ROAD MAP and each of these is a set of EIPs. On the horizon we have The Surge, The Verge, The Pure, The Splurge and proto-Danksharding. In short, it is TO BE CONTINUED...