Ethereum Shanghai Hard Fork — What’s In? What’s Out?

Moonrock Capital
5 min readDec 14, 2022

The last Ethereum All Core Devs meeting of the year took place and the main topic was the next hard fork called Shanghai. Until this last event it was not clear, which Ethereum Improvement Proposals (EIPs) would be included. In this article we will cover the two most interesting news from the meeting and what this means for Ethereum.

EIP-4844 Is Out

One of the most discussed topics for the Shanghai hard fork was the implementation of EIP-4844 or “The Proto-Dankshading Proposal”. It is now official, that this proposal will be implemented at a later stage. Tim Beiko, core developer at Ethereum, wrote in a thread on Twitter, that everyone agreed on seeing Shanghai happen quickly and avoid potential delays if EIP-4844 were not be ready in time.

What Is EIP-4844?

The proto-dankshading protocol was created by Vitalik Buterin and other programmers from the Ethereum ecosystem. The main purpose of this proposal is to reduce gas fees for rollups without sacrificing decentralization. Gas fees of rollups like Arbitrum or Optimism, could be reduced by up to 10–100 times.

EIP-4844 proposes an interim solution until Ethereum 2.0 is complete. The proposal explains how to divide transaction information without actually implementing any sharding, including verification rules and transaction format.

The most important feature of EIP-4844 is the blob, which is a new type of transaction. It is similar to a regular transaction, but it only carries one extra piece of information — known as the blob. A blob is a large package of data (around 125 KB). However, a calldata transaction containing the same data would be more expensive to execute. In contrast, the EVM cannot access the data stored in a blob. It can only see it, but not verify it.

Validators and users can download these blobs. In proto-danksharding, data bandwidth is limited to 1 MB (instead of 16 MB). We’re all familiar with Ethereum’s scalability issues, and this change in the way data is transferred makes a huge difference.

The Impact Of EIP-4844

Each block space on the Ethereum blockchain can accommodate transactions of up to 90 KB. If the gas fee model were modified, a block could be up to 18 MB in size. However, this model is too expensive for both users and validators. It is possible to include more transactions without straining the network by creating a dynamic fee market. EIP-1559, which is a hybrid system that incentivizes miners and burns ether with each network transaction, was one of those proposals.

EIP-4844 adds to this existing system by limiting the maximum number of blobs in a block. They are stored on the consensus layer, not the execution layer and only require confirmation from the EVM.

The Ethereum community often calls EIP-4844 the “stop-gap solution” and there are two different ways to apply it. The first one would be to lower the gas cost of the existing calldata, which are used by rollups or to select a format, that will be used for sharding the data, but not yet shard it. EIP-4844 is the solution for this.

We now have to wait probably until the fall of 2023 for an EIP, that will definitely help scaling Ethereum on its way to ETH 2.0.

Staking Withdrawals Is In

Data compiled by Dune Analytics indicates that there is approximately $19 billion worth of ETH staked on the network, so it was not surprising that Ethereum developers agreed, that ETH withdrawals would indeed be included in the Shanghai upgrade. Even prioritized over implementing the “Surge” upgrade with EIP-4844. With the Shanghai upgrade participants will now be able to withdraw their staked ETH for the first time.

Staked Ethereum

In September 2022, Ethereum switched its consensus mechanism to a proof-of-stake. Investors has already been able to stake ETH on the Ethereum blockchain since November 2020, with the release of the ETH deposit contract, but have not been able to withdraw their staked ETH.

How Withdrawals Will Work

In EIP-4895, validators will be able to push withdrawals from the Beacon Chain to the Ethereum Virtual Machine. A validator must exit the validator set, or queue, before withdrawing all their ether. As long as the validator’s balance post-withdrawal is at least 32 ether, they can remain in the validator set and withdraw their staking rewards. Withdrawing ETH involves a new transaction type called a “withdrawal operation”, which is different from a normal transaction. Whenever the EVM executes a regular transaction, a transaction fee is charged, which can, on occasion, result in the transaction failing. However, a withdrawal operation is unconditional and cannot fail. Instead of an EVM execution, they are a balance update of +32 ETH to the receiving wallet to avoid the complexities and potential failures that come with a normal transaction. The execution layer processes them immediately after the beacon chain requests them, since they are just a balance update.

Long Term Effect For Ethereum

There has been debate over whether unlocking withdrawals from the staking contract will have a positive or negative impact on ETH. Over 11% of the supply has been locked up and you have to look on both sides of this debate.

On the bearish side a big amount of capital has been locked, that could now potentially been unlocked, which could lead to sell pressure if economic conditions worsen.

It is important to mention, and this is the more bullish side of the argument, that the release of ether will be a very slow one. Only 6 validators can exit the validator set per epoch (every 6.4 minutes). This means, that it would take over a year for all validators to exit the set. Additionally, many of those who have locked up their ETH are likely long-term believers in the network and may not want to miss out on staking rewards. Furthermore, liquid staking tokens like stETH and rETH already exist, providing an opportunity for people to earn staking rewards and sell them if they choose. The opening of withdrawals may also attract interest from institutional investors. Overall, the effect on ETH is uncertain, but there are valid arguments on both sides of the debate.

Conclusion

Overall, Ethereum has a lot of exciting things lined up for the future in terms of features to be added, scalability and security improvements, and cleaning up the network itself. However, there is a long way to go on the roadmap, and many fixes and features still need to be put into place before entering its next stage. The Shanghai Upgrade will occur sometime in early 2023 and will set us up nicely for the future of a post-Merge Ethereum.

Who We Are

Moonrock Capital is a Blockchain Advisory and Investment Firm, incubating and accelerating early stage startups since 2019.

Website: https://www.moonrockcapital.io

Twitter: https://twitter.com/MoonrockCapital

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Moonrock Capital

Moonrock Capital is a Blockchain Advisory and Investment Firm, incubating and accelerating early stage startups since 2019. https://www.moonrockcapital.io