The Shanghai upgrade, tentatively scheduled for April 13, will allow validators to withdraw from the beacon chain and withdraw funds for the first time. Relevant expectations are superimposed, and the market once again focuses on the Liquidity of Ethereum. After the Shanghai upgrade is completed, will there be a wave of selling, whether there will be large fluctuations in currency prices, what is the future prospect of the Ethereum pledge track, and what is the trend of pledge income? This article combines Ethereum currency prices, deflation rates, pledge rate trends, supply rates Trend and other data, analyzed and discussed, the conclusions are as follows:
- After the Shanghai upgrade is completed, there may be a certain selling pressure (partial withdrawal) in the short term, and this part of the selling pressure will have an immediate effect on the market;
- Only 40% of Ethereum pledgers (Liquidity pledgers) are willing to sell. The cost of these 40% of Ethereum pledgers is relatively low, which will bring a certain amount of selling pressure, but this process is slow. In extreme cases It takes 125 days to withdraw all staked Ethereum;
- The pledge rate of Ethereum can continue to grow in the next few years, and the growth rate of the pledge rate will slow down after reaching a critical value;
- Without considering nesting and leverage, the rate of return on Ethereum staking will decrease as the rate of Ethereum staking increases. However, with the continuous development of the blockchain industry and the development of the Liquidity staking track, more games are derived. The Ethereum pledge yield will be higher, and the corresponding Ethereum pledge rate will be higher than expected.
Impact on Ethereum Price
At present, about 60% of Ethereum is pledged to service providers that provide mortgage Liquidity Derivatives, and only about 40% of Ethereum belongs to independent verifiers and pledge pools. The impact of these two in the Shanghai upgrade is different.
1. Partial and full withdrawals
Withdrawals are divided into partial withdrawals and full withdrawals.
Partial Withdrawal: Means that balances (earned rewards) over 32 ETH will be withdrawn directly to an Ethereum address, ready for immediate use, and validators will continue to be part of the Beacon Chain and validate as expected;
Full Withdrawal: means that the validator exits completely and is no longer part of the beacon chain, and the validator's full balance (32 ETH and any other rewards) is then unlocked and allowed to be used after the exit mechanism is completed.
It should also be pointed out that the beacon chain validator contains a field called the withdrawal credential. The first two bytes of this credential are called the withdrawal prefix. This value is currently 0x00 or 0x01. validators with 0x00 withdrawal credentials will not be able to withdraw immediately, and these validators will need to migrate to 0x01 for partial and full withdrawals.
2. Possible impact of partial withdrawals on Ethereum price
The rate of partial withdrawal is 16 withdrawal requests per block, and currently 1 block per 12 seconds, 5 blocks per minute, 300 blocks per hour, and about 7.2k blocks per day; So assuming every validator is updated to 0x11 then expect partial withdrawals of about 115k validators per day. According to beaconcha.in data, there are 558,062 verifiers so far, so it takes about 4 to 5 days to withdraw part of the withdrawal. The average balance of each verifier is 34 ETH, so it is estimated that the pledgers Earned approximately "(34 – 32) * 558062 = 1116124 ETH staking rewards (counted as 1.1 million). According to the current Ethereum price ($1800), it will be worth $1.98 within 4 to 5 days About b ether coins are released, as shown in the figure below, according to CoinGecko data, the current total daily spot transaction volume of Ethereum is $10.4b, so the total value of partial withdrawals is about 19 of the total daily spot transaction volume of Ethereum %, released within 5 days on average, and the daily release amount is 3% to 4% of the daily spot trading volume.
This part is the predictable selling pressure, because unlike the full withdrawal, which can be exchanged back to Ethereum through Liquidity staking Derivatives before the Shanghai upgrade, the pledge reward part (partial withdrawal) can only be withdrawn after the Shanghai upgrade, so this Part of it is likely to have a certain selling pressure, but the impact of some withdrawals on currency prices is relatively short-term, and will not affect the price of Ethereum in a long-term and continuous manner; secondly, under the current price of Ethereum, consider Considering the other on-chain behaviors of POS participants (they usually continue to compound interest), a considerable number of long-term Ethereum pledgers and holders will not sell at this time.
Going a step further, not all validators actually have 0x01 credentials. As shown in the figure below, according to Data Always data, as of 2023-01-29, about 20% of new verifiers have not set 0x01 credentials.
In addition, according to the animation in the Date Always study, the conversion peak of 0x00 will be reached in the early days of the Shanghai upgrade and last for about two days, not immediately when the Shanghai upgrade is completed; In extreme cases, Day 1 should see partial withdrawals of around 110k ETH (excluding Lido 0x01 validators).
3. The possible impact of full withdrawal on the price of Ethereum
Full withdrawals and partial withdrawals have the same priority and are in the same withdrawal queue as partial withdrawals. When a partial withdrawal is in progress, if the validator is marked as "exited", then all of the balance + rewards will be executed Refund. However, different from partial withdrawals, the rate of full withdrawals is more restricted. As shown in the following two figures, the current full withdrawal loss limit is 8, and the maximum daily withdrawal is 57.6k ETH, which has been pledged in total About 18M Ethereum, of which LSD and CEX accounted for 60%. Since most of this part has secondary market exit channels, it can be assumed that only another 40% of the Ethereum willing to exit after the upgrade in Shanghai participated in the pledge, that is, 7.2 M, so assuming that there are no more user deposits after the Shanghai upgrade in the ultra-extreme situation and the daily withdrawal amount reaches the maximum, then it will take 125 days for all the pledged Ethereum to be completely withdrawn.
As mentioned above, the two categories that account for 60% of the supply are LSD and CEX, most of which have issued mortgage Liquidity Derivatives, such as stETH, cbETH, rETH, bETH, etc.
Taking stETH as an example, the current exchange rate of stETH to ETH is 0.9996, and the price difference is very small. Therefore, if the pledger wants to sell, he can directly convert the Liquidity Derivatives into Ethereum in the market and sell them without waiting for Shanghai to upgrade. Because of this, the cost of pledged Ethereum is actually very scattered and constantly changing. Many people hold stETH not by staking ETH , but by trading in the secondary market. of. For these 60% of pledgers, regardless of the oversold behavior caused by market selling pressure, the Shanghai upgrade will not have a large impact on them.
There is also a view in the market that large pledgers may sell at a discount because they are worried about the lack of Liquidity of Derivatives , so they will wait for Shanghai to upgrade and exit the pledge before selling. This concern is not unreasonable, but we look back at the historical price of Ethereum, as shown in the figure below, we can see that there was a sharp discount between March 2021 and June 2022. In March 2021, it was because At the high point of the market, most of the people who sold this part were users who pledged at the end of 2020, and they cashed out here; the discount in June 2022 was due to the 3AC and FTX incidents at that time, which caused some institutions to sell a large number of stETH and caused the price to rise. It can be seen that for investors with large capital volume, there will still be selling behavior in the case of insufficient Liquidity, which depends on market conditions rather than concerns about Liquidity, so the future of Ethereum The possibility of a decline is entirely attributable to incorrect expectations of a Liquidity crunch.
4. The impact of the cost price of Ethereum deposits on the price fluctuation of Ethereum after the upgrade in Shanghai
As shown in the figure above, there are currently more pledgers whose deposit costs are in the "underwater state" than in the "profit state". Therefore, there are two views in this regard: one of them thinks that these losers will propose deposits to stop losses, and the other A perceived loss is more likely to be held due to "loss aversion".
In terms of Ethereum pledge, for most of the Ethereum pledgers (60%), there is no cost problem, because as mentioned above, before the Shanghai upgrade, it is also possible to exchange stETH for The ETH is sold, so for the 60% stakers, it doesn't matter.
But for the other 40%, most of them are some early participants in Ethereum POS pledge, and the cost price of this part of people is relatively low; the Ethereum beacon chain Mainnet deposit contract address was first launched in November 2020, when The price of ETH is only about $400-$500, and the Ethereum tokens will not reach today's price until the end of March 2021. Therefore, it may be guessed that these pledgers account for a large part of "In the Money" in the above picture, and such The cost price has also increased by 3~4 times to today's $1800, so this group of people may bring some selling pressure. And due to market sentiment, the selling pressure of this part of people may cause FUD sentiment in the market, causing 60% of pledgers to panic sell. However, as mentioned above, there is a limit rate for the withdrawal of Ethereum pledges, so these The sell-off reaction of stakers is also relatively slow in the market.
Impact on Ethereum pledge rate and pledge rate of return
The above mentioned the possible impact of the Shanghai upgrade on the price of Ethereum. In addition, the impact of the Shanghai upgrade on Ethereum will also be reflected in the pledge rate and pledge yield of Ethereum.
1. Factors affecting the pledge rate of Ethereum and the pledge rate of return
After analysis, we believe that the pledge rate of Ethereum will be higher after the Shanghai upgrade, but it is difficult to achieve such a high pledge rate (60%-80%) as other public chains; in addition, with the increase of the pledge rate, Without counting Matryoshka, LSDFI and other playing methods, the pledge rate of return will drop.
The following three factors may favor the growth of Ethereum’s pledge rate.
i) As shown in the figure below, the pledge rate of Ethereum is currently only 15.52%, while other public chains have a pledge rate of up to 73%. Therefore, it can be judged that the current pledge rate of Ethereum must be low and has a huge room to grow.
ii) Before the Shanghai upgrade is completed, the Ethereum pledged on the beacon chain cannot flow, and a large amount of funds are locked on the beacon chain, resulting in inflexible use of funds, which may reduce users' desire to pledge; and with the upgrade of Shanghai Once completed, the Liquidity risk problem will be solved. The Ethereum pledge will achieve a closed loop from deposit to withdrawal, and the exchange rate of mortgage Liquidity Derivatives tokens to Ethereum token prices will return to 1:1, which may attract a large number of institutions. And the pledge of capital, but in fact, this point does not have much reference value in the current pledge environment where LSD is prevalent.
iii) Ethereum is currently in a state of deflation, and the current inflation rate is -0.62%. According to the relationship between supply and demand, this shows that the value of Ethereum is constantly increasing over time, and the high pledge rate of other public chains is precisely because of Their pledge rate of return is higher, and the result behind this is the continuous issuance and depreciation of tokens. Therefore, from this point of view, for long-term pledgers, it may be a more attractive way to pledge funds on Ethereum. Moreover, it is still in a bear market, the market is less active, and Ethereum is already in a state of deflation. In the subsequent bull market, the daily consumption of gas will be more, and the amount of deflation of Ethereum will be even more impressive.
However, the Ethereum pledge rate will not grow infinitely, we believe:
i) Ethereum cannot provide as high a pledge rate of return as other public chains, so perhaps more users are more inclined to pledge their assets on a public chain with a higher rate of return.
ii) In addition to not having an advantage in the pledge rate of return compared with other public chains, the pledge rate of Ethereum itself will decrease with the increase of the pledge rate (regardless of the playing methods such as nesting dolls and LSDFI) . As shown in the following two figures, the pledge rate and pledge yield of Ethereum are in a dynamic balance. According to this model, when the pledge amount of Ethereum reaches 44.3M ETH , the annualized yield is only 2.5%, 44.3M and now The pledge amount of 18.2M has increased by about 2.5 times; the fact is that such a pledge rate of return is not enough to attract most users, so this article predicts that the pledge rate of Ethereum will double after the current pledge rate. Slow down the growth rate.
2. Forecast of Ethereum supply, pledge rate, and pledge rate of return
As shown in the figure above, it can be seen that since September 2022, the supply growth of Ethereum has flattened or even declined. The upward trend in volume has not slowed down.
Based on this, we believe that:
In a bear market where market transactions are not active enough, the growth of Ethereum supply gradually slows down and shows a downward trend. It can be expected that with the arrival of a bull market, the sharp increase in transaction volume and the increase in gas consumption will further accelerate the deflation of Ethereum. The pledge rate of Ethereum will rise in the context of supply deflation. However, as the pledge rate of Ethereum continues to increase, the pledge rate of return of a single node will decrease. When the pledge rate of Ethereum reaches a certain value, it will enter the gap between the two. state of dynamic balance.
However, we believe that with the continuous development of the blockchain industry, Liquidity staking, as a DeFi Lego component, builds and derives more gameplay on it, and the corresponding Ethereum staking rate will be higher than expected. According to the model calculation, when the pledge amount of Ethereum reaches 44.3M, the pledge rate of return will drop to 2.5%; however, LSD will bring many new ways of playing including revolving loans, nesting dolls, etc. Therefore, with the LSD track and block With the development of the chain industry, a more attractive comprehensive pledge rate of return will push the Ethereum pledge track to a higher dynamic balance.
