March 2023

Key Insights for this month in Digital Assets : Shapella Upgrade Articles | News | Market Dashboard

March 2023 was marked by a series of banking crises which put further pressure on  the Federal Reserve (Fed) to eventually compelled them to step in with a series of measures to protect the banks and prevent a contagion . In just a week, three banks were shut down and many more were in a liquidity crunch, leading to a domino effect of financial instability.

It started with Silvergate, a bank with $12 billion in assets under management, which chose to liquidate voluntarily on March 8th. This event triggered a bank run on Silicon Valley Bank, which held $209 billion in assets under management, and forced the Federal Deposit Insurance Corporation (FDIC) to intervene by taking over all its deposits on March 10th. The panic then spread to Signature Bank, which had $110 billion in assets under management and was shut down by regulators on March 12th.

The fallout from these crises continued to spread, with Credit Suisse being bought over by UBS, with support from the Swiss National Bank

These events have significantly increased the limelight and pressure on global central banks, especially the Fed,, as they are responsible for ensuring financial stability and preventing such crises. While inflation was the primary problem for all these central banks, now they have to juggle it with a banking crisis that may precipitate the onset of a recession. Do they maintain rates higher for longer to tame inflation, or do they ease policy to prevent a contagion led recession and risk inflation shooting up again. The markets have been pricing the latter (easing of policy), providing positive headwinds to risk assets including digital assets. In addition, the leading digital asset, Bitcoin, has been picking up pace as it is being seen as an insurance against a banking crisis and devaluation of fiat currencies.   

Coming back to Web3 and the digital assets ecosystem, we would like to talk about an important update coming to Ethereum – The Shapella Upgrade!

History of Ethereum Proof of Stake

Ethereum Merge happened in September 2022, transitioning Ethereum from the energy-intensive Proof of Work (PoW) consensus paradigm to resource optimised (albeit economically-intensive) Proof of Stake (PoS) consensus model. With The Merge, the network reduced its energy consumption by 99.9% while decreasing the ETH token issuance by 95%, marking the beginning of a new token economics era. Although The Merge happened recently, staking on Ethereum has been live since the launch of the beacon chain in December 2020, allowing ETH holders to stake/delegate their tokens to the network. However, there has been no mechanism to withdraw this delegated stake since — once locked up on the beacon chain, ETH cannot be withdrawn by the owner (or even the validator). All this is poised to change soon with the implementation of the Shanghai-Capella (or Shapella) hard fork on Epoch 6209536 (April 12th or 13th, depending on which part of the world you are).

Shanghai-Capella Upgrade

The Shanghai-Capella upgrade is doubly named because it is the first simultaneous upgrade of Ethereum’s execution layer (EL) and consensus layer (CL). Shanghai is the name of the EL upgrade and Capella is the name of the CL upgrade. The highly anticipated and now finalised upgrade will enable staked ETH withdrawals (amongst other things) for all validators and stakers, allowing participants to enter and leave the network more freely after Epoch 6209536. 

Why Epoch 6209536? With the exception of the Merge, all previous forks have been triggered by reaching a specific block number. Switching to a timestamp-triggered fork allows for the EL and CL to be upgraded synchronously. Shapella upgrade will implement EIP-3651, EIP-3855, EIP-3860, EIP-4895, and EIP-6049 — 4895 being the prominent ETH withdrawal EIP.

Lay of the Land

Close to 18mn ETH has been staked on the Ethereum beacon chain over the last 2 years. Most of this is now under liquid staking protocols or centralised exchanges (Coinbase, Binance). The major players in the liquid staking sector are retail caterers like Lido and Rocket Pool, and institutional service providers like Codefi Staking, Figment, and Stakefish.

Most stakers (73%) on the Ethereum beacon chain are currently underwater because of the macro-dictated price action of ETH. However, with the token supply heavily getting controlled because of issuance and burn (EIP-1559), the ETH holders are not facing excessive value dilution due to token inflation. Jon Charbonneau has written an excellent article explaining the ETH token dynamics.

Validator Types and ETH Withdrawals

Before we understand the complications around ETH withdrawals in the early days after the hard fork, let’s quickly look at the Ethereum validator types. Ethereum currently has 2 validator types: the older 0x00-type which uses BLS keys, and the newer 0x01-type which is derived from an Ethereum address. Since Ethereum does not use BLS address schemes anymore, the 0x01-type provides a commitment that stakers will be able to withdraw their beacon chain funds to a normal Ethereum account (possibly a contract account) once withdrawals are made available.

With EIP-4895, stakers and validators that have ETH currently locked on Ethereum’s CL, i.e. validator balances, will be able to withdraw it to an Ethereum address. The 3 key features that will be enabled with EIP-4895 include:

  • The ability to update the withdrawal credentials of an Ethereum validator from the older 0x00-type to the newer 0x01-type.
  • Partial withdrawals, or the periodic and automatic “skimming” of earned, CL rewards from an active validator’s balance (in excess of 32 ETH).
  • Full withdrawals, or the reclaiming of an “exited” validator’s entire balance.

Impact on the Ethereum Ecosystem

There has been a lot of chatter about 2 possible scenarios with the advent of the Shapella fork — a massive selloff due to unlocked ETH and institutional deposits due to greater flexibility for asset managers. Both of these scenarios have been taken to the extreme, and the end result might probably be just a mild one as some stakers sell ETH and some holders stake ETH. Withdrawal scenarios will be dependent on the extent of partial and full withdrawals happening.

  1. Pre-withdrawals, below is the average reward per validator based on type and withdrawal eligibility. Tripoli has written extensively about potential scenarios here. As mentioned earlier, since most stakers are currently underwater, it is unlikely that a lot of selling would happen.
  1. Partial Withdrawals are dependent on how many 0x01 validators unlock their rewards. Only 16 validators can withdraw per block and only 0x01 credentialed validators are eligible for withdrawals. Therefore, there is a time and amount factor associated with potential selloffs.
  1. Full withdrawals are dependent on how many validators shut down operations and exit with their ETH. Only 8 validators can be churned out of the system per epoch (1 epoch = 6.4 mins. = 12s per slot * 32 slots). It is highly unlikely that other than some solo stakers, people would exit the validator set en masse.

Structural Impacts

Because of live withdrawals, there will be changes to DeFi, PoS Yields, and Gas Prices (potentially), amongst smaller things.

  • There will be more leveraged positions available on liquid staking derivatives (LSDs) due to LSDs’ parity with ETH price. This will lead to better capital efficiency but higher DeFi systemic risk as LSDs become more prominent as collateral.
  • The staking APY would go down as more ETH is staked directly or indirectly (via liquid staking). A lot of people have been sitting on the sidelines, waiting for withdrawals to become active. These people would join the staked ETH bandwagon.
  • With more staked ETH (assume 50 million ETH), the average gas price would need to increase (to 32 Gwei) to offset the net issuance for ETH to be deflationary. However, the rising gas price will make Ethereum expensive again, which is an undesired outcome to offset the issuance. Speculatively, less than 0.3% inflation per year is not a bad thing as such if the network usage and the token utility continue to grow at lower transaction costs.

The web3 world would probably never talk about withdrawals on PoS chains again after April as this big event will quickly turn into a non-event when we look back at it later this year.

Beyond Shanghai

At the #157 All Core Developers Execution call, the Ethereum core developers announced that the Cancun-Deneb upgrade slated for November 2023 will include a much-awaited scalability solution, proto-danksharding (EIP-4844). EIP-4844 is a code change designed to significantly reduce the cost (by > 20x) of layer-2 rollups by introducing blob transactions on Ethereum. The EVM Object Format (EOF) upgrade is also expected to go live in the Cancun fork. EOF is a bundle of several optimizations to Ethereum’s EVM, aimed at helping developers to easily and efficiently test and deploy code. There are several other potential inclusions — EIP-1153 (Transient Storage), EIP-2537 (BLS Precompile), EIP-4788 (EL-CL Data Accessibility), and EIP-6493 (Simple Serialisation Signature Scheme) — which are yet to be finalised after the Shapella upgrade.


  • Pranav Sharma, Founding Partner, Woodstock Fund, was on a panel at the Wealth Today Summit. He shared his views on alternate investment strategies and talked about the emerging trends in web3 and digital assets.
  • Prashanth Swaminathan, Partner and Co-CIO, Woodstock Fund, was on a panel at the Namaste Web 3.0 event organised by CoinDCX and Forbes India. The panel discussed various opportunities in web 3.0 and how India can utilise its immense potential to become the global leader in the space.
  • Himanshu Yadav, Founding Partner, Woodstock Fund, was on a panel at the World Blockchain Summit at The Atlantis, Dubai, where he shared his thoughts on “How VCs are looking at Digital Assets Investments”
  • Adam Mastrelli, Partner (US), Woodstock Fund, was a panellist at the “Digital Assets Symposium” at the Milken Institute Center for Financial Markets. The panel had a great time discussing how Web3 could change the landscape of financial products and how we are looking at the digital assets market to evolve in this decade.
  • Woodstock’s Tech Team did a Twitter space on Ethereum Shanghai Upgrade. You can check out the recording.
  • We recently published an article on our blog – An Introduction to Ordinals and Subscriptions.
  • We conducted a masterclass on “Top Web3 Ideas for 2023” that talked about some key themes that we are excited about, and if you are a founder building on these ideas, feel free to reach out to us.

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