Ethereum on-chain data suggests ETH selling pressure could be a non-event after Shanghai upgrade
Ethereum on-chain data suggests ETH selling pressure could be a non-event after Shanghai upgrade
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The upcoming Ethereum (ETH) Shanghai hard fork is scheduled to take place in March 2023, and the upgrade will complete the network’s shift to Proof-of-Stake (PoS) that began during the September 15, 2022 “merge”. Once Shanghai is implemented, previously locked ether will gradually become liquid for the first time since December 2020.
According to on-chain Etherscan data, over 16.6 million Ethers are currently locked in the PoS staking protocol, which was worth $28 billion as of February 16, 2023. Ethereum’s move from Proof-of-Work (PoW) to PoS has started to achieve the original goal of making Ether’s supply deflationary. In the 154 days since the merger, over 24,800 ethers have been burned to make the token deflationary by 0.05% annually.
Key Ether stats since the merger. Source: ultra sound money
At. As of February 16th, the total Ether supply is at 120 million, meaning a little over 10% of the supply will be unlocked with yield rewards, starting with the Shanghai update.
Let’s explore what on-chain metrics can help spot what may happen during the Shanghai upgrade.
Part of the locked ETH is liquid thanks to liquid staking derivatives
To take advantage of the yield premiums prior to the Shanghai update, investors needed to lock their ether and run a reliable node. The minimum wagering requirement of 32 locked ether is completely illiquid, meaning traders have had limited uses for these coins.
Liquid staking derivatives (LSD) allow users to profit from staking ether while retaining the ability to sell the received derivative token on the secondary market. The LSD protocols charged a fee and locked the native ether, giving users another token representing a share of the pool.
Liquid staking derivatives only gained prominence when Lido and other post-merger protocols experienced a cash flow rush. Since Ether staking began, liquid staking has surpassed illiquid staking. On February 13th, 57% of ether staked was liquid versus 43% illiquid.
Liquid vs. illiquid staking. Source: Binance
With much of the locked ether being LSD, investors currently have access to liquidity, which could reduce selling pressure to Shanghai.
Very few stakers are profitable
Back in December 2020, when Ethereum staking opened, the price of Ether was between $400 and $700. Conversely, many investors started staking as Ether neared its all-time high of $4,200. According to Binance:
“We note that a significant amount of ETH (around 2 million) has been staked at prices in the $400-$700 range – this represents the earliest stakers as of December 2020 – a group likely to be illiquid as Liquid Staking was far less well known at the time.”
Due to Ether’s 69% correction since hitting an all-time high, many of the investors who have staked their Ether currently have an unrealized loss.
price at the time of use. Source: Binance
The minority of players who make profits are likely to have strong beliefs in the Ethereum network as the liquidity date was still unknown at the time. With a large number of players making losses and those who are profitable are likely to be long-term investors, the Ether price may not see a massive dump when the tokens become unusable.
Lido overtakes Solo Staker
On January 2, 2023, Lido officially overtook MakerDAO as the highest TVL in DeFi. As of February 13, Lido is also the largest staking company on Ether. With over 5 billion ether staked in Lido, the protocol represents 29.2% of all companies. Remarkably, almost 30% of all players have the option of current liquidity through Lido.
Solo stakers running nodes took the risk of running nodes from home or with a small group. The solo staker is likely to believe that ether is a long-term currency as nodes carry costs and risks. Solo players currently make up 24.9% of all players.
Staked ether by entity. Source: Binance
With almost 55% of all ether staked being held by either solo stakers or Lido, the risk of ether price dumping can be reduced.
While the on-chain data surrounding the Shanghai fork for the Ethereum network may be bullish, some analysts are still predicting the potential for a sharp drop in the price of Ether.
The views, thoughts, and opinions expressed herein are solely those of the authors and do not necessarily reflect or represent the views and opinions of Cointelegraph.
This article does not contain any investment advice or recommendation. Every investment and trading move involves risk and readers should do their own research when making a decision.
