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(Kitco News) - Ethereum made a lot of headlines leading up to the Shanghai hard fork and the Capella upgrade on April 12, with the ETH token rallying above $2100 by the 16th before retreating to where it was at the beginning of April.
According to Michiel Milanovic, DeFi Strategy and Product Analyst at ConsenSys, the big move upward in price was largely driven by optimism about the broader implications of the ‘Shapella’ upgrade for the Ethereum blockchain, and there’s much more to come.
“I think similar to what we saw in the last upgrade when we had the merge back in September, there was positive reaction from the wider investment community, from the wider Web3 community, around successful execution on the Ethereum foundation roadmap,” he said. “What we saw at the merge was also positive price reaction. What we're seeing now is likely a follow-up on that.”
Milanovic told Kitco News reporter Ernest Hoffman that the Ethereum community was focused on three key areas in the run-up to Shapella. “The first one is, can the Ethereum foundation execute well on the next major upgrade on the roadmap? That was a success from what we saw in Shapella, so I think that was a positive reaction from the community,” he said.
The second point of focus was withdrawals from long-term validators. “Leading up to the Shanghai upgrade, long-term validators who have staked their ETH for up to two years by that time and were not able to redeem any of the rewards or unstake their ETH,” Milanovic said. “Following the Shanghai upgrade, that changed and they can now finally redeem that ETH and unstake, so post Shapella we're seeing some of those withdrawals starting to take effect.”
The third major factor Ethereum experts were watching closely was the amount of new staking activity after the upgrade. “What we've been seeing so far has been an influx of stakers who are now staking ETH because it likely fits the risk profile better given the lower liquidity risk associated with safety needs now that withdrawals are enabled.”
Milanovic said that one way of figuring out how much of the activity is people staking for the first time and how much is existing validators who unstaked in order to test and are now coming back in is to see what validators who have been on-chain for the past few years are doing.
“The community was expecting large withdrawals following Shanghai but in reality, the validator set is largely split between long-term and short-term validators,” he said. “Short-term validators are mostly the liquid staking providers such as Lido or Rocket Pool or even Coinbase. Following the Shanghai upgrade, a lot of those liquid staking providers are actually betting on setting up new validators rather than withdrawing the ETH, so that speaks to the demand that, at least from a liquid staking perspective, these validators are expecting post-Shanghai.”
Milanovic said the amount of Ether that has been staked since the upgrade has been fairly limited compared to what he’s expecting, because not all staking providers have enabled withdrawals yet.
“There's likely capital still on the sidelines that is waiting to be deployed,” he said. “But that being said, if we look at some of the top institutional staking providers, for example if we look at Stake.US or Kiln, we've already seen over 100,000 ETH being staked in the past two weeks alone, which is more than what they did in all of March.”
He added that from an investor’s perspective, a major factor in deciding whether to participate in staking is whether they will have access to the yield that they can earn on their holdings. “Prior to Shanghai, there was a large degree of liquidity risk associated with staking ETH, because you didn't have the ability to redeem the rewards or withdraw it.” He said that after the successful Shapella upgrade, “we expect that capital to start flowing in.”
Milanovic said that liquid staking providers in particular now have more opportunities for capital efficiency “because you can also use the staked derivative tokens that you get on the back of staking ETH in one of these providers to get additional yield in the wider DeFi ecosystem.”
To learn what Milanovic is expecting from layer-2 protocols after Shapella, and to hear his forecast for institutional adoption of blockchain technology and NFTs, watch the above video.
