When Vitali Buterin announced the Ethereum Merge as successful in September 2022, it was the crucial step in moving the Ethereum network from a proof-of-work to a proof-of-stake mechanism.
The merge transitioned Ethereum from a mining-based proof-of-work (PoW) blockchain to a more energy-efficient, scalable proof-of-stake system. Prior to the merge, Ethereum used a proof-of-work consensus mechanism, where miners with specialized devices competed against each other for the right to add new blocks to the blockchain.
With the new Proof-of-stake mechanism this consensus is achieved through incentives rather than competition. In proof-of-stake, validators dedicate Ether as collateral, which can be destroyed if the validator behaves dishonestly, for the chance to add a block to the chain.
The merge formed the basis for several future updates to the Ethereum blockchain. The first of these improvements is the so-called Shanghai upgrade and will include certain expected features that were not available with the merge. In this article, we are going to highlight the main features and the impact that this will create.
The Shanghai Upgrade
We expect that Shanghai upgrade will improve the performance and scalability of the Ethereum network. The update is intended to increase the block size limit, which will allow more transactions to be processed per second, and reduce the cost of gas, which is used to pay for transactions on the Ethereum network. Additionally, the update is expected to improve the security of the network by making it more resistant to certain types of attacks.
The overall motivation for the Shanghai Ethereum update is to make the Ethereum network more efficient and more attractive to users and developers. The upgrade could also affect the demand for Ether as a means of paying for gas, the fee required for executing smart contract on the Ethereum network, as the upgrade will reduce the cost of gas, which could make it more attractive to users and developers.
Technical Impact
The Shanghai Ethereum upgrade, also known as Ethereum Improvement Proposal (EIP) 1559, foresees the following key technical changes:
- Block size limit increase: The block size limit will be increased from the current limit of 12.5 million gas to a dynamic limit based on the median gas price of the previous 100 blocks. This will allow more transactions to be processed per second and reduce the cost of gas.
- Base fee adjustment: The base fee for transactions will be adjusted based on the demand for block space. This will help to reduce the cost of gas and make it more predictable for users.
- Burn mechanism: A new mechanism will be introduced that will “burn” a portion of the base fee, meaning that it will be permanently removed from circulation. This will help to reduce the overall supply of Ether and increase its value.
- Replay attack protection: The upgrade will include replay attack protection, which will make it more difficult for attackers to execute double-spend attacks on the network.
- State rent: The upgrade will include a mechanism for state rent, where users will be charged for the storage space, they use on the Ethereum blockchain.
The Shanghai Ethereum upgrade is still under development and is expected to be implemented in the near future, with the exact date not yet confirmed.
Potential Price Impact
The impact of the Shanghai Ethereum update on the price of ETH is difficult to predict and can be affected by many factors. The update is expected to improve the performance and scalability of the Ethereum network, which could increase its overall value and attract more users and developers. However, the cryptocurrency market is highly volatile and subject to a variety of influences, such as global economic conditions, regulatory changes, and investor sentiment. Additionally, the full impact of the update may not be felt immediately and could take time to be fully realized. Therefore, it is hard to estimate the exact impact on the price of ETH, some analysts predict that it could have a positive effect but it is not guaranteed.