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Ethereum Shanghai Fork:
The Next Major Ethereum Upgrade

Already, Ethereum has held its first virtual meeting of the new year, giving more details about their software upgrade, which is supposed to allow the withdrawal of the staked Ether used for the blockchain network. Ether staking has been possible since the switch from Proof-of-Work to Proof-of-Stake consensus mechanism, which was completed in the fall of 2022 and reduced the energy usage of Ethereum blockchain by 99%.

The new upgrade called “Shanghai Fork” is currently expected in March and is supposed to include further upgrades in addition to the withdrawal of the staked Ether. Such a change to the protocol is called a “fork” in technical jargon and this happens whenever the community makes a change to the blockchain protocol, i.e. the set of rules of a blockchain. A distinction is made between a “hard fork” and a “soft fork”, but what is the difference?

What are hard and soft forks?

Soft fork: A “soft fork” refers to minor changes that are mostly made at the code level. Such revisions must be agreed by the majority of the community and replace the previous rules. Because the end outcome is a single blockchain, the modifications are backward compatible with data blocks made prior to the fork. A “soft fork” can be thought of as an update to an app on your cell phone.

Hard fork: A “hard fork”, on the other hand, involves major changes that are no longer backward compatible with previous data blocks. The blockchain is divided into two parts: the original blockchain and the new blockchain, which is subject to new rules. An example of such a split is Bitcoin Cash or Bitcoin Gold. A “hard fork” can be thought of as installing a completely new operating system on your cell phone.

Image Source: Cointelegraph

From Berlin over London straight to Shanghai.

It is noticeable that the Ethereum Foundation often uses city names for its upgrades such as Berlin, London or Paris. But what lies behind the names? In 2021, the Ethereum community and Ethereum developers on Github discussed what names they could use for their upgrades. Finally, the developers and leaders at Ethereum decided on city names where Devcon conferences were held, such as Paris, Istanbul, London, Shanghai, etc., to ensure they wouldn’t run out of names in the near future.

What does the Shanghai fork include?

Stakeholders have not been able to withdraw their staked ETH tokens unless they employed a liquid staking technique, which is one of the most significant obstacles in the Ethereum ecosystem. This is one of the biggest issues. However, when the Shanghai Hard Fork occurs, there will be new rules in effect for anybody who owns ETH.

Generally, in such an upgrade, Ethereum wants to improve its blockchain, which is why various proposals (Ethereum Improvement Proposal – EIP) are considered and then it is decided which ones should actually be implemented with the current upgrade. In the current upgrade, three planned improvements in particular are of great interest: EIP-3651 (Warm Coinbase), EIP-3855 (PUSH0 statement) and EIP-3860 (limit and counter init code). Especially the EIP-3651 proposal is being hailed as a potential game-changer that has the potential to lower network fees for some of the most important network members, the builders.

In addition, developers came to an agreement that they would work on the implementation of the “EVM Object Format” (EOF) in Shanghai. The EOF is a collection of Ethereum Improvement Proposals (EIPs) that upgrade the Ethereum Virtual Machine, which is the environment in which Ethereum is able to carry out smart contract executions:

These are the EIPs: 3540, 3670, 4200, 4570, and 5450 respectively.

The Shanghai Fork as a potential gamechanger?

It is anticipated that Shanghai will encourage an increased number of individuals as well as institutional investors to stake their coins in order to support the Ethereum network and receive yield. It can be assumed that the interest in Ethereum (ETH) will be stronger after the hard fork. This could therefore lead to fluctuations in the Ethereum (ETH) price in the short term as the supply of ETH in the market increases. However, in the long term, this will have a significant impact on the Ethereum blockchain’s path to becoming a sustainable scaling solution. At the same time, the fluid dynamics of staking in the post-Shanghai fork would provide a high-yield opportunity for portfolios with ETH as a tactical asset.

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