ETH Fire Sale Unlikely After Shanghai Upgrade: Nansen

Unless the Merge sends Ether to the moon, Ethereum die-hards shouldn’t fear a fire sale when the post-Merge “Shanghai” upgrade takes effect next year, according to a new report from crypto analytics firm Nansen.

More than 70% of staked ETH was purchased for more than it is currently worth, Nansen found. Absent a surge in the cryptocurrency’s price, most stakers will have little incentive to sell when Shanghai makes it possible to withdraw their stake.

Merge Slated For Wednesday

Ethereum is expected to transition to proof-of-stake technology on Wednesday in one of the most anticipated events in crypto history. The change is expected to cut Ethereum’s energy consumption by more than 99% while allowing users to contribute to its security by staking their ETH — locking the tokens to earn rewards.

The transition is known as the Merge, because it will merge Ethereum’s original chain, which runs on the same energy-guzzling, proof-of-work technology that secures Bitcoin, with its proof-of-stake Beacon chain, which has been running in parallel since December 2020.

More than $20B worth of Ether amounting to 11% of the supply, has been staked in the Beacon chain to date. But that ETH is locked there until Shanghai, which will enable withdrawals. Shanghai is expected to be activated some six to 12 months after the Merge.

Withdrawal Queue

The update will feature a withdrawal queue designed to prevent a mass sell-off of staked ETH.

“Everyone withdrawing their stake and exiting as a validator would currently take around 300 days with over 13m ETH staked,” Nansen notes in its report.

Nevertheless, validators will be able to withdraw any rewards that have accrued since they began staking, and some have wondered what might happen to the price of the cryptocurrency if validators who could sell were to rush for the exit.

Data compiled by Nansen shows that few stand to make money if ETH is still trading at $1,700 when withdrawals are enabled.

“Looking at the overall picture, however, most of the staked ETH (around 71%) is not in profit at current prices,” Nansen writes.

Illiquid Stakes

Illiquid stakers are likeliest to sell, according to Nansen. That is because “liquid stakers” — those who staked ETH via a third-party liquid staking service, like Lido, Coinbase or Rocket Pool — can effectively exit their position already.

Liquid staking providers offer their users derivative tokens that represent staked ETH on a 1:1 basis and usually trade at par with ETH. Selling those derivative tokens for ETH is equivalent to exiting one’s stake.

Nansen found only 18% of all staked ETH belongs to illiquid stakers who could profit by selling their ETH at current prices.

Billions in ETH were staked when the Beacon chain went live, most of it illiquid, “as the services of the now established liquid staking providers were less known and it is likely that a number of the early stakers preferred to do so themselves,” Nansen notes.

Those stakers stand to profit handsomely, having staked when ETH was trading around $600.

“The approximately 1m locked ETH at this price level could be dripped into the market if they are withdrawn via the unlock queue,” Nansen writes. “However, it should be noted that among these early stakers are strong Ethereum believers and may not necessarily wish to sell their stake (e.g. the likes of Vitalik).”

With just two days left until the Merge, Ether is consolidating around the $1,700 level after hitting a high of $1789 earlier today.