One of the biggest milestones in Ethereum’s history took place in September 2022, when the network switched from a proof of work (PoW) consensus mechanism to proof of stake (PoS). Dubbed “the Merge”, it reduced Ethereum’s energy usage by around 99.95% and added infrastructure which will enable scalability updates that were unattainable under PoW. 

With the Merge successfully implemented, attention turned to what’s next on Ethereum’s roadmap. Expected in March, the Shanghai upgrade will allow validators to withdraw ether staked to participate in the PoS consensus mechanism. However, updates directly impacting the network’s scalability have been pushed back.   

Here's a summary of what to expect from the Shanghai upgrade and what else features on Ethereum’s roadmap in 2023. 

The Shanghai Upgrade: Ethereum’s next milestone  

During the Merge, the Ethereum mainnet (also known as the execution layer) combined with the Beacon chain, the PoS blockchain launched in 2020 to test the new consensus mechanism.  

The energy-intensive computational tasks used to verify transactions under PoW are no longer required. Instead, participants lock up 32 ether in a smart contract, the process universally referred to as staking, to register as a validator. Validators secure the network and verify transactions, receiving newly-minted ether as a reward. 

A validator acting as a block proposer is randomly chosen to create a new block, and other validators verify its transactions and signature (which confirms the integrity of the data). Then a committee of at least 128 validators submits a collective vote, known as an attestation, in support of adding the new block to the chain. 

To date, more than 514,000 validators- including Finoa Consensus Services, which runs validators on Stakewise- have staked over $26 billion of ether (as of 8th February 2023), but they haven’t been able to withdraw their tokens. The Shanghai upgrade, Ethereum Improvement Proposal 4895 (EIP-4895), addresses this issue by adding withdrawal functionality. EIPs are updates to the Ethereum network, which the community and a board of developers must review and approve. At the Ethereum Core Developers meeting on 8th December 2022, the decision was taken to roll out EIP-4895 in March this year. 

Shanghai was originally meant to incorporate other network updates, including the introduction of proto-danksharding, which we explain below, and several updates to the Ethereum Virtual Machine (EVM), the programme responsible for executing smart contracts. But the developers decided at the December meeting to postpone these updates so they could prioritise EIP-4895. When asked for a progress report, Ethereum core developer Marius Van Der Wijden told Decrypt in January ‘things are looking great…I’m not aware of any issues that could delay Shanghai at this moment’. The first test withdrawal took place on 12th January, and developers launched a full testnet- a blockchain used for testing upgrades- on 23rd January. Van Der Wijden declined to commit to an exact release date.  

Shanghai’s impact on liquid staking protocols 

The threshold of 32 ether prohibits some holders from participating in Ethereum’s consensus mechanism. That’s where liquid staking protocols like Stakewise come in, as they reduce the barriers to entry by allowing holders to stake a fraction of ether. They also provide liquidity for assets locked in smart contracts in the form of a liquid staking derivative (sETH2 in the case of Stakewise) which holders can trade. 

Roughly 13% of outstanding ether is currently staked, a relatively low proportion compared with protocols such as Cardano and Solana (both 71%). However, once Shanghai goes live and validators can withdraw their tokens, Ethereum’s staking ratio should reach similar levels as other leading protocols. A sizeable share of these tokens is expected to be staked via liquid staking protocols (which already account for 32% of total staked ether).  

Beyond Shanghai: proto-danksharding (EIP-4844)

As mentioned above, proto-danksharding (EIP-4844) was intended to be introduced as part of the Shanghai upgrade to help the Ethereum network scale. Developers haven’t confirmed a new launch date yet, but it could potentially roll out later in 2023. 

Sharding is a technique commonly applied in computer science. In terms of blockchain technology, it involves breaking a chain into smaller sections called shards to reduce congestion and increase transactions per second. Each shard stores a part of the overall chain’s data and processes a portion of transactions. To put sharding in context, it would split a transaction of $100,000 across 10 shards processing $10,000. 

Danksharding explained

Danksharding, named after researcher Dankrad Feist, is a new type of sharding designed for Ethereum. It introduces the concept of the merged fee market: while sharding has a set number of shards with distinct blocks and proposers, danksharding only has one proposer. It also establishes proposer/builder separation to limit the system requirements on validators. Block builders create new blocks, which proposers verify using a sample of data, a process known as data availability sampling. Oracles, which connect blockchains to external data sources, can also act as builders. 

The Ethereum network isn’t in a position to implement danksharding yet, so proto-danksharding, which takes its name from researcher Proto Lambda, lays the necessary groundwork, such as specifying verification rules. The main feature of EIP-4844 is the introduction of blob-carrying transactions which are similar to regular transactions but comprise an additional piece of data called a blob, short for binary large objects. Blobs offer two benefits: 

  • They’re cheaper than call data, the transaction data currently sent to smart contracts to execute a transaction 
  • They increase scalability because the EVM can’t access the data, so blob-carrying transactions don’t compete with existing Ethereum transactions.

It’s worth noting that Ethereum’s source code is open source, meaning it’s freely available for anyone to modify. You can find it on GitHub where you can explore the specifications of the PoS mechanism and view the EIP repository. The community of core developers plays a crucial role in contributing to the code and maintaining the network.  

Final thoughts

Having supported the development and implementation of Ethereum’s PoS consensus mechanism by locking up ether – in some cases for over two years – the Shanghai upgrade allows validators to finally withdraw their tokens, including any rewards accrued. This upgrade should boost the usage of liquid staking protocols such as Stakewise, of which Finoa is a supporter. However, further updates designed to improve the scalability of the Ethereum network have been postponed, with proto-danksharding expected to be introduced later this year.