Shanghai upgrade is live, Sustained Arbitrum momentum

1. Ethereum ships the Shanghai upgrade without hiccups

The Facts:

• Ethereum’s highly anticipated Shanghai upgrade completed successfully on April 12th with a healthy network participation and no hiccups.
• The upgrade finally enabled withdrawals of staked ETH and accrued staking rewards after a two-year lock up period.
• Since the Beacon chain genesis block, 561k validators staked more than 17.9m ETH and accrued ~1m ETH in rewards.
• The upgrade marks the completion of Ethereum's transition to PoS.
• Following the upgrade, withdrawal activity picked up as expected and as of writing, ~264k ETH were withdrawn of which 255k ETH stem from partial withdrawals, a marginal amount therefore from full withdrawals that currently amount to an exit queue length of around 15 days.
• Partial withdrawals account for accrued staking rewards in excess of 32 ETH while full withdrawals account for the entire balance including the underlying principal and accrued rewards.

Our take:

• The potential price impact of the upgrade was vividly discussed within the community as concerns grew due to substantial supply being unlocked with Shanghai.
• Yet these concerns did not materialize as sell pressure from exiting entities remained way below demand leading to a sharp breakout to the upside, shrugged off the current risk-off sentiment and uncertain macro conditions.
• As partial withdrawals run out after a couple days post-Shanghai, full withdrawals will arguably induce almost negligible sell pressure in the range of Ethereum’s previous daily PoW issuance.
• The Shanghai upgrade is structurally bullish for the Ethereum network as withdrawals de-risk staking by reducing technical and liquidity risks and increase capital efficiency of ETH that sat idle previously.
• It might potentially morph ETH into a liquid commodity and internet bond that features the risk-free rate of the decentralized and permissionless financial ecosystem.
• We expect the upgrade to go hand in hand with a substantial confidence boost and hence attract new stake that was formerly hesitant.
• Notably, Ethereum’s staking ratio ranges lowest among most smart contract platforms and hence, its staking ratio should increase substantially moving forward yielding improved network security and reducing ETH’s free-floating supply that will arguably impact its value.
• Indicated by a sustained uptrend since the Beacon chain launch, we expect that deposits outpace withdrawals in the medium- to long-term.
• As Mara Schmiedt from Alluvial rightfully pointed out, there is a substantial risk of missing out on rewards if too many sidelined ETH, that was hesitant before due to undefined lock- up periods, enters and form a activation queue of up to several months as they hit the churn limit.
• Withdrawals will moreover allow activist staking, where stakers are free to actively reshuffle their funds to achieve more distributed validator pools while the obtained freedom moreover eliminates validators being trapped in regulatory crossfire.
• From a price perspective, the post-Shanghai rally already regained some ground on the ETH/BTC pair and knocked the Bitcoin dominance off a 21 month high while liquid staking tokens of Lido, Rocket Pool or StakeWise gained momentum.

2. Arbitrum retains healthy on-chain momentum

The Facts

• After Abritrum’s airdrop and first controversies around its governance, the ecosystem remains healthy and keeps striving as many on-chain metrics indicate.
• As Ethereum’s rollup centric roadmap materializes, Arbitrum emerged as the most vibrant ecosystem leading the pack across all key metrics.
• While Arbitrum launched in 2021, it only recently launched its own native token rewarding 564’101 adresses with an average 1’859 ARB and allocated 12.75% of its token supply towards loyal users.
• Even prior to the token launch, it dominated the rollup space across the most important metrics such as daily active addresses, daily transactions, protocols deployed or TVL.
• Notably, it now ranks second in DEX volume above all rollups and other renowned L1s such as BNB, Avalanche or Solana and trumps Polygon, Optimism or Tron in TVL ranking 3rd closely chasing BNB.

Our Take:

• Despite the recent governance fiasco and users starting to chase airdrops on upcoming zkEVMs such as zkSync era, the on-chain metrics remain very healthy and price action turned to the upside after post-aridrop sell pressure seems to run dry.
• We expect that the governance controversies will lead to improvements in transparency and fruitful discussions about ongoing protocol design.
• The decision to wait longer with airdropping a token than most of its competitors seem to have played out as its user retention remains impressive capturing organic activity and native innovation that is not based on token incentives or other incentive structures.
• The sustained on-chain momentum is also reflected in recent price action as ARB is the best performing asset in the top 100 within a 24h time frame being up almost 24%.
• Arbitrum’s native token however and broad DeFi ecosystem is a catalyst for its impressive on-chain volume as it attempts to boost its lead further with Arbitrum Orbit, a L3 launchpad recently announced with its airdrop.
• We expect to see sustained ecosystem growth despite more competitors, especially within zk technology entering the field as the technology still needs to mature.
• Moreover, based on the high blockspace demand and activity, Arbitrum was able to generate $2.5m in profits in March via MEV and fee deltas paid to its sequencer.
• While this cash flow is not distributed yet (it might be in the future when Arbitrum decentralizes its sequencer set and establishes a PoS like system), it accrues to the Arbitrum treasury and can be invested into reinforcing the ecosystem.
• Overall, with ongoing adoption, rollups now already achieve a scaling factor of 3.93x with Arbitrum settling 34.5m transactions while Ethereum processed 31.88m transactions within a 30 day period.
• Perceived as some outliers in 2022, we now entered the phase where rollups consistently process more transactions than its underlying base layer Ethereum.
• This very much indicates that Ethereum seems to have found a viable solution to its scaling issues while providing cheap fees ($0.1-$0.2) to its rollup users even if Ethereum experiences very high network traffic and corresponding network fees.
• Beyond the recent activation of withdrawals, the next major upgrade for Ethereum will be centered around activating the Surge related Proto-Danksharding (EIP-4844) that will act as an afterburner and morph rollups even more attractive, efficient and cheaper.
• Initially planned for implementation with Shanghai, EIP-4844 was shifted to the next upgrade in favor of avoiding any delay for withdrawals and potential tension induced by the complexity of the upgrade.
• EIP-4844 will introduce a new transaction type that allows “blob” carrying (instead of calldata) for L2 batch settlement that is expected to massively boost L2 scalability.

In other news

• FTX recovers $7.3b in assets (via Reuters)
• Twitter to add crypto and stock trading via eTorro (via CNBC)
• U.S. CPI falls to lowest level since May 2021 (via Bloomberg)
• Microstrategy’s Bitcoin bet in the green (via Decrypt)
• Central Bank of Montenegro to develop a CBDC with Ripple (via CoinDesk)

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The latest episode of Decrypt titled “The Shanghai Upgrade and what is means for investors” focusses on the upcoming Ethereum upgrade dubbed Shanghai/Capella and its possible volatility implications. Will we see a bullish unlock?