The Ethereum blockchain is undergoing a period of rapid infrastructural evolution. Since its initial launch in 2015, Ethereum has experienced a series of planned technical upgrades. Each upgrade brings its foundational vision into sharper focus—to serve as an open, decentralized, trustless, permissionless, and programmable infrastructure layer for the future of the internet, the global economy, and much of our digital lives.
In September 2022, The Merge unified Ethereum’s consensus and execution layers. This landmark event introduced critical improvements, including a 99.95% reduction in the network’s carbon footprint. By transitioning to a Proof-of-Stake (PoS) consensus mechanism, The Merge altered how value accrues across the network and reduced new ETH issuance by approximately 88%.
The upcoming Shanghai/Capella upgrade represents the next major milestone. This upgrade is uniquely significant because it marks the first synchronized upgrade of Ethereum’s execution and consensus layers. Most notably, it will enable the withdrawal of staked ETH from the consensus layer to execution layer addresses for the first time since staking became possible in December 2020.
The activation of withdrawals addresses a key uncertainty in Ethereum’s roadmap. It may encourage greater validator participation, promote further decentralization, and enhance network security. By improving the portability of staked assets, withdrawals are expected to intensify competition among staking service providers—likely driving further innovation and gradually reducing barriers to entry.
Stakers using third-party services will have the opportunity to reassess how and where they stake their ETH based on factors like reward maximization, validator performance, user experience, and fees.
Understanding the Shanghai/Capella Upgrade
The next planned upgrade for Ethereum is referred to dually as the Shanghai and Capella upgrades. Shanghai is the name for the execution layer (EL) upgrade, while Capella is the name for the consensus layer (CL) upgrade. This dual naming reflects the fact that it is the first synchronized upgrade of both layers.
Unlike previous forks triggered by reaching a specific block number, Shanghai/Capella will be the first fork activated by a specific timestamp. This change allows the EL and CL to upgrade in unison.
Beyond enabling staking withdrawals, the upgrade will also introduce minor technical improvements to the Ethereum Virtual Machine (EVM). However, withdrawals—enabled by EIP-4895—are the central feature of this upgrade.
The exact date for the mainnet activation remains uncertain. However, Ethereum core developers have been steadily progressing through testnet deployments, with the Sepolia testnet successfully upgrading in late February 2023. The Goerli testnet is next, followed—if all proceeds smoothly—by the Ethereum mainnet.
The Role of Stakers in Ethereum Governance
At its core, Ethereum derives its value from a decentralized network of validators who collectively build and secure the blockchain, supported by a broader social layer of community participants. This decentralized, permissionless community is the source of Ethereum’s credible neutrality, censorship resistance, openness, immutability, and robust security.
Independent staking—operating one’s own validator—is often considered the gold standard, as it provides the greatest benefits to both the staker and network decentralization. It ensures no single entity holds disproportionate power over Ethereum’s evolution.
That said, independent validation presents technical, operational, and financial barriers for some users. Many stakers choose to delegate the operational aspects to third-party services, including non-custodial providers and liquid staking protocols accessible through platforms like MetaMask.
While stakers can delegate operations, the responsibility for selecting a values-aligned partner who will uphold the properties of Ethereum that the staker values remains their own. Collectively, stakers act as guardians of the network’s value.
Shanghai/Capella offers most stakers the first opportunity to change how or with whom they stake. This offers a chance to align staking practices with personal and network values—whether through independent validation or by staking with a partner that reflects those values.
What Are Staking Withdrawals?
The Shanghai/Capella upgrade enables three primary withdrawal-related functions:
- The ability to update a validator’s withdrawal credentials from the legacy 0x00-type (derived from a BLS key) to the newer 0x01-type (derived from an Ethereum execution address).
- Partial withdrawals: the periodic, automatic “skimming” of earned consensus-layer rewards from active validators with balances exceeding 32 ETH.
- Full withdrawals: the recovery of the entire balance of an exited validator.
Both partial and full withdrawals share several characteristics:
- Only validators with 0x01-type withdrawal credentials are eligible.
- Withdrawals are processed via an automatic, system-level operation—not an on-chain transaction—so they incur no gas costs.
- The protocol “sweeps” the validator set every 12 seconds (each epoch), identifying and processing up to 16 eligible withdrawals per epoch.
Updating Withdrawal Credentials
Activating a new Ethereum validator requires a deposit of 32 ETH to the deposit contract, along with a payload of data that includes the validator’s withdrawal credentials. This field defines where withdrawn balances are sent.
Two versions of withdrawal credentials exist, distinguished by their prefix: 0x00-type and 0x01-type. Only validators with 0x01-type credentials are eligible for partial or full withdrawals, because these point to a standard Ethereum execution address—required for receiving withdrawn funds.
As of February 2023, approximately 58% of active validators still used 0x00-type credentials. The Capella upgrade includes an operation allowing these validators to update their credentials to 0x01-type. This is a one-time, one-way change requiring a signed message from the validator’s existing BLS key.
There is no urgency for 0x00-type validators to update immediately, as they will continue earning rewards as usual. The rate at which credentials can be updated is limited to 16 per block.
Partial Withdrawals
Partial withdrawals allow for the regular, automatic distribution of rewards earned above the 32 ETH effective balance cap. Any active validator with a 0x01-type credential and a balance exceeding 32 ETH will automatically participate.
This process benefits stakers by providing frequent access to rewards without requiring them to exit their validator or incur gas costs. It also benefits the network by preventing excessive validator exits and long queues that could destabilize the system.
Validators can expect their balances to be skimmed every 2 to 5 days following the upgrade. The exact frequency depends on how many 0x00-type validators update their credentials.
Full Withdrawals
A full withdrawal allows a staker to recover the entire balance of an exited validator. Exiting a validator requires manual initiation—the validator’s private key must sign a voluntary exit operation, which is then submitted to the consensus layer.
The full withdrawal process consists of two parts:
- Validator Exit Process: After signaling exit, the validator enters an exit queue. The duration of this queue depends on the number of active validators and the churn limit—a rate-limiting variable that defines how many validators can exit per epoch.
- Withdrawal Process: After exiting, the validator must wait a minimum of 256 epochs (~27.3 hours) before becoming withdrawable. Once eligible, the validator’s balance is automatically withdrawn through the same sweeping mechanism used for partial withdrawals.
The entire process from exit to withdrawal will take at least 28 hours under ideal conditions, though most withdrawals will take longer due to queueing.
How Withdrawals Impact the Ethereum Staking Ecosystem
The activation of withdrawals is expected to have broad implications across the staking landscape—from the liquid supply of ETH to the competitive dynamics among staking providers.
Liquid ETH Supply
Understanding how withdrawals might affect the liquid supply of ETH requires considering staker behavior and intermediary actions—both of which remain uncertain.
As of February 2023, approximately 16.8 million ETH was staked, accounting for 14.6% of the total supply. The average validator balance was slightly over 34 ETH, indicating that validators had accumulated about 2 ETH in rewards on average. This suggests over 1 million ETH could become liquid through partial withdrawals shortly after the upgrade.
However, the actual impact depends on several factors:
- Only validators with 0x01-type credentials are immediately eligible for partial withdrawals.
- Liquid staking protocols like Lido are likely to reinvest skimmed rewards into new validators to maximize returns for their users.
- The proportion of 0x00-type validators that update their credentials will influence the rate at which rewards are distributed.
Data analysis suggests that if all 0x00-type validators immediately updated, the amount of ETH unlocked via partial withdrawals would peak at around 37.34 ETH per block approximately 70 hours after the upgrade.
Regarding full withdrawals, around 920 validators had voluntarily exited as of February 2023, signaling intent to fully withdraw. Additionally, following regulatory actions in the U.S., Kraken announced it would cease its staking services—potentially leading to the exit of over 38,000 validators (1.2 million ETH). At a churn limit of 8, processing this number of exits would take over 20 days.
In general, the rate of full withdrawals will be constrained by the churn limit, which is currently 8 validators per epoch (~1800 per day). This means approximately 57,600 ETH could be fully withdrawn daily under current conditions.
Competition and Innovation
Withdrawals increase the portability of staked ETH, potentially triggering a large-scale reallocation event that reshapes the staking industry. Incumbents and new entrants alike are preparing for intensified competition, which is expected to drive rapid technological and business model innovation—particularly among liquid staking protocols.
Key areas of innovation include:
- User Experience: Retail and institutional users are benefiting from simplified staking interfaces, better reward tracking, and new products like diversified staked ETH indices.
Liquid Staking Infrastructure: Major protocols are rolling out upgrades to improve decentralization, scalability, and user safety. For example:
- Lido V2 introduces a staking router that allows for multiple validator sets and a novel two-step withdrawal process.
- Rocket Pool’s Atlas upgrade reduces the capital requirement for node operators from 16 ETH to 8 ETH, improving scalability.
- StakeWise V3 offers a vault-based system where anyone can create a customizable staking pool.
- New Entrants: Protocols like Frax, Swell, and Stader are bringing novel mechanisms to attract stakers, often featuring higher rewards or unique tokenomics.
- Emerging Technologies: Distributed Validator Technology (DVT) aims to improve validator resilience by distributing key responsibilities across multiple nodes. Restaking protocols like EigenLayer allow stakers to extend cryptoeconomic security to other services—though not without added risk.
Impact on DeFi
The transition to Proof-of-Stake reduced new ETH issuance by 88%. Coupled with EIP-1559’s fee-burning mechanism, this led to deflationary pressure on ETH supply and spurred the growth of liquid staking protocols.
Liquid staking tokens (LSTs) like Lido’s stETH and Rocket Pool’s rETH represent staked ETH and accruing rewards. They provide liquidity and enable holders to participate in DeFi while staking.
The Shanghai upgrade is expected to reduce the liquidity risk associated with staked ETH, which could have several effects on DeFi:
- Redemption Pressure: Long-term stakers may withdraw significant amounts of ETH. However, the gradual rate of withdrawals and the likelihood that rewards will be restaked by liquid providers should mitigate selling pressure.
- Growth in Liquid Staking: Reduced liquidity risk may attract more stakers, particularly institutional participants who have been cautious about locking funds. Data shows that the number of LST holders has been growing steadily in the months leading to the upgrade.
- Increased DeFi Integration: Only a fraction of LSTs are currently used in DeFi. The ability to redeem LSTs for ETH directly may increase confidence and encourage broader adoption across lending, trading, and other DeFi applications.
Frequently Asked Questions
What is the Shanghai upgrade?
The Shanghai upgrade is a hard fork of Ethereum’s execution layer, synchronized with the Capella upgrade of the consensus layer. Its main feature is enabling the withdrawal of staked ETH.
When will withdrawals be enabled?
Withdrawals will be activated after the Shanghai/Capella upgrade is deployed on the Ethereum mainnet. The exact date is not yet confirmed but is expected in the first half of 2023.
How do I withdraw my staked ETH?
If you staked through a liquid staking protocol or exchange, follow their instructions. If you are an independent staker, you must ensure your validator has 0x01-type withdrawal credentials. Then, partial withdrawals are automatic; full withdrawals require you to initiate an exit.
Are withdrawals free?
Yes, withdrawals are system-level operations and do not require gas fees.
Can I withdraw only my rewards without exiting?
Yes, partial withdrawals allow you to automatically receive rewards exceeding 32 ETH without exiting your validator.
How long does a full withdrawal take?
The process requires exiting the validator and waiting through queues and delays. Under ideal conditions, it takes at least 28 hours, but often longer due to network congestion.
Conclusion
The Shanghai/Capella upgrade is a landmark event in Ethereum’s evolution. By enabling staking withdrawals, it enhances liquidity, reduces risk, and sets the stage for greater participation in network security. The upgrade is expected to drive innovation across the staking industry, improve user experience, and further decentralize the validator set.
Looking ahead, the Ethereum roadmap continues with further upgrades aimed at enhancing scalability, security, and sustainability. The Cancun-Deneb upgrade, expected later in 2023, will introduce EIP-4844—a major step towards scaling layer-2 rollups.
As the ecosystem matures, Ethereum’s core developers and community are poised to continue delivering improvements that strengthen its foundation as the leading platform for decentralized applications and the future of the digital economy.