Ethereum, the second-largest cryptocurrency by market cap, is about to undergo one of its most significant upgrades to date. Dubbed the "Shanghai" upgrade, this marks the completion of the Ethereum network's merge with a new proof-of-stake mechanism designed to reduce the environmental impact of mining. The method awards freshly minted ETH to all who "stake" or “lock up” their crypto in Ethereum smart contracts. The more ETH a blockchain validator stakes, the more likely they are to process a transaction, and the more newly issued ETH they earn as a reward.

The Shanghai upgrade also grants validators who had to provide at least 32 ETH the right to withdraw their funds. It is estimated that around half a million validators are eligible to withdraw their funds, with a total of around 1.1 million ETH or $2 billion expected to hit the market in the first week after the upgrade.

There are currently many more individual stakers than half a million validators, as some pooled ETH from “regular” investors who couldn't meet the 32 ETH requirement. These investors will also be able to withdraw their funds through their validators. The total amount of staked ETH is currently around 31%, according to crypto analytics site DeFiLlama, with Lido being the largest decentralized finance protocol that allows for the delegation of ETH.

One of the most significant aspects of the Shanghai upgrade is that it cuts ties with warehouses of crypto miners by combining the old blockchain with a new network that will run on a much less energy-intensive transaction validation mechanism: proof-of-stake. Ethereum has been offering interest rates of up to 5% since late 2020 to encourage validators to support the move to proof of stake. Although those who staked ETH couldn't withdraw their funds until the developers gave permission, the plan worked, and we will soon be granted that permission.

Shanghai also adds a host of other upgrades, known as Ethereum Improvement Proposals (EIPs), which restrict transaction costs for technical applications, potentially reducing fees on the otherwise expensive Ethereum blockchain. These include EIP-3651, EIP-3860, and EIP-3855.

If Shangai marked the end of the first major step of The Merge, the next major upgrade, Cancun, will mark the beginning of the implementation of The Surge. It introduces "proto-danksharding," a method of speeding up the blockchain by running the network on several smaller chains at once. The goal is to scale Ethereum to over 100,000 transactions per second, making transactions on Layer 2 as cheap as possible for users. This will be significant in all aspects of the blockchain, starting for example with NFTs, which in the future thanks to the sharding may be hosted directly on the blockchain, rendering them fully persistent.

Proto-Danksharding, also known as EIP-4844, is an intermediate step towards Danksharding. It is a way for rollups to add cheaper data to blocks: “The data in these blobs is not accessible to the EVM and is automatically deleted after a fixed time period (1-3 months). This means rollups can send their data much more cheaply and pass the savings on to end users in the form of cheaper transactions.”

While full Danksharding is several years away, Proto-Danksharding is expected to arrive relatively soon. The EIP for Proto-Danksharding is currently being tested and being made production-ready. The next step is likely going live.