Withdrawals are imminent. This March, Ethereum will be undergoing its first hard fork of the year, bringing much anticipated withdrawals to the mainnet. As developers move into the final pre-launch sequence, by upgrading the public testnets (first Sepolia, then Goerli), we wanted to get you up to speed on this coming Shapella (Shanghai + Capella) upgrade.

1. Withdrawals mark the end of the Proof-of-Stake transition cycle

If you look at Ethereum’s Beacon Chain today, the way to participate as a validator means you must send at least 32 ETH to the Deposit Contract, or “stake” your ETH. The Beacon Chain follows the contract, querying for changes so that it can process any new deposits. The entire validator lifecycle consists of different states that determine what you can or can’t do as part of the network.

Ethereum only allows a small number of validators to start or stop validating at a time to maintain the stability of the validator set. Once you are part of the “Active” set, you start accruing rewards by voting (”attesting”) every six minutes with the occasional proposal. The majority of these rewards are added to the balance of the validator.

At any point, you might want to stop validating and take out your ETH, in which case you would want to join the voluntary exit queue. On the other hand, you might have been a validator for some time and want to utilize the excess ETH, considering the average validator balance is ~34 ETH.

Withdrawals close the validator cycle and mark the end of the PoS transition that started with the Merge in September 2022. Before then, the two chains were unaware of each other. Specifically, the Execution Layer didn’t communicate at all with the Beacon Chain until they merged. Withdrawals stand opposite to the deposit process, crediting your ETH from the Beacon Chain on the Execution Layer to finally close the cycle.

2. About the Ethereum withdrawal process

There are 2 requirements for withdrawals to be processed:

• You must have a 0x01 credential, which represents the Ethereum address where the ETH will be credited. If you don’t have this type of credential, you must sign a message to change it, which will take effect at the time of the fork.
• You must have a balance above your 32 ETH (partial withdrawals), or have fully exited the validator according to the validator lifecycle (full withdrawals).

For every block, the network scans the validator set for the first 16 validators that satisfy those two requirements. Then, those withdrawals get processed as part of the block in a gasless transaction.

According to the most recent estimate, ~300,000 validators are on the old credentials, meaning the majority of validators will need to change them (it involves digging for those mnemonics created over 2 years ago). This change can only be done once.

Chorus One developed a tool called “eth-staking-smith” that enables the user to generate those signed messages and easily update their withdrawal address.

The process after that is fully automatic. Meaning, you don’t have to do anything else to start spending those rewards, they will be credited to the withdrawal address without your intervention. If all of those validators properly change their credentials, a complete run through the active validator set would take about 4 and a half days. Meaning, you can expect to receive your rewards to the withdrawal address in that cadence.

Please check the official ETH Withdrawals FAQ to learn more about withdrawal mechanics and enabling withdrawals for your validator.

3. Changes in the staking panorama for Ethereum

We have previously elaborated on why staking is the most attractive risk-adjusted source of yield in crypto. We believe in its force to provide value at the base level to stakers, deliver competitive results and guarantee that networks such as Ethereum continue to operate as the backbone of a decentralized financial system.

However, the inability to withdraw staked assets on Ethereum has been a risk consideration that stakers had to make before committing to the task for the past years. Not anymore. This massive unlocking of liquidity is sure to make big waves in the coming months and impact the staking panorama of Ethereum. Staking has also made the news with the recent news of regulations in the United States. As a non-custodial staking provider, we continue to believe in this thesis.

With an increasing number of ETH being staked post-Merge, along with growing adoption of the Ethereum network and a rising ETH price, we believe that 2023 will be an even stronger year for Ethereum staking post-Shanghai. However, we must get ready for some changes.

• The Shanghai Upgrade de-risks ETH staking as it improves liquidity and reduces lock-up requirements by initiating the withdrawal process, making it increasingly attractive to institutions wanting long-term bets on the blockchain ecosystem.
• In terms of Liquid Staking Derivatives (”LSD”) you will be able to redeem them and unstake your ETH directly on the protocol. This means unlocked liquidity to compound, which might push the APY slightly. Some stakers might choose to migrate to other providers altogether.
• Staked ETH held by the Deposit Contract and active validator counts continue to grow with new momentum after the Merge, and even pre-Shanghai where some narratives called for sell-pressure on ETH.

4. How Chorus One prepares for Withdrawals

We made our bet on the Ethereum staking ecosystem last year, when we finally unveiled OPUS: our API and Portal solution to significantly speed up institutional staking operations.

Since then, we have been working on many exciting features, including enabling MEV rewards, with more in the pipeline to be rolled out in the coming months. We plan to support withdrawals in our infrastructure as soon as it's safe after the upgrade, and we are working to create the simplest staking and unstaking process in the market for all kinds of institutional clients.

We have been testing this process and will continue to do so on the available testnets for increased security. We also provide a suite of options including the mentioned update of validator withdrawals addresses and a full Portal to consult all rewards accumulated.

Reach out to sales@chorus.one to know more about how OPUS can help you start staking or offer staking to your customers with minimal setup.

About Chorus One

Chorus One is one of the biggest institutional staking providers globally operating infrastructure for 35+ Proof-of-Stake networks including Ethereum, Cosmos, Solana, Avalanche, and Near amongst others. Since 2018, we have been at the forefront of the PoS industry and now offer easy enterprise-grade staking solutions, industry-leading research, and also invest in some of the most cutting-edge protocols through Chorus Ventures. We are a team of over 50 passionate individuals spread throughout the globe who believe in the transformative power of blockchain technology.

For more information, please visit chorus.one