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ETH Unstaking + Market Outlook
Early April holds the largest single event of the year for Ethereum, and one of the largest events of the year for the crypto market as a whole: Ethereum’s Shanghai upgrade.
Shanghai allows ETH, for the first time, to be unstaked, which is expected to increase sell pressure by some factor. But by how much? We crunched some numbers on it to begin preparing, and have a quick market update as well.
Table of Contents
Shanghai Upgrade Overview + Predictions
Main numbers
ETH unstaking rates
Potential sell pressure
Our (current) predicted outcome
Current Market Outlook
A brief market outlook after a (very) hectic last few days
1. Shanghai Upgrade Overview + Predictions
Overview
For those who didn’t know, ETH has been stake-able for a while now: since late 2020, anyone could stake, as long as they had the required amount (32 ETH). However, at no point in the past have stakers been able to withdraw their ETH - they earned rewards on it, but none of those rewards or staked ETH could actually be withdrawn. Given that stakers can’t withdraw, charts showing “# of staked ETH” are up only:
With the Shanghai upgrade coming in early April, this changes, as stakers will now be able to withdraw. How’s it work? Stakers can either do:
A partial withdrawal (claim rewards; anything over 32 ETH)
A full withdrawal (claim 32 ETH)
Partial withdrawals have a faster queue, and full withdrawals have a slower queue. Simple enough!
To get an idea of the numbers we’re dealing with here, here are the major ones as of late last week:
About 17.6 million total ETH staked (& according to Binance, >50% liquid staked)
(Liquid staking = receiving a derivative token, like stETH, representing your staked ETH. These can be bought and sold)
Over 1 million of that is rewards (aka, ETH that has never entered the liquid supply)
Around 550k total active validators
(Each 32 ETH staker = 1 validator)
A few entities have large market shares of ETH staking (see below)
Withdrawal Speeds
In order to keep the network stable, there are limits to how many stakers can unstake or begin staking in given time periods. However, since Shanghai is opening up unstaking for the first time, we wanted to mainly focus on analyzing the unstaking side of the equation. Some numbers:
Full withdrawals:
Given the current # of ~550k validators, 1800 full withdrawals are possible per day
So initially, a max outflow of about $86,400,000/day
Partial withdrawals:
115,200 partial withdrawals possible per day (16 per 12 seconds)
So initially, max outflow of about $335,848,500/day
Some deeper background on these numbers, if you’re interested:
Now, what do these numbers realistically mean for each type of withdrawals?
Full withdrawals:
The queue really slows things down; a max of roughly $86 million is small compared to ETH’s market cap and daily trading volume
Plus, new validators offset exiting validators (and both are constrained by the same max rate of change) as they lock up ETH in staking
As I'll note later, liquid staking could strongly affect the # of these withdrawals
Partial withdrawal notes:
As noted in the image above, these make up most of the initial potential sell pressure, then strongly fall
The potential initial sell pressure from staking rewards, $335+ million per day for the first few days, IS worth watching!
What’s also worth noting, though, is that only ~32% of stakers are in profit right now; this may dampen the urge for some to withdraw
With all of this in mind, we can look at potential effects of Shanghai on the fundamentals (staking withdrawals) and the market (ETH price).
Our Predicted Outcome
From a fundamental perspective, we have some views about how things may play out over the initial days after Shanghai:
Overall, it seems relatively obvious that the withdrawal queue will remain full for a while at first
Partial withdrawals should flood out, driving slightly strong initial sell pressure, or at least some selling out of fear of that initial sell pressure
Even if stakers do not want to withdraw everything, we anticipate many unstaking their portion of the 1 million total ETH in rewards
The number full withdrawals may very well be low, but frontloaded (the full withdrawal queue will stay full for a while)
Potential new validators MAY want to wait to see the dust settle; we’re unsure how many new validators are realistic to expect, at least at first
So, the general idea here is that the fundamental effects of withdrawals should not be too overwhelming in terms of ETH sell pressure, especially after the first 4-5 days, but fear could still drive sell pressure higher than only the fundamentals would enable. That said, what could Shanghai mean for the price of ETH, especially in the days right around the event itself?
Trade Opportunities
To keep it simple, our view of Shanghai’s effect on ETH’s price is: "down, then up". We anticipate initial worries around sell pressure from new ETH entering the liquid supply to cause a selloff that would (largely) front-run the actual event. Then, a quick reversal may follow as it becomes apparent that the worst is over. What factors drive us to anticipate any sort of reversal? Three come to mind.
1. The Impact of Liquid Staking
The high amount of liquid staking, over 50% according to Binance, reduces the need for some unstaking. Although some liquid stakers certainly will unstake, such as traders capturing arbitrage opportunities, many liquid stakers will have no need to actually unstake anything. As tokens like stETH actually reflect the underlying staking rewards, in a way, these staking rewards have already entered the ETH supply.
Plus, as many have already concluded and developed theses for that are far better than our short couple paragraphs here, liquid staking seems far more likely to grow than shrink over time. Here, you can see that many of the top staking entities provide liquid staking, including the top two:
2. Plenty of Room to Grow
Speaking of things that are far more likely to grow than shrink over time, only ~15% of ETH is staked. Compare that to other major L1s in the image below; ETH’s increase to closer to those levels likely takes months to play out, but any Shanghai-driven reduction in ETH's % should be short-lived in our view.
*Note: I’m not sure exactly how accurate these #s are, but most seem in the ballpark:
3. The Impact of Yield/Liquidity
ETH staking yields go down the more total validators there are, and up the less there are. Prior to Shanghai, illiquidity was a great reason for many to opt not to stake, which has allowed staking yields to consistently over 4% (depending on how you calculate it). However, as mentioned in the above point, it’s likely that the number of stakers rises a solid amount of time, and we find a yield equilibrium that, in our view, will be lower than it is now. Though, this will likely take a while to play out.
Summary of Our View + Disclaimer
So, overall, our current view is that, relative to BTC and other majors (depending on the market environment at the time, it may make most sense to pair trade rather than purely bet on/against ETH), ETH will likely suffer a hit as Shanghai nears, and perhaps in the initial hours after the upgrade. The same may go for liquid staking related tokens like LDO, RPL, and FXS; although obviously riskier, if things do play out the way we mentioned above, these could be solid positions on a longer time horizon.
All that said, we’re still doing more research, and this is all assuming the upgrade goes smoothly. We’ll likely come out with a quick update in the days before the upgrade with some more finalized trading views; regardless, we hope this helped you understand more about what Shanghai is, and what it means for Ethereum. Also, as always, none of this is financial advice.
Sources
2. Market Outlook
It’s been a big last few days in crypto markets, as fears around bank failures and USDC (temporarily) losing its $1 peg caused a sharp drop Friday, which quickly turned into a face-ripping rally on news that failing bank depositors would be made whole and USDC would continue honoring all redemptions at $1. BTC led the way off the bottom, moving over 35% from the low (around $19.6k) to the top (around $26.55k). COIN also moved almost 30% bottom to top. BTC, specifically, looks to currently be benefitting from its narrative as an alternative, no-counterparty-required store of value, in the face of failing banks and worries about the safety of deposits.
As it stands now, things feel much more uncertain. A 25bps Fed rate hike is still priced in for next week’s FOMC meeting, but there’s also now higher probabilities of Fed rate cuts before year end priced in. On top of that, there’s more concerning news related to Credit Suisse this morning, stocks are selling off, and there’s that FOMC meeting coming next week.
Our view is centered around wanting to reduce some risk, especially after the sharp rally (which was certainly nice), until things clear up a bit more, likely until post-FOMC. To do this, we’ve focused on selling off some ETH yesterday, reducing leverage to zero, and purchasing some COIN puts expiring at the end of the month to partially hedge the larger amount of spot BTC (and some ETH) that we still hold. We’re still largely avoiding alts for now as well.
On any further break above roughly $26k (yellow line on chart below), we’d likely join in on a short-term trade targeting $28-30k, while cutting it immediately on a move back below $26k. In the green zone below, we’d likely add back the sold ETH and sell the COIN puts. Our broader view is still that higher upside (>$26k) is coming at some point this year, as well as more alt rallies like we saw in January, but the current environment currently seems less conducive to that type of move, and we’re anticipating more short-term chop leading into FOMC.
Stay safe, and we’ll be back with more content soon!
Disclaimer
The opinion and commentary herein is provided for general information purposes only and should not be construed as investment, tax or legal advice, and does not constitute an attorney/client relationship. Such information is believed to have been obtained from sources deemed reliable but is not guaranteed. Past performance of any market results including crypto currencies and such related assets is no assurance of future performance. Investing is risky, and you can lose what you put in.