Glassnode: Shapella sales likely to affect no more than 1% of staked ETH

Even in the most extreme scenario of mass withdrawals by Ethereum validators after the Shapella hard fork, the consequences would stretch over days and weeks. The update is more likely to bolster the staking industry, Glassnode argues.

The highly anticipated Shanghai/Capella hard fork is scheduled to take place on 12-April-2023, enabling the withdrawal of staked #Ethereum.

In this extended edition of the Week On-Chain, we shall evaluate the overall Ethereum staking landscape, develop a framework to establish… pic.twitter.com/EVgsz3s6GG

— glassnode (@glassnode) April 11, 2023

Shapella (Shanghai-Capella) includes the implementation of EIP-4895 — enabling users to withdraw funds from staking. The hard fork was scheduled for 12 April (epoch 194 048).

Analyzing the various groups of Ethereum stakers and their motives for selling, analysts estimated that potential sales could total 170 000 ETH ($323 million).

This figure accounts for less than 1% of the ETH staked 18 million ETH ($33.92 billion, 15% of the circulating supply).

«Even in an extreme scenario, if withdrawal limits are reached, the sale volumes will still sit within the average weekly on-exchange inflows. In other words, the price impact on Ethereum will remain within permissible levels», — the analysts reassured.

The conclusions are based on segmentation of cohorts of users who have locked in at least 32 ETH — a condition of the contract.

The analysts highlighted the following criteria:

• duration of staking;
• number of validators launched (multiples of 32 ETH);
• yield on locked coins;
• structure of the process (self-managed or via LSD-providers such as Lido Finance (the latter analysed separately).

In the illustration below, analysts highlighted in red wallets addresses that repeatedly deposited Ethereum into staking, with blue indicating those who did so once. The latter are the minority. The Terra collapse and the ensuing crypto-winter did not affect user activity.

Separately, specialists reviewed the situation around LSD-providers — Lido, Coinbase, Kraken and Binance — which account for respectively 30%, 11.5%, 7% and 5.4% of the ETH staked.

In summer 2022, the Terra collapse and the bankruptcies of 3AC and Celsius affected activity in the segment, causing a temporary loss of peg for the wrapped token stETH to the “original”. In February–March 2023, pressure from the United States Securities and Exchange Commission (SEC) on Kraken and Coinbase was felt. Subsequently, the head of the agency, Gary Gensler, confirmed his position on the readiness to recognize PoS-assets as securities.

When considering stakers (excluding LSD-providers) by lock-up duration, analysts found that the majority blocked funds for the past 7–14 months, indicating rising trust in Ethereum’s economy, they noted.

Notably, a group who locked in 25,000 ETH even before Beacon Chain’s launch stands out. These are highly motivated members of the Ethereum community who “do not chase profits,” the analysts said.

By stake size, analysts found a dominance of whales (more than 500 validators) with a 76% share. The number of “shrimp” (one validator) at 9.5% reduced market turbulence in 2022.

Between the two clearly defined groups, crabs and fish accounted for a combined 13.5% of the total. Their role was noticeable only after the deposit contract launch.

From a profitability standpoint, the average deposit carries an unrealised loss of about 13% — Ethereum deposited at a value of $2,136, versus a market price of $1,880 at the time of the report.

In particular, Coinbase shows $2,840, Lido $2,535, Kraken $1,900 and Binance $1,812.

These figures contrast with the realised value on the Ethereum network ($1,403). In other words, the average holder of the second-largest cryptocurrency outside staking holds an unrealised gain of about 36%.

Approximately 50.3% of all coins in staking are underwater, which gives some insight into potential withdrawal dynamics after Shapella, the analysts noted.

In total, unrealised losses amount to $4.7 billion (peaking at $16 billion in July 2022). 76% of this belongs to whales.

Stakers can withdraw their blocked funds by submitting a corresponding request. 1,229 validators signalled such intent. Another 214 are additionally to undergo this process due to slashing. In total, these categories account for 46 176 ETH (~$85.7 million).

Before Shapella, the accumulated rewards from staking for more than two years that did not participate in Proof-of-Stake stood at 1,137 million ETH (~$2.1 billion). After the hard fork, this amount will be automatically unlocked and transferred from the Beacon Chain to the staker0s address on the mainnet.

Automatic withdrawals will occur only for assets of those validators who updated their credentials from 0x00 to 0x01. The latter account for only 25% of the accumulated rewards — 276 000 ETH.

Withdrawing these funds will take two days (each slot lasts 12 seconds, during which 16 validators with 32 ETH each are processed, at most 235 000 ETH per day).

In an extreme scenario — when all validators switch to 0x01 — it would take 4.5 days to withdraw all 1.137 million ETH.

Below is a graphic comparing both scenarios (left and right histograms). Analysts expect the actual numbers to land in the middle, since not all validators will update their accounts. If only half of the stakers take this step, the amount of unlocked rewards would be 706 000 ETH (~$1.31 billion), the analysts computed.

To estimate the share of the 706 000 ETH that will ultimately be realised, analysts looked at staking segmentation. They allowed that LSD-providers may follow Lido Finance, whose team promised to redeploy the earned rewards back into staking.

The whales (75% of the sample) may exhibit the same behaviour. Given the lower financial sensitivity and the market’s positive momentum of late, this group is also likely to reinvest the coins, analysts forecast. In other words, the coins are unlikely to be sold.

«Even in the extreme case of a sudden surge in voluntary exits from staking ahead of Shapella, we will still see only a limited rise in the share of unlocked coins due to the Churn Limit ceiling. The daily maximum would be 57,600 ETH ($109.4 million) until this parameter is revised», the experts concluded.

Taking into account both full and partial withdrawals, analysts modeled three scenarios for after Shapella.

1. Extreme — all rewards are realised and all eligible-for-withdrawal coins are issued. Market supply would rise by 1.54 million ETH ($2.93 billion).
2. Status quo — 276,000 ETH as rewards from 00×0-accounts and 45,098 ETH from those who submitted withdrawal requests.
3. The best estimate — the assumption that not all validators will update their software and withdrawal requests double. The supply growth in this case would be 170,000 ETH ($323 million).

Even the extreme scenario (1.53 million ETH) would sit within a weekly influx of coins to exchanges.

Put differently, even if this parameter is doubled, the amount would still fall within the range of a recent market correction, when 3.1 million ETH were sold on centralized platforms (CEX), and Ethereum0s price fell by 8.7%. This would be far smaller than during the FTX collapse, when Ethereum0s market value tumbled 30.2% as 5 million ETH were liquidated.

«The unlocks under Shapella will be on the same scale as everyday market trading. It is unlikely to be as dramatic as some fear», the analysts concluded.

Earlier, analysts noted a slowdown in growth of ETH deposits in staking Ethereum due to regulatory pressure and the approaching hard fork.

As noted, the annual ETH burn rate in the run-up to Shapella reached $5.5 billion.