How Will Staking Withdrawals Affect Ethereum?
The recent news suggests that a new Ethereum upgrade will allow the withdrawal of staked coins in March or even earlier. Will it crash the Ethereum price or, conversely, attract new money in Ethereum staking? And how should derivatives be priced around the upgrade?
Shanghai Is Coming
The Merge has successfully transitioned Ethereum from a proof-of-work model to a far more efficient proof-of-stake mechanism, but coins staked in the Ethereum network remain frozen. That is likely to change in March. The recent news suggests that a new Ethereum upgrade called Shanghai, which is scheduled to be implemented in March (or even earlier), will allow the withdrawal of staked coins. “During their first virtual meeting of the year, Ethereum developers said they are pushing ahead with a key software upgrade that would let people withdraw ETH used to operate the blockchain network” – Bloomberg reported last week. Ethereum developers delay some technical updates in order to make staking withdrawals available as soon as possible.
According to the data tracker Beaconcha.in, there are 15.9 million staked Ethereum coins, which are currently unavailable for trading. It’s about 13% of the total Ethereum supply. These coins are worth about $23 billion at the current price and will be available for sale after the upgrade. So, one may wonder whether the staking withdrawals can crash the Ethereum price.
Will the Staking Withdrawals Crash the Ethereum Price?
It may seem counterintuitive, but I think that the upgrade is more likely to inflate the Ethereum price than to crash it. First of all, those who want to sell their staked Ethereum may have been already hedged at least partly via selling futures or Lido’s stETH, so a potential selling flow may be priced in. An exact share of hedged positions is difficult to estimate, but I think that a combination of futures’ easy availability and a generally cautious mood regarding crypto suggests a significant amount of hedging. Also, there is an indirect indication in favor of hedging popularity. Contrary to Bitcoin trends, Ethereum spot trading volume has dropped to just 10% of the futures volume compared with 20-25% in the first half of 2022, suggesting a futures flow from those who cannot trade in the spot market (staked coin holders).
Ethereum Spot to Futures Trading Volume (30-day Moving Average)
Bitcoin Spot to Futures Trading Volume (30-day Moving Average)
Moreover, easy staking may attract many new stakers among existing holders, reducing the available supply of Ethereum and likely boosting its price. “Currently, 13.18% of Ether’s total supply is staked on the Beacon Chain, which is low compared to other PoS chains like Cosmos Hub with a staking ratio of 62.5%, Cardano with 71.8%, and Solana at 71.4%. The reason for Ethereum’s low staking ratio is that the Staked Ether (stETH) is locked in its current state,” – CoinTelegraph said.
Lido DAO token has already doubled in less than 10 days of this year, likely anticipating much better prospects of a staking business.
Lido DAO Token Price (LDO/USD)
New Inflows?
Easy staking may also attract new investments in Ethereum. At the very least, easy staking will improve Ethereum standing within a crypto universe, probably attracting some flows from other cryptocurrencies. If there is a broad risk-on and a more positive market mood regarding crypto, easy staking may even attract new investments in Ethereum from non-crypto assets.
Notably, speculative interest in Ethereum falls back to a pre-Merge level, suggesting a scope to increase positioning if a market mood improves. The options open interest, which was at the center of the Merge hype, has returned to the levels prevailing in May-June 2022.
Ethereum Options Open Interest
Of course, the importance of the Shanghai upgrade should not be overestimated. Large-scale crypto inflows/outflows (if any) may be more important than the upgrade. If there is a large outflow from crypto because of other reasons, the availability of staking withdrawals may exacerbate selling pressure and crash the Ethereum price.
Effects On Derivatives Pricing
I see 3 possible effects of the Shanghai upgrade on Ethereum derivatives pricing. First, Ethereum futures should be aligned with a staking yield after the upgrade. The ratio of September/June futures price should be very close to the staking yield. June to March ratio should be close to the yield too, but that’s already priced in.
Second, staked Ethereum should eliminate a discount after the upgrade. Lido’s stETH is currently priced 1.5-2% lower than Ethereum, offering a modest trading opportunity.
Lido’s Staked ETH to ETH (stETH/ETH)
Third, the Shanghai upgrade may imply a hard fork. Creating a new token during the hard fork does not look like a probable scenario, but cannot be ruled out completely. That is not priced in, as Ethereum futures maturing in March trade with a small premium to the spot (0.3-0.5% depending on an exchange). The hard fork should theoretically make March futures slightly cheaper than usual.
Conclusion
All else being equal, I see the availability of staking withdrawals as a positive factor for Ethereum, potentially attracting flows from other cryptocurrencies or even completely new investments in crypto. Among market-neutral strategies, I would consider buying stETH instead of Ethereum.
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