[SERIOUS] How ETH withdrawals will work after the Shanghai upgrade

As many of you will know, the long-awaited Shanghai upgrade for Ethereum is set to go live in the coming weeks. This is the most significant update since The Merge for Ethereum and brings about the ability to withdraw staked ETH from the beacon chain. Until now, users who have decided to stake ETH have done so with an indefinite timeline. Hence, there is a lot of speculation and thoughts on what will happen once withdrawals open up, including some misconceptions and fear-mongering! Some have suggested that there will be a mass exit from staking causing considerable sell pressure...so let's discuss how withdrawals will work to try and understand this.

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The Shanghai upgrade makes changes to the execution layer to allow withdrawals. This will allow two types of withdrawals:

- Full withdrawals: The validator has chosen to exit and stop being a part of the beacon chain, the entire balance (32 ETH + any accrued rewards) is then unlocked and withdrawn.

- Partial withdrawals: any ETH rewards accrued, putting the validator balance over 32 ETH will automatically be withdrawn. The validator will continue to be part of the beacon chain and continue to earn rewards.

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Once withdrawals are enabled, a validator proposing a block will scan an index of validators in the queue to withdraw until it finds 16 validators with accrued staking rewards or has fully exited the validator set. The linear search stops after this and the index at which this search stops is stored so the next validator can continue their search from this position. Effectively, this is a queue system where a maximum of 16 withdrawals can occur per block, or a maximum of 115,200 per day if no slots are missed. The queue limits the number of validators that can exit the ecosystem at one time. It is important to note that initial withdrawals will remove larger amounts of ETH as it will be all rewards accrued since the birth of the beacon chain. However, subsequent withdrawals will be smaller on average as they are continually accrued rewards. As not all withdrawals will be 'full', the speed at which all validators could leave the ecosystem would be limited by the number of partial withdrawals also occurring, as only 16 withdrawals can occur per block.

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Capella upgrade:

Although there is a lot of talk about Shanghai, you may not have heard of Capella, an upgrade which will occur simultaneously. Capella is a consensus layer upgrade enabling the execution layer to sync together, enabling withdrawal functionality. Capella allows validators to provide withdrawal credentials if they have not already done so. It will also provide automatic account sweeping, continuously processing validator accounts to check for any available rewards payments or full withdrawals from those exiting their validator. As these two upgrades are occurring together, some are calling this the 'Shapella upgrade'.

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https://www.youtube.com/watch?v=RwwU3P9n3uo

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How often will you get your staking rewards?

As mentioned, a maximum of 16 withdrawals can occur per block or 115,200 per day. However, any validator without eligible withdrawals (i.e no withdrawal address or balance <32ETH, or not exited) will be skipped, decreasing the time to 'sweep' through all validators. Note, there are currently around 500,000 registered validators.

Here are some calculations on these rates from the Ethereum website:

Frequency of rewards payments https://ethereum.org/en/staking/withdrawals/

Note, one thing to consider if you have not yet set a withdrawal address, or plan to start a new validator in the future, you can only set your withdrawal address ONCE and this cannot be changed!

https://preview.redd.it/ia3pzl27r9pa1.png?1031&format=png&auto=webp&s=69309b664ae8b38be6e781211f512ac8e43174f6

We cannot predict how much ETH Will be withdrawn over time, but most ETH stakers are early adopters and have a strong long-term belief in Ethereum. There is also the argument that the ability to stake with the knowledge you can unstake at any time will de-risk the process and therefore make it more attractive, resulting in more staked ETH. We may also see a shift from centralised staking providers like coinbase etc towards decentralised liquid staking providers such as Rocketpool, as people have the freedom to move their ETH to wherever they can get the best rate of return.

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The Shapela upgrade has been scheduled for the 12th April, in the epoch denoted here:

ETH devs confirm the scheduled epoch for Shanghai update

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In summary, Shanghai will be the end of the undefined lock-up period for ETH stakers. From then, stakers will be able to freely:

- Stake their ETH

- Earn ETH rewards which are distributed automatically every few days

- Unstake ETH to regain their full balance and any rewards

- Re-stake if desired

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Further resources:
Brilliant video here: https://www.youtube.com/watch?v=RwwU3P9n3uo

https://ethereum.org/en/staking/withdrawals/

https://ethereum.org/en/history/#shanghai