Ethereum's Shanghai Upgrade: A Year Later

Martin Walker
Sep 24, 2023 at 01:42 pm

Approximately a year ago, Ethereum went through the Shanghai enhancement, seeking to bolster network activity and fortify the DeFi ecosystem.

Nevertheless, a recent report by JPMorgan indicates that the upgrade did not meet anticipated outcomes due to an overall dip in the network's engagement since then.

Decline in Ethereum's Network Activity Post-Upgrade

The Shanghai upgrade marked a significant shift for Ethereum, transitioning the blockchain from a proof-of-work (PoW) to a proof-of-stake (PoS) consensus mechanism. This alteration aimed to reduce energy consumption and stimulate network engagement. However, JPMorgan's analysis revealed a decrease in Ethereum's network activity subsequent to the hard fork.

The report highlights that daily transactions on the Ethereum network have witnessed a decline of around 12% post-upgrade. Moreover, the count of daily active addresses on the blockchain has dipped by nearly 20%, signaling reduced user interaction and involvement. Total Value Locked (TVL) in DeFi has also experienced a decrease of nearly 8%.

JPMorgan's experts believe that various external factors within the crypto landscape might have affected Ethereum's performance following the Shanghai upgrade. One of the challenges Ethereum faced was the bearish sentiments prevailing in the crypto market, coupled with setbacks in projects like Terra and FTX over the past year. These incidents, along with regulatory measures in the United States, have induced uncertainty and caution among investors and users.

Another hurdle for Ethereum is the diminishing supply of stablecoins. Stablecoins play a pivotal role in furnishing liquidity and enabling trade within the Ethereum ecosystem. A reduction in stablecoin supply can potentially hamper network engagement and DeFi protocols, contributing to the observed downturn.

Furthermore, apprehensions persist regarding centralization in Ethereum, even with the surge in staking activity, which has increased by 50% since the Shanghai upgrade. Notably, Liquid staking protocols like Lido have gained prominence, prompting concerns regarding the concentration of power within the network.

Analysts Maintain Positivity Regarding the Upcoming Upgrade

Despite these challenges, JPMorgan's analysts remain optimistic about Ethereum's prospects. The blockchain is gearing up for another upgrade known as EIP-4844, or Protodanksharding, slated for implementation in the fourth quarter of this year.

EIP-4844 aims to address some of the observed shortcomings post the Shanghai upgrade, encompassing improvements in scalability, transaction throughput, and overall network performance.

However, the analysts caution that persisting bearish trends in the cryptocurrency market could still pose obstacles despite the potential positive impacts of this impending upgrade.

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