Why Shapella looks like a game changer for Ethereum
by Dr Sreejith Das, CEO and co-founder of Attestant
Analysts were evenly divided in the run up to the Shapella on April 12, and many thought that the ability to withdraw staked Ether for the first time in years would put downward pressure on the price.
However, Ether went up for a period before retreating to where it was before the upgrade.
In terms of active validators staking in the network, we saw an initial reduction of nearly 3,000 validators, and a further 11,000 currently waiting to exit, but this has been more than offset by the 16,000 new validators waiting to enter.
Rather than a predicted reduction in the number of validators staking, we have seen the appetite for staking remain remarkably stable. It would however be a mistake to assume that now the Shapella upgrade has been successfully completed things will carry on as they have been.
For the first time ever, it is now possible to unstake Ether and get back the original stake.
Why is this so important? Before now, staking Ether was like buying a bond that didn’t pay coupons, can’t be resold, and had no maturity date. Not an attractive proposition to an institutional investor!
With the ability to un-stake successfully implemented, it opens up the asset class to a wider range of new investors that were prevented from staking Ether by their disciplined risk management.
These new investors can choose to run staking software in-house, stake custodially, or use a non-custodial staking service and enjoy all the benefits of the staking return without giving up ownership of their assets and be confident they will get their Ether back on demand.
That’s not to say that there aren’t some unanswered questions for risk managers and compliance officers at institutional investment firms. Highly regulated institutional investors face challenges when reporting, assessing the jurisdiction, tax status and accounting for staking profits and losses.
The Shapella upgrade does however remove one major obstacle in that institutions can prove that they can retain custody of their funds and withdraw when they see fit.
This point has become particularly salient in light of the centralized lending platform collapses that took place in 2022.
No pension fund trustee would entrust their funds with a bunch of fresh-faced Millennials who have little financial experience or understanding of compliance. However, if they can manage the investment process, any questions related to risk management end.
Shapella marks a turning point for institutional investors (that manage trillions of dollars worth of assets), allowing them to earn a return where they couldn’t before.
In an era of increasing inflation, more limited access to credit and considerable macro-economic uncertainties, the need for greater diversification and strong returns make digital assets an attractive choice.
Research from Boston Consulting Group estimates the tokenization of global illiquid assets to be a 16 trillion dollar business opportunity by 2030. There’ll be no shortage of new and exciting digital assets to invest in, and any well-constructed portfolio will contain a mix of both high risk and low risk investments.
In order to help facilitate the shift of institutional money to Ethereum, developers should take note of what investors need. They want access points to gain exposure to digital assets, they want a variety of products with varying levels of risk and returns that currently don’t exist or are very limited.
It is clear that the digital asset industry will have to step up its service offering if it’s to evolve into the future of finance, and developers should look to structure new products aimed at institutional investors that acknowledge concerns they might have related to fraud and volatility.
The Shapella upgrade may have passed without much fanfare, but we might look back in the future and recognise this as being the pivotal moment when the cryptocurrency industry matured and answered long-held compliance issues from institutional investors.
Digital assets have come a long way in the last decade from being a fringe movement on the sidelines of finance to a multi-trillion dollar asset class, the next decade will see this industry continue to grow and gain the legitimacy of institutional investment.