Ethereum blockchain update: what it offers and its risks

cryptocurrency enthusiasts are about to receive good news: the next big software upgrade to the Ethereum blockchain is about to take place, this Wednesday, April 12.

(See: What is known about what would be the first crypto issued by a bank).

But like almost everything in the world of digital assets these days, the long-awaited adjustments will not be without complications.

The revision, dubbed Shanghai, follows the revolutionary ‘Fusion’ from 2022, which replaced power-hungry computers with a process that involves staking, or pledging, ether tokens, and so-called validators for ordering transactions on the cryptocurrency network most commercially successful.

Shanghai will now allow ether owners who have staked their coins since December 2020 to withdraw money for the first time.

Cryptocurrency owners who bet they will obtain a return that is paid in additional ether tokens.

Currently, around 18 million ether are staked, with a value of around $36 billion, according to Etherscan.

(See: Who is Do Kwon, the accused of causing the collapse of the crypto).

Of this amount, an estimated 1.2 million ether, valued at $2.2 billion at current prices, will be withdrawn within five days after Shanghai, according to researcher Coin Metrics.

The big unknown is whether the update trigger a broader exodus of holders over time or cause an influx of new demand when the tokens are unlocked.

An unclear regulatory landscape adds to uncertainty: The US Securities and Exchange Commission has warned in recent months that the betting services offered by some trading platforms essentially constitute an illegal sale of securities.

“The market will go back and forth as it tries to analyze what the increase in withdrawals will look likesaid Henry Elder, head of decentralized finance at Wave Digital Assets.

(See: What is the regulation of cryptocurrencies in Colombia?).

“I have no doubt that we are going to see many withdrawals“, he added.

Many ether holders can simply switch between different staking services, or bets, or move from operating their own staking equipment to outsourcing the work to a staking service that operates the equipment for them, Elder said.

It could take weeks or even months to withdraw tokens because withdrawals will be limited to keep Ethereum safe.

Pre-update testing has gone relatively well.

“I am quite confident in withdrawals“Tim Beiko, who coordinates Ethereum developers, said in an interview. “There is not a single thing that makes me lose sleep“, he added.

An additional difficulty: it is expected that the ‘staking’ provider, lido, which accounts for about a third of all ether staked, start enabling withdrawals in May.

(See: Celebrities indicted for an illegal scheme to promote cryptos).

Another potential problem could affect some of the various computing nodes that support the ether gambling wallet services.

Once withdrawals are enabled, node operators will need to retrieve the keys needed to unlock user deposits.

If they’ve misplaced them or can’t locate them for some reason, the staking services to which the nodes belong could become insolvent and that could put pressure on the tokens associated with these services, Elder said.

“Nobody knows that the bank is insolvent until people start taking their money out“, said. “That’s like a black swan on the horizon“, he added.

There is also a risk of nodes being hacked or going rogue, trying to hold user funds for ransom, said Mike Silagadze, chief executive of Ether.fi, which allows stakers to maintain control of their keys.

Until now, the main use of the blockchain has been the creation of digital currencies such as bitcoin or ethereum, among others.

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“Most people have the misperception that when Shanghai passes, the risk of scam is reduced“Silagadze says.

“It’s actually exactly the other way around, the risk grows exponentially at this point.“, he explained.

(See: Identity Fraud Doubled in Cryptocurrency and Banking.)

The Ethereum developers note that there has always been the possibility of a service provider or node being hacked or losing keys, and Shanghai does not increase that risk.

“There is a possible threat if a third party were to get hold of an operator’s withdrawal keys“, says Ben Edgington, Teku product manager at ConsenSys who works on the Ethereum infrastructure.

“Any large operator should take the security of their keys very seriously, so I would be very surprised if there was a widespread leak,” he said.

Once these issues are resolved, the withdrawals feature can make ether a more attractive investment, attracting retail and institutional investors in search of profitability.

But a lot will also depend on the opinion of the regulators on cryptocurrency and gambling.

Bloomberg