Ethereum's Shandong testnet is live. It allows developers to experiment with proposals of the so-called Shanghai upgrade. It is the first upgrade since the Merge of September 2022 and scheduled for the second half of 2023. A big update will be that investors who currently stake their ETH are finally able to withdraw. Second, the transaction fees that builders pay will be lower. Third, Layer 2 will become more scalable. 

The list of proposals (EIP's) for the Shanghai upgrade are currently up for a review. But it's widely assumed that the following three upgrades will be included. 

1 The option to withdraw staked ETH

In the life of a crypto investor, three years feels like an eternity. And that's how long investors will have had to wait who started staking ETH on the Beacon chain at the end of 2020 - and can only withdraw post Shanghai. (which explains how an entire ecosystem of liquid staking could evolve, with all its intricacies and risks.)

Two types of withdrawal unlocks are expected post Shanghai: partial and full withdrawals. Partial withdrawals are also called skimming. It means that stakers only withdraw the yield they earned on their stake. A pressing reason why many stakers will probably chose to skim their yields, is these pre Shanghai yields don't compound. The yields sit in a separate bucket, so to speak. 

Full withdrawals: not everyone at the same time

After the Shanghai upgrade, validators on the Beacon chain are allowed to shut down their validator and reclaim their entire 32 ETH stack. But: not all validators are allowed to exit at the same time. Obviously, if they all would exit in droves, this would make the Ethereum network less safe.

2 Tidying up: separation of code and data   

One of the most important proposals for Shanghai is EIP-3540. It calls for the separation of code (execution) and data. This separation will be applauded by on-chain code validators, especially from layer-2 scaling tools, such as Polygon.

Why is this a welcome upgrade? At the moment, code validators have to follow a painstaking process to validate transactions. The proposed separation would make it easier for developers to code smart contracts into Ethereum apps while lowering gas fees. 

3 Reduced costs for builders

The fees that so-called builders pay could drop with an order of magnitude. These builders create candidate Ethereum blocks and hand them over to proposers, who pick the blocks with the best fees. After Shanghai, builders no longer will have to pay expensive coinbase payments (no relation to the American exchange Coinbase). 

After the Shanghai upgrade, only the first time that builders access the coinbase, it costs them high fees to “warm” the coinbase up. Once it’s warm, it costs less to access it. The warm coinbase will help make the builders more efficient, which is good for anyone who transacts on Ethereum.