Market View
In line with our expectations, ETH price action has been resilient following the Shanghai (Shapella) Fork on April 12. Within the first 24 hours of withdrawals being enabled, ETH supply entering the market has been relatively limited for several reasons:
- First, the majority of addresses receiving partial withdrawals have not spent their received rewards with around 70% of addresses now having properly set their withdrawal credential prefixes to 0x01. (Or more accurately, some addresses were not able to set their withdrawal credentials until the upgrade went live, and this is necessary for both partial and full withdrawals to be enabled and funds unlocked.)
- Second, full withdrawals (i.e. exits) are being processed but their market impact has been partly offset by a healthy number of new entrants in the validator entry queue.
A breakdown of the validator exit queue indicates that Kraken has so far represented over two-thirds of all exit initiations. This had been anticipated following its settlement with the SEC in February that required the winding down of its staking business. The amount of effective staked ETH on the network has fallen from 18.2M prior to the upgrade to 17.9M or 14.9% of circulating ETH supply. As we publish, there are more than 24k validators waiting to exit representing almost 875k ETH of potential unlocked supply, according to Nansen (although Rated has the count at 21k validators). As exits are rate limited to 1800 validators per day at the moment, that would take about 14 days to unlock.
Another reason why ETH is appreciating is that ether’s relative underperformance to bitcoin year-to-date (particularly post US banking turmoil as evident in the ETH/BTC cross trailing behind the 50d moving average since mid-March) has also left a lot of room for catchup post-Shanghai. Consequently, we have seen some rotation from BTC into ETH. Meanwhile, the macro environment remains conducive to risk taking for the time being. Although core CPI is still sticky (rising at a pace of 5.6% YoY), PPI data for March was dovish while Fed staff is projecting a mild recession later this year (as described in the FOMC minutes). That supports arguments that the end of the hiking cycle may come as early as May and could keep market sentiment buoyant through the end of April, in our view.
Chart 1: ETH/BTC cross has been trading under 50d MA since US bank turmoil
Separately, we saw the equivalent of around 31.2k ETH ($62.5M) withdrawn from the liquid staked ETH sector following the Shanghai Fork. Lido’s stETH and Coinbase’s cbETH – two of the largest liquid staking tokens - are still trading at around a 1% discount to ETH, although we haven’t seen any relevant imbalances in major liquidity pools. While these gaps have narrowed recently, we would have expected the discounts to close after the upgrade. The disparity may partly reflect residual uncertainty in the overall timeline of the ETH withdrawal process.
Finally, as of now, it’s unclear when the Cancun Fork - the next major upgrade for Ethereum - will materialize as there is no scope for what it will definitively include other than EIP-4844 (proto-danksharding). Proto-danksharding is a precursor to full danksharding and will support higher throughput for the network by enabling a new data type (“blobs”) as well as data availability sampling.