Shanghai-Capella: ETH Staking Withdrawals with Tim Beiko, Justin Drake, and Anthony Sassano

You know, you don't have to pay any fees when you're solo staking. So already that puts you uh uh above the rest from a from a rational standpoint. But the the other thing I want to highlight is that my prediction is that there is going to be special airdrops specifically for solo validators.

Bankless Nation, it is a special day. Today we are hard forking. ETH staking withdrawals is enabled. David, what is going on? Who do we have on?

Yeah, the Shanghai, now called Chappella upgrade, coming to Ethereum, coming to a blockchain near you. Uh, the long-awaited withdrawals hard fork uh that allows stakers to withdraw Ether. Uh, we uh hard forked into proof of stake a while ago, created the beacon chain, did the merge, but in an abundance of caution, we left out this one ability called withdrawals, just to not overcomplicate things. It's really the only reason why we didn't include withdrawals in this original merge was to not to make the merge as least complicated as possible. So, fast forward to where we are now. We are now enabling withdrawals. Uh, and so this has caused a bunch of conversations uh around the crypto sphere. Uh, is this bearish? Is the ETH price going to dump? Uh, is it actually this bullish? And more people are going to stake as a result of this. What happens to LIDA? What happens to Rocket Pool? What happens to the insane supply of Ether that is in Coinbase? Uh, there is a lot of second-order consequences as a result of this merge. There are 18 million ether that is locked up in the beacon chain, and that becomes to be unlocked later today, I believe at 9 p.m., no, 6 p.m. Eastern time, uh, 6 30 p.m. Uh, and so this uh uh episode's going live uh a few hours earlier than that. And this is just a conversation with three guests from around the Ethereum ecosystem. We got Anthony Susano, Ethereum community member and content producer, also solar staker and solo staker tinkerer. He gives his perspectives as uh what his role is in the Ethereum ecosystem as a result of being a solo staker and what he's doing in the four different boxes that he runs to solo stake. Uh, so he's got Anthony, we got Anthony, we also got Justin Drake, and we all know Justin Drake, uh EF researcher and ether economic thought leader. Uh, and then we also got Tim Baco as well, who leads the all core devs calls. So three diverse perspectives to all give their takes about uh this Shanghai Chapella upgrade.

Guys, uh, we're gonna get right into the episode. Um, maybe a few last thoughts here as we get in. So we're going through the um what's happening, why is it a big deal, why it's called what it's called, the effect on price, liquid staking, and what's next for Ethereum. So this is a really interesting episode. We hope you stay tuned for it. We'll be right back with Tim and Justin and Anthony. But before we do, we want to thank the sponsors that made this episode possible.

Bankless Nation, we are here with Tim Bako, protocol support of the Ethereum Foundation. He leads the All Core Devs Call, which is the only true source of hard fork dates. Tim, welcome to the show.

Thanks for having me.

Also, we got Justin Drake, another researcher at the Ethereum Foundation, lead of the ultrasound.money website project, and also meme. Justin, welcome back.

Thanks for having me too.

And last but not least, Anthony Sedano, Ethereum Community Member, also content producer, solo staker, and solo staker tinkerer. We will get into what that means towards the end of the show. Anthony, welcome back.

Thanks for having me on, guys.

So, guys, it is a big day in Ethereum history. Uh, I think this will be the last hard fork that is relevant to the proof of stake project. But since Tim, you are the herder of cats as it relates to what it takes to make a hard fork come to be, I'm wondering if we could start with you and just kind of give us the the high level details for people who uh need to catch up to what uh Chappella is. From the protocol perspective, what is the Chappella hard fork and what does it do for Ethereum and why is it significant?

Of course, yeah. So the most obvious thing that Chapella brings is the introductions of withdrawals on the beacon chain. So I assume anyone listening to Banklist knows this. But uh today, if you launch a validator on the beacon chain, you're basically depositing your funds into a smart contract, which gets read by the beacon chain, activates your validator there, credits your fund on your funds on the beacon chain. You can earn rewards and penalties depending on if you do good or bad job. But then there's no way to actually get your funds back out on the execution layer to either, you know, sell your ETH, use it in DeFi, anything like that.

And uh since the merge, uh validators have been able to receive transaction fees. So when they produce a block, the transaction fees they get are not on the beacon chain. You know, they get sent to any ETH address. Uh so the main thing we're introducing with uh Chappella, this upgrade that's activating today, is kind of closing the loop and allowing validators the ability to withdraw their stake. Um and again, you know, for your listeners, some of those validators have been have locked their stake since 2020. So it's been uh it's been a while. Um, and so yeah, after this upgrade, they'll be able to to to withdraw it. There's a couple other small changes that we're introducing as well, but this is really kind of the big one.

So within hours, as soon as that hard fork happens, Tim, um those listening who have staked ETH will be able for the first time to withdraw that staked ETH. Is that correct? And is there some sort of queuing mechanism as well? Let's say there's a there's a run on the the ETH staking. Run on the bro

Protocol.

Yeah.

Yeah. Does that put us into trouble? Like what you know, uh t tell us the mechanics of how this might work.

Okay, yeah. So um, and there's many, many different ways to break this down. So please bear with me. Um so there's two types of withdrawals you can think about. So there's full and partial withdrawals. Um and the way that they work is that uh

Every block basically validators scan over uh the validator who's producing a block scans over the validator set and tries to find the first 16 validators for whom they can do either a full or a partial withdrawal. And they they process those, they add them into the block, and then the next validator, you know, picks up or the last one let's left off, scans the chain, tries to find the next 16, packs them into a block, and so on. Um, so if you're a staker and you don't want to stop staking, um, those partial withdrawals will basically happen automatically as long as you've set uh an ETH uh ETH uh address as a withdrawal credential. And if you've been a validator for a long time, you might not have done this. It'll be possible to change it after the fork. Um, but this is basically what

What happens every block is a validator checks, finds 16 validators who either are fully exited or have a balance bigger than 32 ETH, which draws that back on the execution layer and then moves on.

If you're a validator and you do not want to be a validator anymore, you need to exit before you can get your full withdrawal process. And just like when we have new validators join, we kind of want uh to throttle them so that the validator set can't change too quickly.

If there's a bunch of validators who want to leave at the same time, we also throttle this process. And the reason for this is basically security, where you know you could imagine if we didn't have this on both sides, somebody could either hack a bunch of ETH, you know, acquire a bunch of ETH, replace the entire validator set or the majority of it, do some bad stuff, exit, and kind of not be penalized. So because we want to prevent this, we we sort of slow down the flow of validators on both ends. Um and so this means that if you are a validator today and there's a bunch of other validators who want to stop being a validator at the same time as you, you need to send this exit message and then it gets processed basically in the order that nodes receive them. Um and there'll be kind of a delay between

When your message was received and when you can fully exit your funds. And during that period, though, you still basically earn rewards and penalties. You could still get partial withdrawals processed, but to get like your 32 ETH back, or potentially less, you know, if you if you were slashed or whatnot, you need to wait until you've like cleared that queue. And I'm not quite sure Justin probably knows the exact number that we clear every block. But it's uh yeah, it's a constant number per block that actually, well, it's a constant number that depends on the total stake size. So um, but on the order, it's less than 10 per block, basically. Yeah.

Yeah, I'm I am familiar that even with simple updates to Ethereum, there are these like edge cases that get really, really complex, even though simply put, Shanghai is withdrawals, and then there's like a bunch of like rabbit holes and things to pull apart. But let me summarize what I think you just said, uh Tim. There's this bottleneck called the withdrawal or deposit cue. And that bottleneck is the same on both sides. So it's equivalent. And all that really does, like imagine just like water sloshing back and forth between two buckets, and there's like a pipe between these two things, and one is staked ETH on the on the beacon chain, and the rest is ether everywhere else in the world. And there is a pipe between these two things that constrains how fast ether can move in either direction, and it's the equivalent uh size. And the reason why we have that constraint is that we're talking about the security of the Ethereum protocol. We don't want things to move too quickly. We don't want to go from 18 million ether staked to 2 million ether staked to 25 million ether staked really, really quickly. So we put in this constraint that we call the deposit and withdrawal queue. And that just helps things settle and the foundation of Ethereum to not churn too quickly. Uh, yet it still is sufficiently large enough that if you want to withdraw, you are going to be able to get your ether within a pretty reasonable amount of time. Uh, Tim, I don't know if you guys have done any like simulations, but like, what's the longest somebody would expect to wait after pressing the withdrawal button before getting their ether in the in normal circumstances, like non FTX E type weird stuff? I know this is almost an impossible scenario to ask you about, but just like, can you kind of put a time box on this thing?

So honestly, I I don't spend my time doing simulations on this. Maybe Justin does. Yeah, but you know, I think you see with like the deposit queue, like it's mostly empty most of the time. You know, sometimes there's like a couple of hours, maybe a couple of days, but it's like rare that you get these massive, these massive spikes. Um, that said you did get like, you know, a pretty big initial set of people wanting to be validators, like

at the launch of Ethereum, at the merge and whatnot. So I wouldn't be surprised. Like, obviously, this is the first time we're gonna have withdrawals. There's probably a whole set of people who want to or have to like exit their validators. Um, so you know, we'll we'll see some churn.

And I suspect we'll probably see some churn on both sides. Like we'll probably see some people who didn't want to like stake their ETH until withdrawals were alive and now can. But once we've processed that initial chunk, like I,

you know, I don't see why there would be like a huge exit cue on a day-to-day basis, except in cases when, like, yeah, there's a massive amount of the stake that that has to exit. And whether this is, you know, like the Kraken thing that happened or um something like that, where um they represent like a non trivial part and they all have to exit at once, um, then obviously you'd have it you'd have a delay. Similarly, to if you know there's a new cool liquid staking pool that shows up and people want to stake with that and they launch a bunch of new validators, then they'll have a delay in getting them activated.

And one thing, sorry, one last thing I'll add is

for most people who just want to stay a validator, the scan happens. I think it's every four or five days that you get your rewards after uh after this. So even imagine you know you you haven't set your ETH withdrawal address yet. Uh you set it tomorrow and like you sort of missed the first scan. Um, you'll you'll get it like five days later. So I think on the

For the average validator who's just getting their partial rewards, um, it'll be a pretty regular process. And and and and there's no

there's nothing that would like extend the duration of that scan significantly except the number of validators. So if we double the number of validators and you know it'll go from four or five days to like eight or ten. Um, but that's that's what how it's bounded. Yeah.

Well and uh Justin, I I'm wondering if you can comment on the economics of these things. I think the last time I remember, it was uh around 1800 validators per day that can fit through that pipe of withdrawals or deposits. I don't know if that's the right number. Is that is that right?

Um that sounds a bit too high. I think it's uh in in in ETH terms, it's about 50,000 or 60,000 uh Eve per day. Now, just to give you an order of magnitude, uh since uh proof of stake happened, we've had on average 20,000 ETH per day. So the the activation is uh Q is definitely not full.

Cool. Okay. So 50,000 ETH per day times 900, $1,900 basically round up to $100 million at the current ETH price can flow between the beacon chain and the withdrawals. And the withdrawals is what's being unlocked today. And so today, for the first time, at maximum, $100 million of value can go from the beacon chain back into the rest of the world. And that is the thing we're celebrating.

But

I didn't know bank has denominated in USD.

I thought this.

a significant portion of our listeners do. And so we're doing the the big computational work on their behalf.

Okay, so where do you guys want to go next? Uh the Justin, I know that this is uh the proof of stake world is and the ETH staking is is is uh something that you pay attention a lot of attention to. So when we see the Shanghai, the now called uh Chappella upgrade, like why why is this so significant to you? Like when you when you is this F grade, like uh I think everyone kind of sees something different in it. Uh a lot of people want us to talk about liquid staking derivatives, a lot of people want to talk about ether cell pressure. Uh when you look at the Chappella upgrade, what do you see?

And and guys, ca but as we get into that, Justin, can someone just I feel like I went on vacation and it was called Shanghai and I came back and now it's called Shabella. I wasn't ready for that. What's with the name change? How how did how did this come about?

Okay, I feel I feel strongly about this. So

Okay.

Ethereum has like this execution layer, this consensus layer. You know, before the merge, we were all doing your own thing. Uh obviously the networks communicated, but in terms of the network upgrades themselves, they were pretty independent. So, you know, we had London with 1559, uh, and then on the on the beacon chain, they had Altair, which was their first fork. Um, and then we have the merge, and we sort of had to specify like the set of changes on both sides of the chain, right? Like there's some stuff that happens on the beacon chain, some stuff that happened on a proof of work chain then.

And so those upgrades actually had separate names as well. So like the set of changes on the proof of work chain was called Paris, and uh on the on the proof of stake chain it was called Vilatrix. We were lucky that we could just call it the merge and move on with it with our day. Um but knowing that we would be in this situation, we started to think, okay, what's like a way we can name these things that people don't have to like follow two different names. Um so right now the set of changes on the consensus layer side is called Capella. They use stars to do those changes. On the execution layer side, it's called Shanghai because we use the DEF CON city names in order. Um, but then most people like don't want to know that like Shanghai and Capella are the two sets of changes. Um and so proto from optimism have the idea that we should just merge the names together. Uh, it gets us a new name. So Chapella in this case. Um, and this is kind of neat because if you have a weird funky name, you can know it's like an upgrade on both slides. But then say that like we just changed something on the beacon chain, we can just use a star. If we just change something on the execution layer, we can just use a DEF CON city. Um so we can, you know.

We can call this Chappella because it's like the sum of the two upgrades. And then the next one, you know, it'll be Cancun and Daneb. So we can call it Dan Coon. And no one has to know about Cancun or Daneb. So Schapella, Dan Coon, and we'll keep going from there.

So every time that we talk about the naming nomenclature of Ethereum upgrades, I just remember that nerds are taking over the world.

I thought it was named after Dave Chappelle and he's just like, Y'all gotta be more of that eat steak, right? It did give us

That's gonna be power that

a

That was a fun detour. Thank you for guiding us through that one. Tim. Justin, I'll throw this, I'll throw this back to you. The kaleidoscope, that is the Chappella upgrade. What do you see in it?

Right. So I guess before we get into that, I just want to do a couple of clarifications. The first one is proof of stake, yes, I agree, it's now functionally complete.

And so if we were to leave Ethereum as this for the rest of time, it would be a functioning system. Having said that, there's a bunch of security upgrades and improvements that are coming to proof of stake. So we have, for example, secret uh single leader election, we have single slot finality.

uh which uh reduces the time to finality. We have what's called enshrined PBS, we have VDFs, and we have maybe a dozen or so security upgrades that will eventually make Ethereum World War III resistant.

And the second detail that I wanted to, it's really a minor one, is differentiating the activation and exit cues versus the deposit and withdrawal cues. So really the throttling of the validators is at the activation and exit level. The deposit and withdrawal queues are basically there because the beacon chain needs to process all of these things, and it's a bit of a DOS vector if they have to process too many deposits or withdrawals at the same time.

Now, in terms of the big picture of why withdrawals is important, I think there's several aspects. One of them is, of course, liquidity. You know, it's a big de-risking event because so far we've mostly had early adopters come in. And the way that I see it is the big picture is we're going to go from the early majority to the to the late majority. So we're about halfway through, I'd say

we have 18 million EVE staked. And over the next two and a half years, all I'm expecting is that to roughly double.

And if you were to zoom out and look at the shape of the amount of ETH staked over time, it's surprisingly, shockingly linear.

Yeah.

Straight line up.