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How True Is the Rumor That Ethereum 2.0 Staking Cannot Be Unlocked?

How True Is the Rumor That Ethereum 2.0 Staking Cannot Be Unlocked?

By Oreld Hadilberg
Reviewed by Tony Spilotro

Table of Contents

In light of the recent non-withdrawal events that eventually turned into impending bankruptcies at some crypto lending firms, widespread fear and panic has gripped the crypto community, who are understandably  getting paranoid at almost everything after the spate of events that has plagued the crypto market since the implosion of LUNA.

One particular incident that stands out among all new paranoias is the postponement of the staked tokens release date for ETH 2.0, which has caused a lot of criticism and anxiousness amongst ETH 2.0 validators who are seeing the staking duration of their ETH tokens extended. This has led to an uproar on crypto social media, with many critics of Ethereum jumping in to spread rumors that Ethereum Foundation was going bankrupt because ETH 2.0 is not allowing withdrawals. While this accusation is entirely false because the definition and meaning behind has been distorted and is entirely incorrect, we cannot deny that the latest update to the timeline on ETH 2.0’s schedule has postponed the unlocking of all staked ETH. How did all this come about? Let us find out together below.

The Background And Why ETH Stakers Are Worried

How ETH 2.0 staking works is like this, validators would stake ETH on the Beacon Chain to participate in the validation of new blocks in ETH 2.0 after the Merge has commenced, and in exchange for that, get paid in newly minted ETH as reward for verifying the new PoS version of the Ethereum blockchain. However, all their staked ETH and any accrued rewards would remain locked up in the Beacon Chain smart contract until the next upgrade. This upgrade, which is named Shanghai, is expected to include the mechanism by which those rewards will be released.

The Ethereum Foundation initially projected an implementation timeline of between six to twelve months for Shanghai after the Merge, however, last week, ETH followers noticed that the schedule had changed - the Ethereum Foundation’s website had removed its initial timeline, and the Shanghai upgrade now no longer has a proposed timeframe.

This change in language is not sitting well with ETH stakers right now, who understandably have justification to be worried, especially after witnessing the withdrawal suspensions at many large crypto service providers like FTX, Blockfi and Gemini Earn.

Many ETH stakers are anxious to know when they will be able to access their funds, and this includes their “initial capital” of staked ETH, not just the rewards, which means that we could be talking about large sums of money here. However, the Ethereum Foundation has been quiet about the giving any specifics or updates, which is making ETH stakers very nervous, while skeptics are having a field day attacking Ethereum, predicting that Ethereum would be the next to become bankrupt, scaring a tonne of people who are none the wiser.

ETH Has Not Defaulted, Funds Are Not Lost

However, while ETH stakers are justified to feel anxious, this case should not be confused with the default cases of centralized entities, as Ethereum is a decentralized blockchain and not a centralized entity - it cannot go bankrupt. Ethereum the blockchain is governed by code, and as long as the blockchain is still running (it takes only a minimal of one computer in the world to be running the Ethereum node for Ethereum to function), their funds will not be lost. However, their funds can be locked up by smart contract, but once someone manages to write and apply the code to release the staking, (after the code gains the consensus of the majority of the people running the nodes, i.e. the validators themselves) they will be able to get all their funds and accrued rewards back. Until that time comes, the staking rewards will continue to accrue and be paid one day. This is in stark contrast to the bankruptcy of a centralized entity, which has lost the funds and is in no position of returning them to the original fund owner. In Ethereum’s case, the delay of Shanghai is simply a postponement of an upgrade which will eventually materialise.

Why Shanghai Needs To Postpone

For the benefit of readers who have not been following Ethereum long enough, Ethereum has always been notorious for not being able to keep to its timelines. Delays have regularly happened in the past when Ethereum developers had to upgrade several key components within one particular upgrade. This is not something to be alarmed about, as upgrading a blockchain is not an easy feat, especially with its decentralized nature - a lot of coordination needs to be done across the globe.

As for Shanghai, it even involves another hard fork of the Ethereum blockchain, which makes it even more tedious to execute and requires more fine tuning to prevent errors from occuring. The postponement and the lack of a timeline simply means that the developers see the need for a delay, but are not yet confident of committing to a date for the upgrade, not that the upgrade is not going to happen. It must be emphasized that the Ethereum developers derive no incentive from delaying the Shanghai fork. If there is consensus for a delay, it means it is definitely called for.

Ethereum developers are still committed to making withdrawals a priority for Shanghai. According to Parithosh Jayanthi, a DevOps engineer at the Ethereum Foundation, who explained about the delay in an interview with Coindesk, “There’s always discussions about timelines and moving things around, but I don't think there’s ever been more consensus among core developers to move withdrawals back. It has and will always be included in the next fork. I don’t see a scenario in which withdrawals don't get shipped in the next fork.”

The Shanghai upgrade is not a simple upgrade as we would have guessed by now. There are other Ethereum Improvement Proposals (EIP) that are under consideration for inclusion in the upgrade. For example, EIP-4844, also known as proto-danksharding, could be a first step toward making the network more scalable through sharding, an upgrade that can increase Ethereum’s capacity and bring down gas fees. However, because more data needs to be collected to determine how difficult it is to implement EIP-4844, developers have not decided if it should be included in Shanghai, or in another subsequent upgrade. This is one reason why Shanghai needs to be postponed, it has nothing to do with stakers’ funds. While stakers are mostly concerned with their funds, developers' concerns are how best to make the blockchain more efficient.

Once everything is finalized, the developers will likely present a fresh timeline that could still be within the original six to twelve months timeline, or it could be later. It may even be earlier, it all depends on the complexity of the upgrade. Thus, while it is true that their gratification could be delayed, stakers need not be unduly worried about losing their funds; they should be happy that they have a team of responsible developers who are seeing to the success of the blockchain they have invested in and have a bit more patience to simply wait till it is time to reap the fruits of their waiting.

The above are the personal opinions of the author and should not be taken as the official view of the Margex platform. They are also not financial advice and should not be construed as a solicitation to trade. Readers are strongly encouraged to do your own research, conduct due diligence, and assess your financial abilities before doing any investment or trading as these activities carry risks. Should you be in doubt, kindly speak with your personal financial advisor.