Ethereum’s Ether coin (ETH) is on a post-Shanghai surge.

Two days after Ethereum introduced staking withdrawals via its Shanghai Upgrade, the price per ETH rocketed upward, to $2,100. For context, the last time ETH traded in the $2,000 range was in May of 2022. CoinMarketCap also shows Ethereum’s Dominance Score (or ETH’s share of the entire crypto market) is holding steady at roughly 19 percent (as of writing).

But what’s causing ETH to shatter high price levels, and what does this mean for the crypto & NFT ecosystem?

The news of ETH’s rapid rally may seem odd considering how more validators are taking their coins off of the blockchain. According to data from Rated and Metrika, validators submitted more than 17,000 full ETH withdrawals in the blockchain’s queue. A “full withdrawal” means validators want to release all of the ETH they have on the blockchain, while a “partial withdrawal” means they want the rewards above their minimum 32 ETH stake.

Reports suggest the crypto exchange Kraken will release more than $1 billion in staked Ethereum following Shanghai to comply with the U.S. Securities and Exchange Commission. In fact, more than 70 percent of the total staked ETH going off the Beacon Chain is for Kraken.

Although these withdrawal requests may seem bearish for ETH’s price, more people are depositing ETH to fill the vacancies. Messari’s Former Senior Research Analyst Tom Dunleavy pointed out that the average ETH deposits on the Beacon Chain were 11,584 versus 7,042 withdrawals following Shanghai. Data from TokenUnlocks also suggests 95 percent of total ETH withdrawal requests are “partial,” meaning validators will keep their initial 32 ETH on the blockchain. Ethereum’s official estimate for total staked ETH is still hovering at 17.9 million, which is where it was before Shanghai went live.

Another positive sign is the DeFi protocol Lido Finance’s Staked ETH (stETH) reached a market capitalization of $12 billion following the Shanghai Upgrade. Lido Finance is a decentralized liquid staking platform best known for issuing stETH as a “cryptocurrency receipt” to depositors. The rise in activity for stETH suggests more people are staking their ETH through Lido Finance to earn passive income.

More crypto investors are comfortable locking ETH on the Beacon Chain for crypto rewards now that they know Shanghai is a success. Anyone who deposits ETH can withdraw their stake whenever they want, which seems to have brought more buyers into the crypto market.

Besides the value proposition of consistent staking rewards, ETH’s price may have increased thanks to a short squeeze. Traders betting against ETH (or shorts) lost $100 million in liquidations on April 13th. Since shorts sell positions to open, they must buy their underlying asset to close positions (ideally at a lower price). Because ETH’s price rose following Shanghai, many shorts took a loss by buying ETH, further propelling its recent rally.

Also, data from Ultra Sound Money shows ETH’s supply is going down following the Shanghai Upgrade. According to Ultra Sound Money, ETH’s yearly inflation rate is at -0.2 percent, meaning ETH is now a deflationary asset. If the supply of any asset goes down while demand stays steady or rises, basic economics dictates it will positively impact price. The decrease in ETH’s total supply combined with an increase in staking activity helps explain the recent price action in the crypto market.

The recent price action for ETH is a positive sign for Ethereum bulls, and it further solidifies ETH’s position as the leading smart contract blockchain. For the NFT space, the price action in ETH should calm the nerves of anyone anxious about ETH’s value falling due to the rise in withdrawals. Since many NFTs are sold in terms of ETH, any weakness in Ether might have weakened activity in the NFT space.

However, it’s difficult to say whether ETH’s recent rally will increase NFT trading activity. Remember that the Shanghai Upgrade lets ETH depositors withdraw their crypto anytime. In financial jargon, ETH is far more “liquid” than ever before in the crypto ecosystem. If people were on the fence about staking 32 ETH on the Beacon Chain because they didn’t know when they could take it out, they no longer have to worry about withdrawals.

Crypto investors holding ETH may be more tempted to earn a consistent 4 percent yield than engage in high-risk/high-return NFT trading activity. Although ETH is a volatile asset, it’s often perceived as a “safer bet” than NFTs, especially as ETH’s total supply decreases. It’s also possible other crypto or NFT projects may take advantage of ETH’s flexible staking system to generate passive income or offer unique benefits to Web3 community members.

Although the long-term effects of Shanghai are unknown, it’s clearly having a positive impact on today’s crypto market. If ETH can sustain its recent price action and attract more stakers, it’s on track for an exciting 2023.