Will 2024 Be a Big Year for Ethereum?

15 min readFeb 7, 2024

Author: F.F from LBank Labs Research team

TL; DR

Over the past year, Bitcoin has dominated the crypto landscape, diverting attention from the Ethereum ecosystem due to a diminished wealth effect. Despite this, the Ethereum ecosystem, boasting the second-largest market cap protocol, remains significant with the largest developer community. The rollup-centric roadmap has made substantial progress, with many Layer 2s reaching milestones and Ethereum itself paving the way for a Data Availability (DA) layer supporting extensive Layer 2 networks. It has evolved from a mere Proof of Concept (PoC) to its current stage.

Looking into the New Year, four narratives may unfold within the Ethereum ecosystem. Firstly, the ongoing Layer 2 (L2) wars, involving battles for the top spot and remaining rollups completing Total Value Locked (TVL) through airdrops. Secondly, the DA war between Ethereum, Celestia, and Eigen Layer. Thirdly, parallelization driven by Monad. Lastly, the persistent attempts by ETH killers to encroach on Ethereum’s market share, either strengthening its position or weakening its dominance.

Despite potential alpha returns in these narratives, this research article aims to provide a comprehensive analysis of these trends and insights into Ethereum’s future prospects in the upcoming year. Ethereum has ensured steady growth, delivering a beta return comparable to treasury yields in the crypto market. As the cycle progresses, Ethereum is like rowing upstream; if it halts progress, it risks falling back.

Layer 2 War Never Stops

Top Spot: Arbitrum vs Optimism

The battle for supremacy among Layer 2 (L2) solutions has captured the attention of Ethereum enthusiasts and developers, with Arbitrum and Optimism emerging as key contenders. Their market performances over the past six months have revealed distinctive trends.

Optimism has seen a surge in its price, outperforming Arbitrum in this regard. However, on-chain metrics tell a different story, as Arbitrum boasts twice the figures of Optimism in key areas such as DAU, daily transactions, and TVL. Notably, Arbitrum’s Dex volume surpasses Optimism’s by a factor of ten.

Examining developer activity, Arbitrum maintains a slightly larger full-time developer community, leading to the overall developer base.

In terms of ecosystem, Arbitrum stands out with a greater number of protocols (891) compared to Optimism (381), showcasing exceptional strength in its top-tier protocols. The performance and revenue generated by Arbitrum’s ecosystem position it as a formidable competitor in the ongoing L2 wars.

Despite Arbitrum’s current dominance, Optimism’s recent market performance suggests it has the potential to challenge its rival in the coming year. The driving force behind Optimism’s growth lies in its strong community and the underlying positioning of OP Stack.

Arb Orbit, associated with Arbitrum, aims to build its Layer 3 (L3) Stack and is open to combining with third-party Data Availability (DA) solutions without legitimate restrictions. In contrast, OP Stack, aligned with Optimism, positions itself as an L2 Stack and is more likely to receive support from the broader Ethereum community, featuring a more open license compared to Arb Orbit.

Launching an independent L2 on Ethereum using Arbitrum Nitro chain requires obtaining a custom license, with options including reaching out to Offchain Labs, the initial developer of the Arbitrum Nitro codebase, or proposing to the Arbitrum DAO. The DAO will democratically decide whether to grant a license for the proposed L2 chain.

The differing positioning and licensing approaches result in distinct outcomes. OP Stack has a higher presence among the top and upcoming L2 rollups, with 11 L2 rollups utilizing OP Stack among the top 36, compared to 3 rollups using Arb Orbit. Similarly, among the upcoming 34 rollups, 11 are based on OP Stack, while 3 are based on Arb Orbit.

While 10 protocols claim to adopt Arbitrum Orbit for app-specific L3 rollups, the ceiling of Layer 3 remains lower than L2. OP Stack firmly occupies the position, indicating a potential trend above leveraging Arb Orbit for Layer 3 development.

For a detailed analysis of OP Stack, refer to our previous articles: <Will Superchain upon OP Stack be the endgame of Layer2 Rollup War?>

Upcoming Airdrop Season

The unfolding competition for the top spot in the Layer 2 (L2) arena promises to be intriguing. Simultaneously, numerous emerging L2 solutions are entering the market, posing a challenge to the older generation of Layer 2s, particularly zkRollups like Starknet and zkSync. Having maintained a robust user base, especially among ‘PUAed’ users, they face the need to respond and reinforce their position by airdropping tokens to reward early adopters. The upcoming airdrop season is poised to play a crucial role in driving user engagement and adoption within their ecosystems. Effective distribution and community satisfaction during this period will be pivotal in retaining their first-mover advantage.

Based on available information, Starknet seems poised to make the first move, having recently released its v0.13 update. This update introduces unique features such as batch transactions, enabling users to execute multiple actions in a single transaction. Notably, it allows the use of $STARK as gas fees, providing users with increased flexibility and cost-effectiveness. The recent surge of ‘e-beggars’ may also act as a catalyst for Starknet to foster a stronger relationship with the community.

Following suit, zkSync is likely to align itself with Starknet’s strategies, as has been the norm. Both platforms have thrived on sequencer fees from general users, even during bear markets. The distinction lies in Starknet’s commitment to rewarding early developers and ecosystem projects, while zkSync may focus on users, evident in its launch of an NFT collection called LIBERTAS OMNIBUS for the broader community.

Other zkRollups, with a focus on establishing a decentralized sequencer and prover network, are set to distribute tokens to node operators, resembling a more traditional airdrop approach. Taking Scroll and Taiko as examples, Scroll has launched the Scroll Origins NFT for early developers, with undisclosed incentives for sequencers and provers. In contrast, Taiko, after completing 6 rounds of testnet, is testing various mechanisms, suggesting a potential inclination towards distributing a higher proportion to validators.

As these standout projects unfold their airdrop plans, more L2 solutions will likely specify their strategies to attract users and developers. TVL remains a significant indicator for L2 platforms, with various approaches beyond conventional airdrops contributing to their overall

Operation Wins TVL Battle

The competition for TVL among Ethereum’s Layer 2 solutions underscores the significance of effective operational strategies. While technology stacks play a crucial role in scalability and efficiency, operational efficiency and market share acquisition are becoming central. Given the maturity of technology stacks for launching Rollups, such as OP Stack, Polygon CDK, Arbitrum Orbit, Starknet Repo, zkSync codebase, the emphasis on technology will likely diminish in the future. Protocols that prioritize operational strategies can gain a significant advantage, even before their L2 solutions are fully operational.

A notable example is Blast, which strategically launched its staking contract ahead of its fully operational L2. The calculable airdrop offered by Blast attracted numerous whales to deposit into their contracts. Collaborating with Lido to provide additional staking yield further strengthened its appeal in the bear market. This operational prowess is evident in Blast’s ability to capture TVL, leveraging users and capital to entice developers through substantial token incentives.

Blast serves as a template for operation-driven Layer 2 strategies, and subsequent projects have expanded on this approach. ZkFair, another contender in the TVL battle, focuses on fair launches with token-based gas returns and revenue-sharing mechanisms. This ensures an equal opportunity for all participants to benefit from the protocol’s success. ZkFair also introduces a decentralized governance model, allowing token holders to actively participate in decision-making processes.

Manta, building on the Blast concept, enhances user interactions through additional multi-chain airdrops. Providing users with unique and personalized airdrop experiences sets Manta apart from competitors, attracting a loyal user base. While not adopting Lido staking services, Manta’s marketing strategy towards whales and recent listing on Binance have contributed to achieving nearly 1.5 billion TVL.

However, the challenge lies in retaining this liquidity, as users may seek higher yields once tokens are airdropped by these L2 platforms. Additionally, the possibility of security breaches and hacking incidents can induce panic and raise concerns among users. Protocols prioritizing robust security measures and establishing user trust will maintain a competitive edge in the TVL battle.

DA Wars Determine the Affiliation

While Layer 2s vie for a stronger ecosystem position, they all contribute a portion of transaction fees to the Ethereum mainnet. As long as Ethereum maintains legitimacy as the Data Availability (DA) layer, it can step aside and reap the benefits. However, users continue to express discontent due to high transaction fees, driven by Ethereum’s elevated security costs. Many protocols and users find these costs prohibitive, particularly in anticipation of the next wave of mass adoption.

This dissatisfaction has spurred the emergence of more cost-effective solutions, posing a potential threat to the foundation of Ethereum. Foremost among them is Celestia. We have previously highlighted the cost and time advantages of Celestia in our articles <The Opportunities in the Modular Narrative>. Looking ahead to 2024, we anticipate a direct competition between Ethereum and Celestia, especially with Ethereum’s planned launch of EIP-4844 in the coming months. Eigen Layer, leveraging restaking to retain more liquidity, is poised to complement Ethereum effectively in this landscape.

Proto-Danksharding Sets the Foundation of Ethereum

The concept of Proto-Danksharding, also known as EIP4844, introduces a groundbreaking approach to data availability (DA) in Ethereum without resorting to sharding. The core idea behind Proto-Danksharding is to optimize data availability within the Ethereum network, addressing challenges related to scalability, storage costs, and data retrieval.

Key Features

Blobs: Proto-Danksharding organizes data into blobs, each consisting of 4096 fields, where each field occupies 32 bytes. This structured arrangement facilitates efficient storage and retrieval of data. The use of blobs significantly reduces storage costs and enhances data availability within the network. It’s essential to note that the storage within the blobs cannot be directly accessed by the Ethereum Virtual Machine (EVM).
Gas Accounting: Proto-Danksharding employs a more cost-effective gas accounting mechanism compared to using CALLDATA. This efficiency contributes to an overall reduction in costs and improved performance across the Ethereum network.
Pruning: To manage storage requirements and optimize resource utilization, Proto-Danksharding implements a pruning mechanism. Older data within the blobs is pruned after approximately two weeks, ensuring the integrity of the blockchain while efficiently utilizing storage space.
KZG Commitment Scheme: Proto-Danksharding utilizes the KZG (Kate-Zaverucha-Goldreich) commitment scheme. This scheme provides fixed-size proof data and is forward-compatible with data-availability-sampling. The KZG commitment scheme ensures the integrity and security of the data stored within the blobs.

Upgrade Schedule for Dencun:

According to the recent timeline, the Dencun upgrade schedule for testnets has been released:

Goerli: 17 Jan 2024 @ 06:32 UTC (epoch 231680)
Sepolia: 30 Jan 2024 @ 22:51 UTC (epoch 132608)
Holesky: 07 Feb 2024 @ 11:34 UTC (epoch 29696)

The mainnet upgrade is expected shortly thereafter, most likely in February. Forecasts suggest that the Dencun upgrade will result in a substantial cost reduction, estimated to be a factor of 100. Considering the development process of Ethereum, Proto-Danksharding is poised to become the primary foundation of Ethereum as the DA layer.

Celestia Leads Alternative Solutions

In this section, we’ll focus on tracking the movements and current status of Celestia, avoiding a detailed analysis of its technical mechanisms as we’ve extensively covered them in <The Opportunities in the Modular Narrative>.

With Celestia’s mainnet launch, we anticipate an easier comparison of data costs. Numia Data’s comprehensive research and testing in this area estimates significant cost savings. Based on the last 6 months’ spending of different Layer 2s on posting callData to Ethereum, Celestia is expected to save nearly 99.9% of data availability costs, translating to a remarkable x1000 cost saving.

Celestia’s cost-saving benefits extend uniformly across various transaction types. Whether it’s ERC20 transfers, ERC721 mints, or Uniswap V3 swaps, Celestia ensures a minimum of 99.5% cost savings in data availability. This makes Celestia an appealing choice for developers and users seeking both efficiency and cost-effectiveness.

The combination of Celestia and Polygon zkEVM stands out as the most cost-efficient technology stack. This trend is evident in recent projects, including Manta and ZKFair, opting for this tech stack.

Despite an immature ecosystem contributing limited usage according to on-chain stats, Celestia’s price surges mask its developmental stage, attracting users to stake more $TIA. Celestia continues to expand its influence by strategically collaborating with protocols less aligned with Ethereum, such as Arbitrum, Movement Labs, and Eclipse. Additionally, it adopts a second-market strategy, integrating modular protocols within the broader Cosmos ecosystem.

Celestia’s astute move involves collaboration with various RaaS (Reusability as a Service) platforms. A comprehensive list includes AltLayer, Astria, Caldera, Conuit, Gateway, Gelato, Karnot, Lumoz, Snapchain, Vistara, and Zeeve. This approach allows long-tail market projects on these platforms to seamlessly connect with Celestia, contributing to its widespread accessibility.

Eigen DA as an Ally of Ethereum

Eigen DA is an implementation that aligns with the principles of Proto-Danksharding, offering an alternative approach to data availability within the Ethereum network. Strictly speaking, Eigen DA serves as an ally of Ethereum, contributing to the consolidation of its position against alternative DA solutions like Celestia.

In contrast to Celestia, Eigen DA doesn’t require a large validator network to bootstrap its operations. Instead, Eigen DA relies on convincing a significant number of Ethereum validators to opt in. This approach simplifies the process and lowers entry barriers for adopting Eigen DA.

Eigen DA, functioning as a non-consensus layer, exhibits enhanced cost efficiency compared to Celestia. The absence of consensus-related overhead allows for higher throughput and faster transaction processing. This makes Eigen DA an attractive choice for applications demanding high-performance data availability.

The workflow involves the rollup sequencer creating a block with transactions, and the Disperser erasure encoding data blobs into chunks, generating KZG commitments and multi-reveal proofs. EigenDA nodes verify the chunks against the KZG commitment, persist the data, and return a signature to the Disperser for aggregation. This streamlined process ensures optimal data availability and enhances the overall performance of the Ethereum network. A more in-depth exploration of this mechanism may be undertaken in the future.

Eigen DA has strategically forged partnerships with notable projects within the Ethereum ecosystem. Collaborations with OP Stack showcase a shared vision of serving Ethereum’s ecosystem and driving innovation. Additionally, partnerships with Near contribute to growing their developer community.

However, Eigen DA faces challenges due to a lag in development, resulting in fewer representative projects. Many projects currently favor Ethereum or Celestia, requiring additional effort to persuade migration. Currently, only Versatus and Layer N stand out, highlighting the potential of Eigen DA in unlocking new possibilities for decentralized applications.

Parallelization Wave Up

Parallelization has emerged as the newest narrative in the Ethereum ecosystem, drawing inspiration from concepts explored in Diem’s research papers and implemented in chains like Aptos and Sui. Aptos, for instance, adopt the OCC and STM solution, while Sui employs the DAG and Narwal consensus. Following these pioneering projects, protocols like Avalanche have implemented their versions of Block-STM.

Currently, several protocols are actively working on modifying the EVM to be parallelized, with Monad leading the way, followed by Sei, Neon, and Eclipse. As these projects open-source their implementations, it is projected that every EVM chain will integrate or modify itself for parallelization. In the foreseeable future, parallelization will become standard, quietly driving efficiency across the ecosystem.

Monad

Monad addresses the challenge of parallelization through the use of techniques like Optimistic Concurrency Control (OCC) and Software Transactional Memory (STM), akin to Aptos. Monad allows transactions to execute in parallel, even before earlier transactions in the same block are completed. This significantly boosts blockchain performance. To ensure data integrity, Monad sequentially merges the updated state for each transaction, meticulously checking for conflicts. MonadDB, the database employed by Monad, leverages the latest kernel support for asynchronous I/O (async I/O), eliminating the need for a large number of kernel threads and ensuring efficient database operations.

Sei

Scheduled to launch its v2 in H1 2024, Sei shares similarities with Monad in its adoption of OCC and modification of storage to optimize read and write operations. Sei v2 executes all transactions in parallel, maximizing throughput and efficiency. When conflicts arise, conflicting transactions are re-executed sequentially to ensure blockchain integrity. Sei v2 introduces SeiDB, a redesigned storage interface with efficient data structures, enhancing read and write performance while minimizing state expansion. Moreover, Sei v2 ensures compatibility with Geth, the Go implementation of the Ethereum Virtual Machine (EVM).

Neon

Neon takes a unique approach to parallelization as an EVM on the Solana blockchain. Leveraging Solana’s built-in parallelization capabilities, Neon converts Ethereum transactions into Solana transactions, which are then processed on the Solana blockchain. This innovative process enables faster and more efficient transaction processing, contributing to scalability and performance.

Eclipse

While not strictly a parallelized EVM, Eclipse presents an intriguing approach by utilizing the Solana VM (SVM) to interact with the Ethereum network. Eclipse executes transactions on the Solana VM and settles them on the Ethereum network, fostering enhanced performance and efficient transaction settlement.

In examining these projects, we witness diverse strategies employed to achieve parallelization, each contributing to the continuous evolution and growth of the blockchain ecosystem.

ETH Killers Come and Go

In previous cycles, numerous Layer 1 smart contract platforms branded themselves as “ETH killers,” yet none succeeded. Ethereum’s vast developer community and substantial capital stake make it resilient against such competition. However, those that weathered the bear market of the last cycle have accumulated capital and community strength, challenging Ethereum’s dominance. New Layer 1 platforms entering the scene offer enhanced token incentives for users.

Meanwhile, Ethereum itself faces challenges from alternative data availability (DA) layers. The transition from PoW has weakened its position against other PoS chains. We observe the following scenarios becoming the norm:

Ethereum ceding more market share in smart contract platforms.
ETH Killers surpassing Ethereum in certain metrics.
ETH Killers outperforming Ethereum in price.

To illustrate these cases, we’ll use three protocols as examples. Solana, emerging as a formidable competitor, has led the market share occupation wave. Its high scalability and impressive performance have resulted in a significant surge in DEX volume since December 21, 2023, showcasing growing popularity and adoption among cryptocurrency traders and investors.

Moreover, Solana has made significant strides in the NFT space. On June 30, 2023, Solana recorded substantial 24-hour NFT volume, solidifying its position as a prominent player in the NFT market. This demonstrates the platform’s ability to support the trading and minting of unique digital assets, contributing to Solana’s overall ecosystem growth.

Avalanche, another blockchain platform, showcases high throughput and stability. Notably, Avalanche’s daily transaction count surpassed Ethereum during the Inscription season, highlighting scalability and efficiency. This achievement underscores Avalanche’s capability to handle a large number of transactions, making it an attractive choice for developers and users seeking faster and more cost-effective solutions.

Near, a contender in the blockchain space, has made substantial strides in adoption and usage. Surpassing Ethereum Mainnet in DAU and daily transactions marks a significant milestone. This demonstrates the growing popularity and trust in the Near network, positioning it as a scalable and user-friendly blockchain platform.

These developments in Solana, Avalanche, and Near signify the evolving landscape of blockchain technology and the emergence of formidable alternatives to Ethereum. As these platforms continue to innovate, they present exciting opportunities for developers, businesses, and users seeking efficient and scalable solutions in the blockchain space.

Appendix

Disclaimer: This article is provided for informational purposes only and should not be considered as financial advice. The cryptocurrency market is highly volatile and unpredictable. Always conduct thorough your own research and consult with a qualified financial professional before making any investment decisions.

Edited by El Bachir Essamari