Quick one for the Dencun upgrade:
On February 8, 2024, Ethereum developers convened for an All Core Developers Consensus call, focusing on pivotal updates to the Ethereum Consensus Layer. The Dencun upgrade was scheduled for activation on the mainnet on March 13, 2024.
This session also served to distill insights from a recent incident impacting validator operations on the mainnet, reinforcing the urgency for upgrades like enshrined proposer builder separation (ePBS) to enhance validator independence.
Discussions extended to revising specific code changes for the forthcoming Electra upgrade, particularly concerning maxEB and inclusion list parameters. A spotlight was cast on the Dencun upgrade’s testing progress and its deployment timeline.
Successful activation on the Holesky testnet was reported, with no significant issues encountered, setting a positive precedent for its impending Goerli network tests. An anomaly identified during the Holesky upgrade emphasized the need for meticulous testing.
The implementation of node recovery logic within client software was debated, highlighting the intricate challenges and the necessity for collaborative problem-solving among client teams alongside ongoing scrutiny into potential vulnerabilities.
Engagement with leading Ethereum Rollups teams revealed a widespread state of advanced testing, signaling readiness for the Dencun upgrade’s mainnet integration by early to mid-March. The consensus on the timeline emphasized a strategic three-week buffer.
This carefully orchestrated schedule aims to provide node operators with ample preparation time, facilitating a seamless transition to the enhanced network capabilities introduced by the Dencun hard fork on March 13, 2024.
The benefits of the Dencun upgrade
In a series of three previous introductions, we discussed the DePIN project and its underlying business logic. A noteworthy observation is that many DePIN projects are hosted on blockchains like Solana, which are characterized by their fast speeds and low transaction costs. The significant growth of the Solana ecosystem towards the end of 2023 can be attributed to its exceptionally low network transaction fees. In comparison, the gas costs for Ethereum’s Layer 2 (L2) solutions are considerably higher, making Solana’s fees almost negligible.
This low-cost environment on Solana has fostered a thriving ecosystem of Meme trading, DeFi application interactions, and migrations of DePIN applications. It’s evident that low network transaction fees play a crucial role in stimulating transaction activities and the overall prosperity of network applications. This issue has not gone unnoticed by Vitalik Buterin and the broader Ethereum community.
Vitalik Buterin published an article titled ‘Make Ethereum Cypherpunk Again’, wherein he shared his vision for the future of cryptography. He highlighted that one of the primary reasons blockchain technology has been confined to asset speculation is the increasing cost of transaction fees. These high fees have shifted the role of users from active participants in the blockchain network to mere speculators. For blockchain applications to realize their true potential, a significant reduction in transaction fees is essential. Although the advent of Ethereum’s L2 has lowered fees compared to the mainnet, there remains a need for further reduction.
In Ethereum’s upgrade roadmap, the next major step following ‘The Merge’ is ‘The Surge’, an upgrade aimed at increasing Ethereum’s Transactions Per Second (TPS) and reducing the ecosystem’s transaction fees. The upcoming Dencun upgrade, a part of ‘The Surge’, focuses on implementing Proto-Danksharding. This involves integrating blob storage into the block space, optimizing data availability costs, and enhancing the scalability of L2 solutions. The Proto-Danksharding introduced by Dencun represents a significant step in Ethereum’s full-scale expansion, laying the groundwork for the eventual implementation of full Danksharding, separation of block proposers and builders, and data availability sampling.
The Dencun upgrade is particularly beneficial for the L2 sector. The introduction of blob storage is expected to significantly reduce L2 transaction fees and increase throughput. This upgrade positions L2 to compete more effectively with alternative Layer 1 (L1) solutions, such as Solana, by offering lower costs and enhanced performance, thereby attracting high-quality projects and a broad user base from these ecosystems.
Arbitrum, known for its high transaction volume and frequency, is poised to reap substantial benefits from this upgrade, particularly in reduced transaction fees and improved TPS. These enhancements are also advantageous for leading on-chain exchanges and high-performance-demand protocols on Arbitrum. From a fundamental network perspective, Arbitrum stands as one of the primary beneficiaries of the Dencun upgrade.
Moreover, the Dencun upgrade is expected to generate increased demand for decentralized storage solutions, benefiting established projects like Filecoin, Arweave, and Storj. A key feature of the upgrade is the introduction of blob storage for submitting L2 data to L1. However, as blob storage is not permanent and data is discarded after approximately a month, there’s potential for this data to be utilized and analyzed further, thereby driving the demand for decentralized storage services.
Beyond these domains, the Dencun upgrade is set to catalyze development and innovation in data availability layers, orderers, and application layers. We are actively seeking projects that are developing in these areas, aiming to provide incubation, market-making services, and other forms of support to leverage the opportunities presented by the Dencun upgrade.
a game changer for ethereum Layer 2 (L2)
The Dencun upgrade is a game changer for ethereum Layer 2 (L2), notably reducing transaction fees and boosting throughput. This makes L2s more competitive, attracting quality projects with lower costs and enhanced performance. Let’s explore more of these!
Leading the L2 space are arbitrum and Optimism, each with unique strengths. Arbitrum is ahead in the diversity of protocols on its Arbitrum One platform, while Optimism leads in the interchain ecosystem diversity with its OP Stack.
Arbitrum is currently the most protocol-diverse L2. It surpasses Optimism, ranking second, in the number of protocols and nearly holds half of the TVL in Ethereum Rollups. Additionally, network transaction activity on Arbitrum is notably vibrant.
With its high transaction volume, Arbitrum is poised to benefit substantially from reduced transaction fees. The TPS optimization is particularly advantageous for protocols like GMX and Gains Network on Arbitrum that demand high performance and real-time trading.
In contrast, Optimism, beyond enhancing its top protocols like
VelodromeFi, focuses on developing the Optimism SuperChain network using the OP Stack. The value of Optimism is increasingly linked to the network value of the Optimism SuperChain.
Post the launch of OP Stack, numerous projects have been developed using it. The OP Stack’s Bedrock update has enhanced transaction processing and node performance. Optimism benefits from more chains potentially adopting OP Stack, aligning with its SuperChain vision.
Moreover, unissued token L2s are gearing up, drawing engagement with anticipated token releases and marketing strategies.
for LSDs
Beyond EIP-4844, the Dencun upgrade also incorporates EIP-4788. This proposal introduces the beacon block root into each EVM block, enabling the Ethereum mainnet to access consensus layer data with minimal trust. This reduces reliance on external oracles and minimizes potential security risks, oracle malfunctions, and the threat of malicious manipulations.
The introduction of EIP-4788 significantly bolsters the security of staking protocols. Although this improvement might not be directly noticeable to users, it is a major boon for Liquid Staking Derivatives (LSD) and ReStaking sectors. Protocols like Lido, Rocketpool, and Swell, which offer liquidity in staking, along with re-staking protocols such as Eigenlayer, will be able to directly access vital data like validator balances and statuses from the consensus layer. This enhancement will markedly improve their safety and operational efficiency.
We maintain high expectations for the evolution of LSD, particularly the ReStaking sector led by Eigenlayer, in the wake of the Dencun upgrade. Eigenlayer has recently been very active, extending support to various LSTs and collaborating with Altlayer to introduce Restaked Rollups. The ecological re-staking protocol Renzo has been launched, and EigenDA has entered the second phase of its test network. Eigenlayer’s Total Value Locked (TVL) has reached 1.7 billion and continues to rise. As the narrative around re-staking is just beginning to gain momentum, EIP-4788 is poised to provide a robust layer of security for this emerging sector.
for L2(on-chain derivative exchanges)
We previously discussed in detail the benefits of the Dencun upgrade for the entire Layer 2 and other foundational infrastructure tracks. The improvements in cost and performance for L2 brought about by the Dencun upgrade will also foster the development and innovation of the application layer. Next, we’ll briefly analyze the application layer tracks that stand to benefit significantly from the Dencun upgrade: on-chain derivative exchanges!
Generally, interactions in the DeFi track are characterized by low frequency but high returns per interaction. Thus, in a sense, DeFi is not particularly dependent on high performance, as the returns from a single DeFi operation can well cover the costs of interaction. However, decentralized derivatives are an exception. The limitations of performance bottlenecks and the flaw of high network transaction fees are greatly magnified in the operation of decentralized derivative protocols.
Due to the performance limitations of L2 networks, Perps-like projects are almost unable to run on-chain order books, failing to efficiently respond to real-time order matching needs. Moreover, excessive network fees significantly limit market makers and high-frequency trading users. These issues lead to lower efficiency in Perps trading, relatively higher slippage, and an inability to attract deep liquidity and professional traders, thus failing to offer an exchange experience comparable to CEXs.
We believe that the Dencun upgrade can address these issues to some extent, especially the performance improvements, which are particularly crucial for derivative trading. Compared to point-to-pool or AMM model Perps, the Dencun upgrade is more beneficial for L2 Perps with order book models like Aevo and Vertex Protocol, encouraging more emerging derivative platforms such as Struct Finance to enter Ethereum’s Layer 2 ecosystem. Similarly, the reduction in network transaction fees will also further stimulate the trading of more mature point-to-pool model Perps such as GMX, Synthetix, and GNS.
About ZMQ
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