L2s are at the heart of Ethereum’s scalability plans. Yet, with Ethereum's price hitting $4,000 and a surge in activity on both Ethereum and L2s, users are feeling the pinch from high transaction fees. These fees make everyday onchain activities expensive, pricing out many users.
Today marks a significant change.
The Dencun upgrade just went live on Ethereum's mainnet. This is a milestone development that promises to make transactions on L2s dramatically cheaper. It could set the stage for a host of new apps and users to come onchain.
Let's unpack the Dencun upgrade and discuss how it will make Ethereum cypherpunk again👇
Overcoming the Scalability Trilemma
Every Ethereum upgrade is the result of years of community effort and includes multiple EIPs (Ethereum Improvement Proposals). These proposals consist of a wide range of features, aimed to enhance various aspects of the Ethereum network.
Today, we've seen the release of the much-anticipated Dencun upgrade, a portmanteau of two upgrades, ‘Deneb’ and ‘Cancun’. The Dencun upgrade brings enhancements that boost Ethereum's efficiency and scalability, among other improvements to the network.
The most noticeable benefit of Dencun will be the reduced costs for L2s to post data on Ethereum. This will result in significantly lower gas fees on L2s, potentially up to 90% cheaper based on current activity levels.
To illustrate the impact, let's look at a comparison of projected gas costs for a DEX swap on major L2s before and after the Dencun upgrade:
The Dencun upgrade is centered around EIP-4844, known as "proto-danksharding." This proposal is named after Ethereum researchers Protolambda and Dankrad Feist, and its main aim is to support the rollup-centric roadmap of Ethereum. It fundamentally changes the structure of Ethereum as a modular blockchain and makes it a more efficient data availability layer for its L2s.
EIP-4844 introduces a new transaction type that carries "blobs," which are large packets of raw data that L2s post on Ethereum. With the Dencun Upgrade, Ethereum now processes two main types of transactions:
- Regular transactions — these are the standard transactions we’re familiar with, covering actions like ETH transfers and interactions with smart contracts on the mainnet. These transactions are processed and executed by the Ethereum Virtual Machine (EVM) and are stored permanently on the Ethereum blockchain, consuming significant amounts of blockspace. They currently account for about 90% of Ethereum's gas usage and storage, with the remainder being transaction data posted by L2s.
- Blob-carrying ‘data transactions’ — introduced by EIP-4844, these transactions provide L2s with a more efficient way to post large amounts of their data on Ethereum by storing them in blobs. Unlike regular transactions, they don't need to be executed by the EVM and are stored on Ethereum temporarily, around 18 days (or 4096 epochs), rather than permanently.
Blob-carrying transactions cost a fraction in gas compared to regular transactions.
Traditionally, L2s post batches of regular transactions on the mainnet. These transactions are more expensive because they include call data. Call data provides granular details about each transaction – for instance, when transferring tokens, it includes the transfer function's arguments and other transaction parameters. This level of detail enlarges the transaction size and, consequently, the gas required, as the EVM must read and execute it. While this is necessary for transactions directly on the mainnet, it's superfluous for L2s that only need Ethereum for data availability.
With EIP-4844 and blob-carrying transactions, the data posted by L2s only includes important details of L2 transactions required for the data availability needs of the chain. These include raw data of the transactions in the form of blobs as well as references or pointers to the blobs within the transaction.
Ultimately, blob-carrying transactions make it drastically cheaper for L2s to post data on Ethereum mainnet. Since blob data doesn't require re-execution on Ethereum, it's cheaper to post. This cost-effectiveness is their key advantage when compared to regular transactions.
To summarize, EIP-4844 and blob-carrying transactions introduce several key enhancements:
- Enhanced scalability for Ethereum — Given the constraints on the number of transactions Ethereum can process per block, EIP-4844 and blob-carrying transactions enable a more efficient use of blockspace compared to existing methods.
- Lower fees on L2s via more efficient data availability — With blobs, L2s now have a cheaper way to post data on Ethereum Mainnet. This reduction in costs can be passed on to users, making transactions on L2s much cheaper. Moreover, since blobs are a different type of transaction altogether, they have their own fee market and remain unaffected by any increased activity of regular transactions on Ethereum Mainnet. Lower gas fees are a big part of every L2's roadmap and vision for onchain adoption, and we are seeing proactive initiatives from all L2 teams to integrate these fee reductions into their ecosystems promptly following the Dencun Upgrade.
- Foundation for harding — Proto-danksharding is an incremental step that introduces some of the concepts of sharding without fully implementing it. For instance, EIP-4844's blobs will be a crucial part of full sharding. The Dencun Upgrade's activation of blob transactions allows the community to test Ethereum network's capacity to handle increased data loads live in production and prepare for the full sharding upgrade.
Will EIP-4844 Reduce Value Accrued to $ETH?
A common misconception is that EIP-4844 will diminish Ethereum's overall revenue due to L2s incurring lower fees for their DA needs.
Although it is accurate that L2s will be paying less for DA on Ethereum, this reduction is unlikely to have a substantial impact on Ethereum's total fee generation. Data availability fees from L2s constitute only a small fraction, approximately 7-10%, of Ethereum's entire fee revenue. For instance, in February 2024, out of the total $355 million in fees, only $33 million was attributed to L2s posting data on Ethereum. The majority of the fees were generated by onchain activities on the Ethereum mainnet.
Moreover, it’s important to consider that the current estimates of the potential reduction in fees on L2s are based on existing demand levels of these chains.
As gas fee goes down with the Dencun upgrade, it’s expected that the more affordable fees will encourage users to engage with a greater number of applications and increase their onchain activity, which is currently hindered by high costs.
For instance, based on current estimates of gas price per blob, the fees for a simple swap on Uniswap on Base will come down to ~1 cent as opposed to ~58 cents right now. It’s likely that the decrease in fees will lead to increased user engagement onchain.
Additionally, with airdrop mania in full force, the prospect of lower gas fees on L2s could further incentivize airdrop farmers to increase their onchain interactions to boost their chances of getting an allocation.
This uptick in activity would, in turn, benefit Ethereum and its ecosystem by potentially increasing the overall value generated within the network.
In the long term, as L2s become more affordable, it will open up the design space for unique applications to be built on them. For example, many high-throughput-demanding applications like AI and decentralized physical infrastructure (dePIN) projects could choose to build on L2s (or even L3s).
This potential shift is precisely why the Dencun upgrade is a significant milestone in Ethereum's scalability journey. With reduced fees on L2s, Ethereum's rollup-centric strategy receives the necessary boost to begin onboarding a broader user base.
Dencun is one small step for reducing costs on L2s, and one giant leap for scaling Ethereum to onboard the world onchain.
Do you believe the Dencun Upgrade will herald a new era of increased onchain activity on L2s, and will we observe a proliferation of apps on L2s tailored to unique use cases? Share your perspectives in the comments below.
