Ethereum has completed another successful network upgrade!

The Dencun upgrade went live on the Ethereum mainnet at epoch 269568, which occurred on March 13, 2024 at 13:55 UTC.

This upgrade is a key step for Ethereum to further scale, as it will increase the transaction throughput per second and enhance Ethereum's data storage and retrieval capabilities.

imToken now supports all Layer 2 networks and EMV-compatible chains. After the Dencun upgrade, users can enjoy a more cost-effective experience with lower gas fees on Layer 2s through imToken.

Impact of Dencun upgrade​

For users: After the Dencun upgrade, the gas fees required for transactions on Layer 2s will significantly decrease. About 90% of the fees paid by users for initiating transactions on Layer 2s are due to data storage. These fees may decrease to only one-tenth of the current amount following the upgrade.

According to IntoTheBlock, transaction fees on Arbitrum are estimated to decrease from $2.02 to $0.4, on Optimism from $1.42 to $0.28, and on Base from $0.58 to $0.01.

Source: Dune▲ Source: I2fees.info on 8 December 2023
Data after Dencun upgrade is speculative

For developers: After the Dencun upgrade, it is necessary to promptly upgrade the client, check the Ethereum technical protocols included in the upgrade, and determine whether these EIPs will affect related projects. The Dencun upgrade introduces many exciting new features for both the execution layer and consensus layer of Ethereum. EIPs with backward compatibility impacts are EIP-6780, EIP-7044, and EIP-7514. Additionally, Goerli will be shut down.

For the blockchain ecosystem: Following the Dencun upgrade, the Layer 2 ecosystem is poised for accelerated growth as gas fees see substantial reductions. Beyond cost savings, the upgrade promises enhanced data processing speed, potentially boosting transaction speeds by up to 100 times. Such advancements intensify competition within Layer 1 platforms, while for Layer 2, it marks just the inception of a competitive landscape with the emergence of numerous promising projects in the pipeline.

Presently, the total value locked (TVL) in the prominent Layer 2 platform Arbitrum falls just shy of Layer 1s like Tron and BSC. Meanwhile, the TVL of OP Mainnet (previously known as Optimism) slightly trails behind Arbitrum's, yet it has already exceeded that of certain notable Layer 1s such as Solana.

How do Layer 2s stand to gain substantial advantages from the Dencun upgrade?

The most important feature implemented in the Dencun upgrade is EIP-4844, which is also the primary contributor to help Layer 2 reduce the cost and improve the efficiency.

In the Layer 2 ecosystem, it has been common to use the Ethereum mainnet as the Data Availability Layer (DA Layer). This is done to fully leverage the security and data integrity of the Ethereum mainnet and avoid malicious attacks or tampering to transactions which are processed on Layer 2.

However, due to the limitations of Ethereum mainnet in terms of block capacity and transaction throughput, it is actually difficult for Ethereum to support all the Layer 2 transactions, which generated data in every second is tens of times greater than Ethereum mainnet.

It has been an ongoing issue, which led to a situation where, prior to the Dencun upgrade, many Layer 2 transactions often require a significant amount of time for confirmation or necessitate the payment of higher gas fees in order to expedite confirmation.

Therefore, in the long run, if Layer 2 can only rely on the Ethereum mainnet as the data availability layer, there is certainly an obvious bottleneck in the future development of Layer 2.

During the Dencun upgrade, EIP-4844 introduces a new transaction type known as blob, enabling the temporary storage of transaction data in a blob when transactions occur.

The existence of the blob is akin to introducing an external parallel data storage pathway to the Ethereum mainnet. In operational terms, blob data is stored by nodes on the consensus layer. This segregation of data addresses the previous challenge, prior to the Dencun upgrade, where Layer 2 transactions were queued for verification against Ethereum mainnet data, resulting in substantial gas expenses and wait times.

Meanwhile, the data in a blob will be deleted after 18 days in order to reduce the data pressure on the Ethereum mainnet. In addition, EIP-4844 sets a limit on the amount of storage space added to each beacon block, restricting it to approximately 0.5 MB of data (about 4 blobs), but this limit is expected to increase in the future.

The primary concern tackled by the Dencun upgrade for Layer 2 remains centered around the data challenge.

Before the Dencun upgrade, there was a growing interest in solutions that relied on third-party chains to act as the data availability layer. The most well-known of these is Celestia, which is capable of handling a large transaction volume. This enables it to assist in verifying transactions on Layer 2 and then batch-upload transaction states back to the Ethereum mainnet. It is a highly modularized data availability solution. Currently, many application chains within the Cosmos ecosystem use Celestia as their data availability layer.

In the short term, relying on third-party chains to tackle Layer 2 data capacity issues may not gain as much trust as Ethereum mainnet serving as the data availability layer. As a result, the temporary storage introduced by EIP-4844 in the Dencun upgrade, known as blob, has become the more advantageous solution for the current Layer 2 ecosystem.

Outlook for well-known Layer2 projects in 2024

The Dencun upgrade will benefit all Layer 2 projects, whether developed using Optimistic Rollup or ZK Rollup.

As mentioned by the founder of Ethereum in his blog post "The Three Transitions", Ethereum needs to go through three major technical transitions, which are:

• The L2 scaling transition - everyone moving to rollups;
• The wallet security transition -everyone moving to smart contract wallets;
• The privacy transition - making sure privacy-preserving funds transfers are available, and making sure all of the other gadgets that are being developed (social recovery, identity, reputation) are privacy-preserving.

After the Dencun upgrade, which Layer 2 projects warrant our attention?

Arbitrum and OP Mainnet, boasting the highest user counts and the largest Total Value Locked (TVL) in the blockchain landscape, hold significant first-mover advantages. Following the implementation of the Dencun upgrade, these networks are likely to emerge as the top choices for new users and capital entering the Layer 2 ecosystem.

Polygon zkEVM, shifting its focus from the public blockchain market to embracing Ethereum Layer 2, enjoys inherent market momentum compared to other Layer 2 projects. The 10-day timelock for the mainnet Beta upgrade of Polygon zkEVM has commenced. Transaction details for the Elderberry proposal and upgrade contracts are available on GitHub and Etherscan. The mainnet launch is anticipated around early March 2024.

Metis: Initially deployed in 2021 using Optimistic Rollup, it will evolve into a Hybrid Rollup architecture combining Optimistic Rollup with Zero-Knowledge Proofs (ZK) in 2024. The sequencer for Metis has been live on the Holesky testnet since January 3, 2024, enabling community testing. Moreover, Metis plans to introduce a liquidity staking project, enabling community users to participate in node staking and earn rewards.

Base: In 2024, Base prioritizes accelerating decentralization, improving network availability, significantly reducing network fees, and bringing Coinbase's existing and new users, assets, and products onto the chain. The 2024 roadmap also emphasizes achieving inter-chain communication among OP chains to strengthen interoperability, refining and enhancing chain rules and optimistic RPGF, and fostering a dynamic decentralized on-chain economic ecosystem.

Linea: Launched in July 2023 and built on ZK Rollup, Linea may have a lower Total Value Locked (TVL) compared to other Layer 2 projects. However, its robust development team background, rapid growth in transaction volume post-launch, and substantial funding have led many industry experts to believe that it could become one of the largest airdrop projects in 2024.