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What You Need to Know Before Wednesday’s Ethereum Dencun Update
Key points
- The next major Ethereum network upgrade, known as “Dencun,” is scheduled for Wednesday.
- Dencun is expected to reduce transaction fees on the many Layer 2 networks built on the Ethereum core blockchain.
- This update is part of a major effort by Ethereum developers to move toward mass scalability via Layer 2 blockchains.
- Reports from digital asset managers Grayscale and Fidelity Digital Assets suggest that the upgrade could be a boon to expanding Ethereum’s overall user base.
On Wednesday, Ethereum will undergo a network upgrade dubbed Deneb-Cancun, or Dencun, aimed at improving user experience and lowering transaction fees for some users on the network’s Layer 2 blockchains.
Ether (ETH), the native coin of the Ethereum blockchain, surged above $4,000 on Wednesday morning, but gave back some of those gains to settle just below that mark as of 10:30 a.m. Eastern.
What is the Dencun Ethereum Update?
Dencun’s upgrade prioritizes scalability, efficiency, and security through the implementation of various Ethereum Improvement Proposals (EIPs).
According to the Ethereum Foundation, the most notable change is EIP-4844 for proto-danksharding, which seeks to optimize gas fees for Layer 2 Network (L2) data and improve the network’s ability to handle larger transaction volumes through these secondary layers.
Exchanges may be subject to processing delays Ethereal transactions Wednesday as the update rolls out. Coinbase (CURRENCY) said Monday that it expects the outage from the upgrade to last at least an hour around 9:45 a.m. Eastern time, though that could change. The KrakenIn the meantime, it expects a delay of about 15 minutes for maintenance around 4:00 a.m. Eastern time, and recommends users “not to place or cancel orders during this time.”
Blob, Rollup, Gas: What’s Changing?
Layer 2 networks, such as rollups, are secondary blockchain built on the Ethereum core network. In an effort to scale transaction volumes, rollups compress transactions by grouping them together. Initial verification for these transactions occurs off-chain, but transactions are settled on the main Ethereum blockchain.
However, even with compression, the nodes processing transactions retain Layer 2 data forever, expanding their hardware requirements, which is then passed on to users via higher-level transactions or gas ratesOver 90% of the fees paid by users on rollups are due to this type of data storage.
The Dencun update will change this by allowing Layer 2 network information to be added to the Ethereum core blockchain via temporary “blobs,” which are stored more efficiently, rather than as permanent data. At the time of writing, blob data will be available for 18 days. This is intended to reduce costs.
“Each byte of data that L2s stores on Ethereum costs approximately 16 gas. The introduction of blobs and a new fee market designed for blob data reduces the gas cost to 1 per byte of data stored,” Fidelity Digital Assets noted in a report on the upgrade. “That’s a maximum gas cost reduction of 94%!”
However, it is important to note that Ethereum users on the main blockchain or Layer 1 users will not benefit much from the lower fees present on Layer 2 networks after the upgrade.
Ethereum more accessible and competitive?
“Currently, Ethereum’s performance is hampered by its slow transaction speed, low flow rateand high costs for users. With average transaction fees of $2.3 as of February 22, Ethereum is significantly more expensive than alternatives like Solana. This threatens to drive end users away from chains,” cryptocurrency manager Grayscale said in a report.
According to the Grayscale report, the Dencun upgrade “could help Ethereum compete in terms of scalability with faster chains.”
Fidelity also notes that, in addition to differentiating it from competitors, the latest changes to the Ethereum network could help it transition from a general-purpose blockchain to a global database for Layer 2 networks. “The best way to gauge the success of Dencun’s upgrade will be to track the number of Layer 2 users via a metric like active addresses,” Fidelity said.
(Update: March 13, 2024: This story has been updated with more recent information on the price of ETH.)