Ethereum

What You Need to Know Ahead of Ethereum’s Dencun Update on Wednesday

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Key points to remember

  • The next major upgrade to the Ethereum network, known as “Dencun,” is scheduled for Wednesday.
  • Dencun is expected to reduce transaction fees on the many layer-2 networks built on the Ethereum base blockchain.
  • This update is part of a major effort by Ethereum developers to move towards mass scalability via Layer 2 blockchains.
  • Reports from digital asset managers Grayscale and Fidelity Digital Assets indicate that the update could be a boon to scaling Ethereum’s overall user base.

Ethereum is set to undergo a network upgrade called Deneb-Cancun, or Dencun, on Wednesday, aimed at improving user experience and reducing transaction fees for some users on the network’s Layer 2 blockchains.

Ether (ETH), the native coin of the Ethereum blockchain, broke above $4,000 early Wednesday, but gave up some of those gains to trade just below that threshold as of 10:30 a.m. ET.

What is Dencun Ethereum Update?

The Dencun update 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 experience processing delays Ethereum transactions on Wednesday as the update rolls out. Coinbase (PIECE OF MONEY) said Monday that it expected disruptions from the update to last at least an hour starting around 9:45 a.m. Eastern time, though that could change. KrakenMeanwhile, it is anticipating a delay of about 15 minutes for maintenance around 4:00 a.m. Eastern Time, and is recommending that users “not place or cancel orders during this time.”

Blobs, Rollups, Gas: What’s changing?

Layer 2 networks, such as rollups, are secondary blockchains Built on the core Ethereum network. In order to increase transaction volumes, rollups compress transactions by grouping them together. The initial verification of these transactions happens off-chain, but the transactions are settled on the main Ethereum blockchain.

However, even with compression, the nodes processing the transactions retain the Layer 2 data forever, increasing their hardware requirements, which are then transmitted to users via transactions or gas costs. More than 90% of the fees paid by users during rollups are due to this data storage.

The Dencun upgrade will change this, allowing information related to Layer 2 networks to be added to the core Ethereum blockchain via temporary “blobs” that 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 L2 stores on Ethereum costs approximately 16 gas. The introduction of blobs and a new fee market designed for blob data brings the gas cost down to 1 gas 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 found on Layer 2 networks after the upgrade.

A more accessible and more competitive Ethereum?

“Currently, Ethereum’s performance is hampered by its low transaction speed, Speedand high costs for users. With an average transaction fee of $2.3 as of February 22, Ethereum is significantly more expensive than alternatives like Solana“This threatens to divert end users to other chains,” crypto asset manager Grayscale said in a report.

The Dencun upgrade “could help Ethereum compete in terms of scalability with faster chains,” the Grayscale report said.

Fidelity also points out that in addition to differentiating it from its competitors, the latest changes to the Ethereum network could help transition from a general-purpose blockchain to a global database for Layer 2 networks. “The best way to gauge the success of the Dencun upgrade will be to track the number of Layer 2 users through a metric such as active addresses,” Fidelity said.

(Update — March 13, 2024: This story has been updated with more recent information on the price of ETH.)

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