The Evolution of Ethereum: A Deep Dive into the Cancun-Deneb Upgrade The Evolution of Ethereum: A Deep Dive into the Cancun-Deneb Upgrade

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By Ronald Tech

Enhancing Ethereum’s Network

The Ethereum blockchain has witnessed notable upgrades in recent times, striving to strike a delicate balance between security, decentralization, and scalability. These ongoing improvements play a pivotal role in augmenting network performance while keeping operational costs in check.

One of the significant milestones coming up is the Ethereum Cancun-Deneb (“Dencun”) hard fork upgrade slated for deployment on the mainnet on March 13. This upgrade focuses on scalability, efficiency, and security, with Ethereum Improvement Proposal EIP-4844 for proto-danksharding taking center stage. This proposal aims to streamline gas fees and bolster network scalability.

The Surge of Ethereum

The Dencun upgrade heralds the commencement of the “The Surge” era in Ethereum’s roadmap, ushering in a phase aimed at achieving mass scalability through layer-two rollups. These rollups are set to make Ethereum more user-friendly, thereby propelling adoption and utility across diverse sectors, including DeFi 2.0.

Unveiling the Power of Layer-2 Rollups

Layer-2 rollups represent a game-changer for Ethereum’s scalability and efficiency by executing transactions off-chain while upholding the security assurances of the main Ethereum blockchain (Layer-1). These rollups boast unique characteristics:

  • Off-Chain Execution: Processing transactions off-chain facilitates swift and cost-effective throughput without vying for space on the Ethereum blockchain.
  • Transaction Aggregation: Multiple transactions’ outcomes are bundled into a compressed form of transaction data post off-chain execution.
  • Posting to Main Chain: The compressed transaction data, or rollup, is subsequently posted to the Ethereum main chain (Layer-1).
  • Data Availability: Despite off-chain processing, all participants can access and verify transaction-related data on the main Ethereum blockchain.
  • Security: Layer-2 rollups uphold Ethereum network’s security guarantees by leveraging various cryptographic techniques.

EIP-4844 and the Promise of Proto-Danksharding

EIP-4844, also known as Proto-Danksharding, is poised to revolutionize the network’s scalability by introducing temporary data blobs attached to blocks. This innovative approach cuts processing costs and amplifies throughput by:

  • Temporary Data Blobs: These storage spaces linked to Ethereum blocks allow for additional data inclusion in transactions without direct interaction with the Ethereum Virtual Machine (EVM).
  • Lower Processing Costs: Effective transaction data handling via blobs leads to reduced gas fees for users, potentially driving average transaction costs below $0.01.
  • Increased Throughput: EIP-4844 paves the way for higher transaction throughput, potentially reaching speeds of up to 100,000 transactions per second (TPS).
  • Facilitating Layer-2 Solutions: The proposal is expected to benefit Layer 2 scaling solutions like rollups by offering additional temporary storage space.
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An Overview of Trading Dynamics Post the Cancun-Deneb Upgrade

2022 witnessed Ethereum’s network transition from Proof-of-Stake to Proof-of-Work, leading to ether’s transformation into a deflationary asset. Presently, over 25% of Ethereum’s total supply is locked in staking platforms, substantially limiting the available supply for trading or investment. This structural overhaul aligns with a burning mechanism that decreases ETH supply by 0.21% annually.

The Dencun upgrade is poised to serve as a favorable catalyst for ETH. Ether holders have significantly reduced their exposure to exchanges by moving over $1.3 billion worth of ETH into private wallets. Recent data from Bloomberg indicates the ETH/BTC spot ratio regressing to 0.5, reminiscent of post-Luna/Terra levels in 2022.

This scenario presents a credible entry opportunity for Ethereum enthusiasts. Furthermore, there has been a surge in short-term call buying for ETH, with traders anticipating a march towards $4,000 by March-end. Traders also lean towards purchasing March 2024 calls while executing April 2024 calendar strategies. The market reverberates with traders’ bullish sentiment, with around $2.5 billion worth of ETH calls and $1 billion worth of ETH puts in notional value.

The ETH/BTC Crossroads

Source: Bloomberg

Looking ahead, besides ether, other high beta names in Layer 2 are poised to gain from the Dencun upgrade. Layer 2 networks like Arbitrum (ARB) and Optimism (OP), which bundle transactions before posting them back to the main chain, are expected to reap substantial benefits from the introduction of data blobs.