Ethereum’s next hard fork, the Dencun upgrade, is only two days away, and experts are calling it one of the most important events for the network since the Merge. And unlike prior upgrades, analysts say Dencun won’t mean much for Ethereum holders.
“This marks a significant shift in the focus of Ethereum, going from servicing users directly to servicing other blockchains directly,” said Fidelity Digital Assets Research Analyst Max Wadington.
Specifically, Dencun will introduce EIP 4844—otherwise known as “protodanksharding”—which will usher in lower gas fees on Ethereum layer two (L2) networks. It will allow L2 transactions to settle on Ethereum through a new transaction type called “blobs,” which temporarily store large amounts of data in a more gas-efficient manner than before.
That makes networks like Polygon, Arbitrum, and Optimism direct beneficiaries of the upgrade because they process transactions in batches called “rollups” before settling them to Ethereum.
“We are expecting a pretty drastic reduction in costs for Polygon ZK EVM,” Polygon Labs VP of Product David Silverman told Decrypt. This will only follow Polygon’s Feijoa upgrade, which doesn’t have a target date yet.
He also expects a slight decrease in proof of stake costs, thanks to Ethereum L1 block space becoming slightly cheaper. Overall, Silverman also believes the upgrade represents a broader directional pivot within Ethereum towards using L2s as an execution layer.
“I think there’s a belief of Ethereum as a core settlement layer… in order to introduce true scaling, we know the monolithic design is not gonna work,” he added. “I think Ethereum is recognizing that and leaning into that narrative.”
In a research report, Fidelity said the upgrade will increase hardware requirements for Ethereum node runners by an extra 100 gigabytes of SSD storage, and 64 kilobytes per second of bandwidth. These are marginal increases compared to the 2 terabytes and 25 megabytes per second requirements of today. That means it shouldn’t negatively impact Ethereum’s ability to stay decentralized.
Right now, L2 submission fees account for roughly 10% of all L1 fees, but should decline significantly after the upgrade goes live.
Unlike the Merge, Dencun doesn’t feature any “number-go-up” technology such as the “triple halving,” nor a new yield mechanism for ETH as a currency. However, in a research report published by JPMorgan in December, analysts predicted that the upgrade could be a catalyst for ETH to outperform BTC in 2024.
“We believe that next year Ethereum will re-assert itself and recapture market share within the crypto ecosystem,” the bank’s analysts wrote, citing protodanksharding as a primary catalyst. “We believe that this upgrade will likely prove a bigger step towards improving Ethereum network activity, thus helping Ethereum to outperform.”
Bitcoin rose to an all-time high of over $72,600 on Monday, while Ethereum firmly cracked above $4000. Year to date, both assets have risen 63% and 71% respectively.
Edited by Ryan Ozawa.
