An in-depth analysis of the post-Dencun upgrade era: data and investment perspectives

he Dencun upgrade has a significant effect, significantly reducing the transaction costs of L2, and basically achieving the expected reduction of 90% of the transaction costs of L2. However, the transaction cost reduction effect of Ethereum itself is not as good as that of L2. At the same time, the throughput of L2 has been reduced to varying degrees after the upgrade. Improvement, among which the most outstanding performance is the Base chain.

TL;DR

1.First, the Dencun upgrade corresponds to The surge section of the Ethernet development plan, which aims to improve the scalability and modularity of Ethernet, enhance the security features of the Ethernet network, and improve overall availability:

• At the core of the upgrade is the introduction of EIP-4844, which significantly reduces transaction costs and increases transaction throughput in Ethernet Layer 2, while preparing for the full implementation of Danksharding;
• The introduction of a new data storage structure, the Blob, dedicated to storing transaction data submitted by L2 to L1, which is the core reason for the overall reduction in L2 Gas;
• EIP-1153 transient storage opcode reduces storage cost and Gas consumption, EIP-4788 realizes interoperability between EVM and beacon chain with minimal trust, EIP-5656’s MCOPY instruction fills in the missing gap in the current method of copying memory in EVM, and EIP-6780 restricts the function of the opcode SELF DESTRUCT to improve the development stability of EtherNet. Ethernet development stability.

1. Secondly, we compare the effects before and after the upgrade from the data level:

• At the level of gas fee, L2 gas fee has decreased significantly, which is basically in line with the expectation of 90% reduction of Layer2 fee before the upgrade; while Ethernet gas fee has been reduced, but not significantly, and there is no change in users’ experience in actual use;
• In terms of transaction volume, the transaction volume of each Layer2 has increased after the upgrade, with the most obvious one being Base, which has increased from 500,000 to 2 million, benefiting the most from the upgrade;
• At the level of TPS (throughput), the TPS of each L2 has increased after the upgrade, only not as obvious as the transaction volume, but from the perspective of industry development, this upgrade is also laying a foundation for the future, and also echoes the expectation of the development of EtherCenter, which has reached 100,000+ TPS;
• At the level of Blob usage, the Blob usage rate after the upgrade is average, not reaching the expected target value of 3, but it can be intuitively seen that the L2 average transaction cost of using L1 data cost is significantly reduced.

1. Finally, the investment impact of the Dencun upgrade on Ethereum and L2 is explored:
2. In my opinion, this upgrade for Ethereum is primarily a foundation for future development, bringing it closer to becoming a fully scalable and accessible global trading platform. As for ETH, as the native token of the “platform”, and in conjunction with the ETH-ETF narrative, it will be used more as a global asset allocation in the future, just like BTC’s current role, which is more suitable for long term investment;
3. L2 leaders Arbitrum and Optimism are especially noteworthy, as they are currently developing well and have their own moats, while the current upgrades are expected to boost their profit margins in the future, thus benefiting users and forming a positive cycle for their ecological construction;
4. Another more inclined concern in L2 is Base, backed by Coinbase, which naturally has a scale of users and capital volume, and the recent data performance is very outstanding, the market heat is also there, after the upgrade or a good alpha opportunity;
5. For L2, which has not yet issued coins, we should keep a close eye on it, as the upgrade will cause a significant drop in interaction costs, and more users will be willing to participate in ecological interaction, such as ZKsync, Blast, and so on.

Preface

The subsequent boom in the blockchain ecosystem was created because Ether introduced the concept of smart contracts. Since its official launch on July 30, 2015, Ether has had a history of 12 upgrades, each of which has attracted a lot of attention.

The main goals of the Dencun Upgrade are to improve the scalability and modularity of the Layer 2 network, enhance the security features of the Ethernet network, and improve overall usability.

1. What is Dencun upgrade?

1.1 Upgrade introduction

1.1.1 Origin of Names

The underlying layer of Ethernet consists of two merged parts, the Execution Layer and the Consensus Layer, each of which has a different naming convention.

The naming convention for the Execution Layer Upgrade is named after the city where Devcon (Ethernet Developer Conference) is held since 2021. Examples include Berlin Upgrade, London Upgrade, Shanghai Upgrade, and so on.

Consensus Layer Upgrade Naming Rule is named after celestial bodies in alphabetical order since the launch of the beacon chain. Examples include Altair, Bellatrix, and Capella.

Each upgrade name for Ether is a combination of the different upgrade names using both to form the overall upgrade nomenclature. Since the Devcon location is in Dencun, Mexico, and the consensus layer upgrade is Deneb, this Ether upgrade is simply called the Dencun Deneb.

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1.1.2 Upgrade Background

The background of the Dencun upgrade is twofold: it is based on the long-term development plan of Ethereum, and its core objective is to enhance the overall user experience of Ethereum, ultimately realizing a permissionless, decentralized, censorship-resistant, and open-source ecosystem.

On one hand, according to the roadmap unveiled by Ethereum founder Vitalik Buterin on December 31, 2023, the Dencun upgrade corresponds to a part of “The surge,” prioritizing user experience (such as increasing transaction speed and reducing Gas fees). The aim is to improve network efficiency, lower transaction costs, and lay a solid foundation for future development.

On the other hand, from Vitalik Buterin’s article “Make Ethereum Cypherpunk Again” published on December 28, 2023, it can be seen that Vitalik believes that one of the core reasons currently causing blockchain to become more and more confined to asset speculation is the rise in transaction fees, which makes Degen Gamblers This makes Degen Gamblers become the mainstream group, which is not conducive to realizing the application value of the blockchain, so it is necessary to reduce the transaction costs.

1.1.3 Upgrade time

According to the Ethereum plan, the upgrade time and activation information are:

1.1.4 What’s involved

The Ether Dencun-Deneb liters make a series of improvements to the Execution Layer and Consensus Layer, respectively, with Dencun refining the Execution Layer (EL) and Deneb enhancing the Consensus Layer (CL), and incorporating a series of EIPs (Ether Improvement Proposals) that are critical to the development of the Ether network. There are 9 EIPs in total, and we will cover the key EIPs later.

1.2 Focus of the Dencun Upgrade

From the understanding gained above, we know that the main focus of the Dencun upgrade is to improve Ethereum, with specific implementation plans revolving around a series of EIPs. The following will delve into the analysis of the core EIPs involved.

1.2.1 EIP-4844: Sharded Blob Transactions (Proto-Danksharding)

EIP-4844 is the highlight of this upgrade, aimed at reducing fees, increasing transaction throughput (TPS), and scalability. Essentially, it is a transitional upgrade preparing for the future to achieve full Danksharding (the final part of Ethereum’s “serenity” phase upgrade), with Proto-Danksharding laying the groundwork for Danksharding.

The data availability on the Ethernet main chain is Calldata (which can be understood as the data generated by the contract transaction calls), and the data from Layer 2 back to Layer 1 is stored in Calldata. In addition, for security reasons, each step of the Calldata execution requires Gas, which results in a large expenditure of Gas. However, after the transaction data in Calldata is verified, there is not much use for it, and the data can be downloaded and verified for a long period of time, and it does not even need to be transmitted to the execution layer. Taking the historical composition of the average transaction cost of the Layer2-OP chain as an example, it can be seen that close to 80% of the cost comes from the cost of the data in L1.

Therefore, EIP-4844 introduces a new data storage structure, Blob, which is specialized in storing transaction data submitted by L2 to L1. After the introduction, the transaction data of L2 is directly submitted to the Blob for storage, which can be completely downloaded by the consensus nodes and deleted only after a short delay, thus reducing the unnecessary storage burden. This means that the introduction of Blob will greatly reduce the transaction cost of L2. Additionally, Blob effectively expands the block space for Layer 2 and significantly increases transaction throughput on Layer 2.

1.2.2 EIP-1153 Transient Storage Opcode

The main purpose of EIP-1153 is to save storage space and storage costs. Transient storage is discarded after each transaction, therefore, temporary storage is cheaper as it does not require disk access.

EIP-1153 is more friendly to Dapp developers by introducing new opcodes TSTORE and TLOAD in EVM, the Gas cost of calling these opcodes is about 100 Gas each, which is 95% cheaper than traditional storage calls (SLOAD and SSTORE). At the same time, once a full transaction is executed, that part of the storage is cleared, which reduces storage costs and Gas consumption, and may, for example, make the new DeFi contract more Gas-efficient in the future.

1.2.3 Beacon Block Roots in EIP-4788 EVMs

EIP-4788 will enable communication between EVMs (Ethernet Virtual Machines) and beacon chains (Beacons). This feature supports a variety of use cases, improving staking pools, restaking constructions, smart contract bridges, MEVs, and more.

Previously, EVMs could not directly access the data and state of the Beacon, but could only capture the state through external trusted predicators. Therefore, it is proposed to place a parent_beacon_block_root in each EVM block, so that when there is an update of the Beacon, the EVM can get the accurate information immediately.

The parent beacon block root will be stored in the ring buffer and will only be kept for about 1 day. Once a new parent_beacon_block_root enters while the buffer capacity reaches a critical value, the oldest parent_beacon_block_root will be overwritten, thus realizing an efficient and limited consensus storage. In this way, communication is achieved in a trust-minimizing manner, and security is increased by eliminating the risk of external predicator failures and malice.

1.2.4 EIP-5656 MCOPY - Memory Copy Instruction

EIP-5656 optimizes the cost of the process of copying memory regions by introducing a new EVM instruction, MCOPY, which improves the efficiency of moving data through EVM.

Memory copying is a basic operation, but implementing it on an EVM can be costly. For example, by copying 256 bytes of memory data, developers can significantly reduce the cost from 96 Gas (using MLOAD and MSTORE) to 27 Gas with the MCOPY opcode, and it is expected that in the future, most developers will use MCOPY instead of MSTORE/MLOAD, and that the more efficient Gas contract will ultimately benefit end-users as well.

At the same time, MCOPY fills a gap that was missing in the current approach to copying memory in EVMs.

1.2.5 EIP-6780 SELFDESTRUCT only in the same transaction

EIP-6780 limits the operation code SELFDESTRUCT function. The new function only sends all funds in the account to the target, but does not affect the code, storage and other information. It is also preparing for subsequent Verkle tree upgrades.

Prior to EIP-6780, if the SELFDESTRUCT opcode was referenced in the contract creation, the funds could be sent to the target but the code, storage, and other information would be deleted, however, there were certain dangers and unintended consequences associated with this feature. After EIP-6780, none of this will be affected and developers can better manage projects, leading to a more stable and predictable blockchain.

2. Post-Upgrade Data Impact

2.1 Impact on Gas Fees

The most crucial aspect of this upgrade, and also the one that everyone is most concerned about, is undoubtedly the change in Gas fees. With the introduction of EIP-4844, the most significant beneficiaries are the Layer 2 solutions. The reduction in Gas fees is quite noticeable, leading to an improved user experience. This aligns well with the expectation before the upgrade that Layer 2 transaction fees would decrease by around 90%.

For Layer1 (Ethernet itself), the Gas fee has been reduced after the upgrade, but not significantly, and users actually feel no change in actual use.

2.2 Impact on Transaction Volume

In addition to reducing Gas fees, the upgrade also aims to increase throughput, which is a key focus of Ethereum’s scaling development plan.

Following the completion of the upgrade, the transaction volume on the Base chain surged and surpassed the previous bottleneck, jumping from 500,000 to 2 million transactions. This indicates a direct impact of EIP-4844, with Base chain benefiting most prominently.

2.3 TPS Impact

The optimization of TPS (transactions per second) means that developers have more flexibility in building and deploying dApps, which is expected to lead to more complex, data-intensive applications that will appeal to a wider user base.

After the upgrade was completed, TPS for each Layer2 was largely increased, but to a maximum of 30 transactions per second.

The relatively low TPS is a common phenomenon in the current Web3 industry, distinguishing it from the high TPS characteristics of the traditional Web2 industry. Even the highest TPS of Layer 2 solutions has not exceeded 500. However, from the perspective of industry development, this upgrade lays the foundation for the future and also aligns with Ethereum’s development expectations—achieving a TPS of 100,000+.

2.4 Blob usage

The main reason for the overall decrease in Layer 2 transaction fees is the introduction of the Blob type. The more Blobs involved in a transaction, the greater the overall throughput will be, which also lays the foundation for subsequent Ethereum upgrades.

It was initially expected that if the average target of 3 Blobs per block is achieved, L2 throughput will be improved by nearly 2 times. If the goal of adding 64 blobs to a block is finally achieved, the throughput of L2 will be improved by nearly 40 times. The maximum limit for this upgrade is 6 blobs.

Judging from the current situation, Blobs have begun to be used in transactions, but the overall usage rate is not high. The peak occurred when the upgrade was just completed, and then gradually fell back, and has not yet reached the estimated average target of 3 Blobs.

Indeed, the introduction of Blob types has significantly improved the data costs of Layer 2 on Layer 1. As mentioned in the example of the OP chain in the previous context, one can directly perceive the significant reduction, almost elimination, of L1 data costs in the average transaction fees of Layer 2. This also leads to speculation that the profit margins of Layer 2 may increase as a result.

The profit model of L2 is relatively simple and clear, which can basically be summarized as follows: on-chain profit = transaction fee of L2 - payment cost of L1; taking OP chain as an example, although upgrading reduces the transaction fee of L2 and payment cost of L1 at the same time, due to the increase in the transaction volume and the user base, the rate of reduction of both of them is not at all in the same order of magnitude. The transaction fee is reduced from hundreds of thousands to tens of thousands, while the payment cost is reduced from hundreds of thousands to less than 1k, and the profit of the chain also increases from the upgrade.

2.5 Price Impact

For this upgrade, users are not only concerned about whether the on-chain experience has been improved, but also about the price of each Layer2’s native tokens. It can be seen that after the completion of the upgrade of the Layer2 coins, the coin price began to fall, which is also related to the characteristics of the industry, the good landed to become negative. In fact, the market has been speculating on the concept of ethereum upgrades since 2023, and through the rise in coin prices during this period of time, this upgrade is also considered to be a good realization.

3. Impact on Investment Value

The Dencun upgrade has been a focal point of attention in the years 2023-2024, with the public making investment judgments based on a series of concepts surrounding the Dencun upgrade. This upgrade is bound to influence the investment value of Ethereum and Layer 2 solutions in the future.

3.1 Ethereum Passing the Baton to Layer 2

The vision of Ethereum is to become more scalable and secure under the premise of decentralization.

To overcome the “impossible triangle” proposed by Vitalik Buterin, Ethereum transitioned from proof of work (POW) to proof of stake (POS) in previous upgrades to enhance security. In terms of scalability, Ethereum has explicitly adopted the L2 Rollup solution to increase throughput while significantly reducing user costs.

Although Ethereum still leads in Total Value Locked (TVL), other Layer 1 (L1) blockchains have made considerable impacts. For instance, Solana’s transaction volume has surpassed Ethereum’s, and in terms of active addresses, Ethereum ranks only sixth.

Take, for example, the surge of Sui and the recent buzz around BTC Layer 2 concepts. These factors will lead to users continually flowing out of Ethereum. A decrease in the user and developer base usually results in a decline in its value. However, this doesn’t mean that Ethereum will decline. Instead, its development trajectory will change.

Since its launch in 2015, Ethereum has played a pivotal role in ushering in the Web3 era, fostering industry prosperity. One of the most prominent developments is the emergence of Layer 2 solutions. Many Layer 2 solutions provide scalability solutions for Ethereum, and the focus of the Dencun upgrade is on Layer 2. Future Ethereum upgrades will also involve various aspects related to Layer 2, and the connection between the two will become increasingly tight, complementing each other.

In my opinion, this upgrade primarily lays the foundation for Ethereum’s future development, bringing it closer to becoming a fully scalable and accessible global transaction platform. As for ETH, as the native token of the “platform,” combined with the narrative of ETH-ETF, it is likely to serve more as a global asset allocation option in the future, similar to the role transition currently happening with BTC. It is more inclined towards long-term investment, and future alpha opportunities will undoubtedly arise in Layer 2 solutions. Ethereum will gradually pass the baton of expansion to Layer 2 solutions, completing its role transformation. Therefore, the current focus of investment should be on Layer 2 solutions and other tracks.

3.2 L2 ecological explosion

Without a doubt, the biggest and most direct impact of the Dencun upgrade is on Layer 2 solutions. As per the data mentioned earlier, transaction fees for Layer 2 have significantly decreased across the board, and throughput has also increased. This allows Layer 2 solutions to attract users to their ecosystems with lower prices and higher performance, further intensifying competition with other Layer 1 solutions.

According to DeFiLlama statistics, among the top 10 Total Value Locked (TVL) projects, four are Layer 2 solutions (Polygon technically counts as a sidechain but also has corresponding ZK Layer 2 solutions gradually embracing Ethereum Layer 2). Among them, Arbitrum ranks fourth, following only BSC and Solana. There are also emerging stars in the Layer 2 space, such as the popular airdrop project Blast and Base, backed by the substantial resources of Coinbase. These Layer 2 solutions with enormous growth potential deserve special attention.

For Layer 2 solutions, the Dencun upgrade actually reduces their costs, which means there’s an opportunity for future profit expansion. Leading Layer 2 solutions like Arbitrum and Optimism are likely to invest these increased profits from the upgrade into their own ecosystem development and user engagement. Consequently, users will benefit, and it’s safe to say that the enhanced profitability of Layer 2 solutions will drive up the value of their tokens, a notion widely recognized by the market. Despite the initial expectations of the upgrade being met and some price retracement for $arb and $op tokens, market sentiment remains optimistic, evident from their respective trading volumes and active user bases.

To understand the ecosystem development of Arbitrum and Optimism, we can examine their respective contract deployment situations. Arbitrum’s growth in contract deployment is lower than that of Optimism, but it still boasts the most diverse range of Layer 2 protocols. According to DeFiLlama statistics, Arbitrum currently has 575 protocols, far more than any other Layer 2 solutions, and its Total Value Locked (TVL) also ranks among the highest in the Layer 2 space. Since its launch, Arbitrum has consistently demonstrated excellent performance across various metrics.

On the other hand, Optimism introduced the Superchain strategy in 2023 and began promoting the OP stack, an open-source Layer 2 technology stack. This allows other projects wishing to run their own Layer 2 solutions to do so for free. Additionally, due to technical consistency, secure and efficient atomic-level communication and interaction of information and assets can be achieved among them. Optimism has already gained adoption by Coinbase and launched the Base chain. Other notable projects include opBNB by Binance, NFT project ZORA, and the popular on-chain data dashboard Debank.

Arbitrum and Optimism, as the top players in terms of TVL and user volume, have gradually built their own moats in the thriving ecosystem. They remain the core Layer 2 solutions most directly impacted by this upgrade. With their inherent first-mover advantages and the leading protocols within their ecosystems, both are worthy of close attention.

Another noteworthy Layer 2 solution is Base, which has seen a TVL growth of over 80% in the past month. In terms of active addresses, Base has surpassed all other Layer 2 solutions, second only to Ethereum. In addition, in terms of the number of ecosystem protocols, it has surpassed OP, rising to seventh place.

For Layer 2 solutions, the Dencun upgrade has actually lowered their operating costs. This means that there is an opportunity for increased profit potential in the future. Leading Layer 2 solutions like Arbitrum and Optimism are likely to reinvest the profits generated from the upgrade into their own ecosystem development and increasing user engagement. As a result, users will also benefit from these improvements. In other words, the enhanced profitability of Layer 2 solutions will likely lead to an increase in the value of their tokens, which has been widely recognized by the market. Despite a slight pullback in the prices of $arb and $op following the upgrade as expectations were met, market sentiment remains optimistic, evident from their trading volumes and active user bases.

Base’s inherent strong ties with Coinbase naturally bring a certain scale of users and funds. With the breakout of the friend.tech project, market attention has been redirected back to the SocialFi track. The core demand of SocialFi itself is high interaction frequency, low interaction costs, and the ability to accommodate a large user base. Applications related to this have higher performance requirements, which align well with the benefits brought by the Dencun upgrade. Perhaps in the future, we may see phenomenon-level projects emerge on Base.

Additionally, there are still many Layer 2 solutions like Blast and Zksync that have yet to launch their native tokens, still in the process of accumulating strength. The Dencun upgrade can greatly reduce the cost of user interactions, potentially further promoting the prosperity of activities on such Layer 2 chains.

However, on the flip side, although EIP-4844 has brought about a decrease in Layer 2 transaction costs, it does not always guarantee consistently low fees. Using Base as an example, during the period after the upgrade, with the increasing popularity of memecoins on Base, transaction fees have surged and remained at a relatively high level.

Eric Wall, co-founder of Taproot Wizards, gave an example of this phenomenon on Twitter, and you can read the original article at the link. Simply put, the L2-DA capacity brought by EIP-4844 is not unlimited. When a large number of centralized transactions occur (TPS increases), in order to achieve priority transactions, the cost of Blob Space will compete and increase, and the cost of the L2 sequencer will also increase, which affects the transaction cost, and the sequencer can only prioritize in a limited number of TPS. In other words, when a large number of concurrent transactions occur on the same chain, the transaction cost will also become higher.

Source：https://twitter.com/ercwl/status/1771156029121663082

4. Conclusion and outlook

1. The Dencun upgrade has delivered significant results, notably reducing transaction costs in Layer 2 (L2) and nearly achieving the expected 90% reduction in L2 transaction fees. However, the reduction in transaction fees for Ethereum itself is not as pronounced as for L2. Additionally, the upgrade has led to varying degrees of improvement in L2 throughput, with Base Chain showing the most remarkable performance. On the flip side, transaction fees may still increase when a large number of concurrent transactions occur on the same chain.

2. This upgrade represents a further development in Ethereum’s scalability and lays the groundwork for handling high concurrency situations with the introduction of the Blob data structure.

3. The Dencun upgrade will further drive the prosperity of the L2 ecosystem. Leading L2 solutions such as Arbitrum and Optimism deserve special attention. Arbitrum boasts the richest variety of protocols and has consistently demonstrated good data performance. Optimism’s Superchain strategy aims to form an “OP stack,” and this upgrade may enhance their profit potential in the future, potentially benefiting users and fostering ecosystem development.

4. Emerging L2 platforms like Base also warrant attention. With the backing of Coinbase and remarkable data performance—such as an over 80% increase in TVL in the past month and leading in active addresses—Base has surpassed Optimism in the number of protocols deployed. The development of projects within its ecosystem is worth monitoring.

5. Following the upgrade, the most noticeable improvement in user experience is the significant reduction in interaction costs across various L2 solutions. This encourages greater user engagement and fosters a positive feedback loop within the ecosystem. Additionally, it’s worthwhile to continue monitoring L2 projects that have not yet issued tokens, such as Blast and Zksync, as reduced interaction costs will likely attract more users to participate.

Statement:

1. This article is reprinted from [panews] with the original title “In-Depth Analysis of the Post-Upgrade Era in Dencun: Data and Investment Perspectives,” Copyright belongs to the original author [@0xJohnsons ], if you have any objections to the reproduction, please contact Gate Learn team, the team will be dealt with according to the relevant process as soon as possible.

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