MT Capital research report: Comprehensive interpretation of Ethereum Dencun upgrade, potential opportunities and favorable tracks

TL;DR

• One of the core aspects of the Dencun upgrade is the introduction of a new data structure called blob through EIP-4844. This structure stores transaction data submitted by L2 to Ethereum, significantly reducing transaction costs and increasing through put in the Ethereum L2 space, benefiting the L2 ecosystem.
• Dencun upgrade also introduces a new transient storage opcode through EIP-1153, enabling smart contracts to read and call data from transient storage. This helps in reducing Ethereum’s storage costs and gas consumption, enhancing the scalability of the mainnet, and benefiting applications within the mainnet ecosystem.
• According to the Shadowfork test report released on December 19 and the Ethereum Core Developers’ Meeting #178 held on January 4, the testing progress for the Ethereum Dencun upgrade is favorable. There are expectations that the mainnet upgrade will be completed by the end of February.
• Dencun upgrade is expected to stimulate the prosperity of the L2 ecosystem and drive demand in infrastructural segments such as decentralized storage, DA, and RaaS. Additionally, application-layer segments like Perps, LSD, ReStaking, and FOCG are also anticipated to benefit from the Dencun upgrade.

Dencun upgrade

Background of Dencun Upgrade

On December 28, 2023, Vitalik published an article “Make Ethereum Cypherpunk Again”, freely discussing his vision of cryptography. Vitalik emphasized that one of the core reasons why blockchains are currently limited to asset speculation is the rise in transaction fees. The high network transaction fees have turned people from users of blockchain networks into speculators on them. To realize the application value of blockchains, the transaction fees of blockchain networks must be reduced by another order of magnitude. Although the emergence of L2 has reduced network fees compared to the Ethereum mainnet, this is still far from enough.

Similarly, the takeoff of the Solana ecosystem network at the end of 2023 is also closely related to its extremely low network transaction fees. Compared to the Gas cost of up to $0.5 on Ethereum L2, Solana’s Gas fee as low as 0.0005 is negligible. The extremely low network Gas has promoted the prosperous Meme speculation, DeFi application interaction and DePIN application migration on Solana. In particular, cNFTs on Solana can reduce the minting cost by 1000 times compared to NFTs on Ethereum, which has also led to the prosperity of some DePIN projects and creator economy projects with NFTs as the economic core. It can be seen that low network transaction fees have a significant boost to network transaction activities and ecosystem application prosperity.

Ethereum L2 still has high gas fees

Of course, Ethereum has long been aware of this problem. In Ethereum’s upgrade roadmap, the next upgrade “The Surge” after “The Merge” aims to increase Ethereum’s TPS and reduce transaction fees in the Ethereum ecosystem network. The upcoming Ethereum Dencun upgrade is part of “The Surge”, aiming to further improve Ethereum’s transaction throughput and scalability by introducing Proto-Danksharding.

One of the core aspects of the Cancun upgrade is the introduction of the Proto-Danksharding module. Proto-Danksharding is also in preparation for Ethereum’s eventual sharding scaling. Ethereum’s earliest scaling plan was to split Ethereum into different shards, distributing the mainnet’s computing load across shards, with each independent shard storing a subset of transaction data occurring on Ethereum and processing transactions in parallel to improve Ethereum’s TPS. The original ETH2.0 plan ultimately shards the mainnet into 64 shards to achieve 100,000+ TPS.

source：Crypto.com Research

However, developing sharding itself has high complexity and slow progress. In contrast, scaling solutions that offload transaction execution to layer 2 while relying on Ethereum for settlement, consensus and data availability have evolved extremely quickly, achieving lower transaction costs and higher throughput, meeting some of Ethereum’s scaling needs to some extent. This has led Ethereum to gradually abandon the sharding-centric scaling path and adopt data sharding for Rollups.

Compared to traditional sharded chain sharding, Danksharding’s scaling approach is relatively simpler. One of the core aspects of the upcoming Dencun upgrade is introducing Proto-Danksharding, which primarily introduces blobs into the block space, optimizing data availability costs through blobs and improving L2 scalability. The Proto-Danksharding introduced in Dencun will also be the first step towards Ethereum’s full scaling, laying the groundwork for further realizing full Danksharing, separating block proposers and builders, and enabling data availability sampling.

Cancun upgraded kernel

Proto-Danksharding

Proto-Danksharding, also known as EIP-4844, is the most critical module in the Dencun upgrade. It is named after the two researchers who proposed this scaling approach — Proto Lambda and Dankrad Feist, taking part of each of their names. Proto-Danksharding introduces a new data structure called blob to reduce L2 costs and optimize L2 performance.

blob-carrying transaction

Previously, all L2 transactions were stored in L1 Calldata. However, Calldata itself has limited space, and all data on Calldata is processed by Ethereum nodes and stored permanently on chain, resulting in high data availability costs. In theory, L2 transaction data does not need to be permanently stored on expensive Ethereum L1, only needing to be stored for some time to meet fraud proof and other validation requirements. In other words, Ethereum L2 transactions previously lacked suitable storage space. From a data perspective, 80% of L2 transaction costs and gas fees come from expensive data storage costs in Calldata.

Proto-Danksharing will introduce a new data storage structure in the Ethereum block: blob. The blob will be used exclusively to store transaction data submitted by L2 to L1.

Each blob introduced by Proto-Danksharing is 128 KB in size, with each Ethereum block planned to contain 3–6 blobs (0.375 MB — 0.75MB), gradually expanding to 64 in the future.

In contrast, the amount of data that each Ethereum block can currently accommodate is less than 200KB. After introducing blobs, the amount of data that an Ethereum block can accommodate will increase significantly.

After introducing blobs, L2 transaction data submitted will no longer need to compete for Calldata storage, but will be directly submitted to blobs for storage. Also, blob data will be automatically deleted after about a month, further reducing unnecessary storage overhead. The introduction of blobs means L2 transaction fees will be greatly reduced (~90% reduction), and since blobs effectively expand block space for L2s, the transaction throughput L2s can simultaneously submit will also increase significantly. If the average goal of attaching 3 blobs per block is achieved after the Cancun upgrade, L2 throughput will increase by close to 2 times. If the ultimate goal of attaching 64 blobs per block is achieved, L2 throughput will increase by close to 40 times.

Additionally, blobs have an independent fee market. Proto-Danksharing also introduces a new type of Gas called Blob Gas. The Blob Gas fee mechanism in EIP-4844 is rooted in the EIP-1559 mechanism introduced earlier, where blob storage space will be auctioned according to its own fee market. This means the blob fee market is completely independent of block space demand, thereby improving the flexibility and efficiency of network resource allocation. The data storage cost in blobs is approximately 1 data gas per byte, while Calldata is priced at 16 data gas per byte. In comparison, blob data storage costs are significantly lower than Calldata data storage costs.

After introducing blobs, the operational flow of the L1, L2 blockchain networks will also change. First, the L2 needs to publish its commitment to the transaction data on-chain. Then, the L2 needs to submit the actual transaction data to the blob. At the same time, nodes can check if the commitment is valid and verify the data. Consensus layer nodes attest that they have seen the data and that it has propagated across the network. After about a month, nodes will delete the data in the blob, which can be stored in other DAs.

source：OP in Paris: OP Lab’s Protolambda walks us through EIP-4844

KZG Commitments

EIP-4844 also introduces Kate-Zaverucha-Goldberg (KZG) commitments as part of the blob validation and proof generation process. KZG commitments are a polynomial commitment scheme that enables submitters to commit to a polynomial using a short string, and enables verifiers to confirm the claimed commitment using the short string. In short, KZG can simplify the verification of large amounts of data to the verification of small cryptographic commitments.

Data blobs can be represented as polynomials, and then used with polynomial commitment schemes to commit to the data. Generating commitments to the data using polynomial commitment schemes allows efficiently verifying specific properties of the data blob without needing to fully read its contents. The implementation of KZG commitments also paves the way for data availability sampling (DAS) in Danksharding. With DAS, validators can verify the accuracy and availability of data blobs without downloading the entire blob, improving efficiency and scalability.

Other EIP upgrades:

In addition to EIP-4844, the Dencun upgrade also includes the following four key EIP improvement proposals.

1. EIP-1153: EIP-1153 introduces a new storage state: transient storage. Previously, all storage on Ethereum was permanent, with permanently stored data not only occupying block space but also consuming gas fees. However, for some unnecessary data, such as data that is only valid during a single transaction, permanent storage is unnecessary and wasteful. Therefore, EIP-1153 introduces transient storage opcodes that allow smart contracts to read and invoke data in temporary storage. Once the complete transaction execution cycle ends, the storage of that data will be cleared, thereby reducing Ethereum’s storage costs and gas consumption.
   

2. EIP-4788: EIP-4788 introduces beacon block roots into each EVM block. Previously, the EVM and beacon chain operated independently, with the EVM unable to directly access beacon chain data and state. EIP-4788 essentially introduces a protocol-level oracle, relaying consensus state to the Ethereum mainnet. It adds a “parent_beacon_block_root” field in block headers, allowing the EVM to derive consensus layer state and data in a minimally trusting way, reducing security risks and reliance on external oracles.The parent beacon block root will be stored in a circular buffer and will only be retained by the mainnet for approximately 1 day. Once a new parent beacon block root is added to the buffer and the buffer capacity reaches a threshold, the oldest parent beacon block root will be overwritten, thus achieving efficient and limited consensus storage. The introduction of EIP-4788 allows the Ethereum mainnet to obtain data from the Ethereum consensus layer in a trust-minimized manner, eliminating the reliance on external oracles and reducing potential security risks, oracle failures, and malicious manipulation risks.

3. EIP-5656: EIP-5656 introduces a new EVM opcode called MCOPY, which aims to optimize the process of copying data in memory during smart contract execution. Previously, developers needed to use the MSTORE and MLOAD opcodes to copy memory data. MCOPY essentially combines these two opcodes and fills the gap in memory copying in the EVM. The introduction of MCOPY significantly reduces the cost of copying 256 bytes of memory data from the previous 96 Gas to 27 Gas. MCOPY’s introduction will make the process of copying memory data faster, cheaper, and more efficient. Developers can further optimize smart contracts involving memory operations based on this improvement.
4. EIP-6780: EIP-6780 will restrict SELFDESTRUCT opcode functionality. By limiting self-destruction, Ethereum can better manage its state size, resulting in a more stable and predictable blockchain. This is critical for the long-term scalability and maintenance of the network as it will simplify future Ethereum upgrades.

Dencun upgrade status

12.19 Shadowfork test report

According to the test report of Shadowfork, which was launched on the 19th, the current Ethereum Cancun upgrade test is going well. The Ethereum Foundation will continue to fork Shadowfork in the next two weeks for intensive testing. Goerli, Sepolia, and Holsky nodes will also be tested at three time points: 1.7, 1.30, and 2.7. If the testnet works well, thenThe Dencun upgrade to the mainnet is expected to be completed within February.

Judging from the Shadowfork test report, the node resource usage, overall network usage, network health, blob distribution and propagation during the test were all as expected.

From the perspective of CPU and RAM usage, resource usage did not fluctuate significantly before and after the Dencun test fork, and remained stable overall.

In terms of network usage, compared to the Shadowfork baseline, network usage increased as expected after Dencun testing. With good Blob usage, network usage is expected to increase by about 200kbps.

During testing, the overall network remained stable, with no client crashes and smooth client operation.

During testing, most blocks contained 3 blobs, consistent with the target number of blobs.

During testing, blobs propagated to 95% of nodes in under 2s, with most blobs fully propagating across the network in an average of 500 milliseconds. Ideally, block propagation time is expected to increase by about 250 milliseconds.

1.4 Teleconference

On the evening of January 4th, the 178th Ethereum Core Developers’ Meeting was held online. During this meeting, the upgrade schedule for the Dencun testnet was finally confirmed. Developers unanimously agreed to conduct upgrade tests for the Goerli, Sepolia, and Holesky testnets on January 17th, January 30th, and February 7th, respectively.

Simultaneously, in order to promptly address and resolve any issues that may arise during the testnet upgrade process, developers decided to convene the 179th meeting on the day after the completion of the Goerli testnet testing on January 17th. They will discuss the test content and decide whether it is necessary to update the testnet upgrade schedule based on the situation.

Although developers have not reached a final consensus on the upgrade schedule for the mainnet, based on the current stage’s Shadowfork test data, testnet testing arrangements, and the timeline, there is a high probability that the Dencun upgrade for the Ethereum mainnet will take place at the end of February.

Potential opportunities and bullish tracks

L2

One of the most direct bullish tracks resulting from the Dencun upgrade is in the Layer 2 (L2) domain. The introduction of blob significantly reduces transaction costs on L2, leading to a substantial increase in throughput. Dencun’s stimulus to L2 lies in enabling it to compete more fiercely with other alternative Layer 1 (Alt L1) solutions, attracting high-quality projects and a vast user base with lower cost expenditures and superior performance.

While the Dencun upgrade is favorable for all Ethereum-based L2 solutions, we will focus on observing which L2 projects possess more unique competitive advantages to capitalize on the dividends brought about by the Dencun upgrade.

L2 Ecology

Arbitrum

Currently, the leaders in the Ethereum L2 space remain Arbitrum and Optimism, each with slightly different competitive advantages and directions. Arbitrum excels in the diversity of protocols based on Arbitrum One, while Optimism leads in the cross-chain ecosystem diversity based on OP Stack.

Arbitrum continues to be the most diverse L2 across all protocol types. According to incomplete data from DeFiLlama, there are approximately 520 protocols on Arbitrum, far surpassing Optimism’s 216. According to L2beat data, Arbitrum’s Total Value Locked (TVL) is currently around 11.26 billion, occupying almost half of Ethereum Rollup’s total TVL.

Additionally, network transaction activity on Arbitrum has been thriving. Looking at the ranking of network transaction volume in the past 30 days, Arbitrum boasts approximately 36 million in transaction volume, ranking just below zkSync, which is still undergoing significant token distribution activities. If we exclude L2 solutions with airdrop interactions and focus solely on the issued tokens, comparing Arbitrum with Optimism, Arbitrum leads by a significant margin with a network transaction volume three times higher than Optimism.

In summary, Arbitrum, with its highest network transaction volume, is evidently poised to benefit more from the reduction in transaction fees, and the optimization of Transactions Per Second (TPS) is advantageous for the prosperity of high-performance protocols like GMX and GNS on Arbitrum. From a network fundamentals perspective, Arbitrum is undoubtedly one of the primary beneficiaries of the Dencun upgrade. Additionally, Arbitrum is actively promoting Arbitrum Orbit and Stylus language, enabling developers to build Rollups based on both the Ethereum Virtual Machine (EVM) and WebAssembly Virtual Machine (WASM VM) simultaneously, thereby creating a network effect based on Arbitrum.

Optimism

In contrast to Arbitrum, Optimism’s competitive focus is more centered around building the Optimism SuperChain network based on the OP Stack. The value of Optimism is more dependent on the network value of Optimism SuperChain.

Since the release of OP Stack, numerous projects such as Base, Lyra, opBNB, Redstone, Zora, Mode, Debank, and others have built their own L2 solutions based on OP Stack. The Bedrock version upgrade of OP Stack further optimizes aspects such as transaction costs, transaction processing within blocks, and node performance, making building L2 based on OP Stack even more attractive. According to the plan for Optimism SuperChain, all Rollups using OP Stack will be integrated into a standardized OP chain. These chains can communicate directly through a cross-chain messaging protocol, sharing a common Ethereum cross-chain bridge and sequencer network.

While the Dencun upgrade is a positive for all L2 solutions, the upgrade premium enjoyed by Optimism is the combined network value of all ecosystems within Optimism. If the Dencun upgrade leads to the emergence of more new L2 solutions, the upgrade premium for Optimism will be the adoption of more L2 chains built using OP Stack. Optimism is also getting closer to the ultimate vision of the Optimism SuperChain super ecosystem.

Decentralized Sequencers

Metis

The competition between Arbitrum and Optimism revolves more around protocols, network activity, and ecosystem value. However, another pressing issue that needs to be addressed is the decentralization of L2 Sequencers, which has become the proverbial elephant in the room. With the surge of more L2 solutions due to the Dencun upgrade, the problems associated with centralized sequencers, such as single points of failure, malicious arbitrage, capturing MEV value, and the potential for scrutinizing user transaction spaces, may become increasingly severe.

Metis has disrupted the centralized pattern of sequencers, allowing nodes that stake at least 20,000 METIS tokens to enter the sequencer pool as sequencer operators. Sequencers in the pool are responsible for determining the order in which transactions are packaged and require the signatures of at least 2/3 of the sequencers to upload data to the L1 mainnet. Additionally, to further prevent malicious behavior by sequencers, Metis has introduced the role of validators to randomly sample and inspect blocks, ensuring that sequencers correctly order transactions.

Metis has chosen to proactively share profits, giving the most lucrative sequencer revenue to staking nodes. As more staking protocols for sequencers emerge in the future, we can anticipate broader user participation in sequencer staking, allowing users to share in sequencer revenue. Metis’ innovations in decentralizing sequencers and empowering the METIS token have contributed to the rise in METIS token prices, staking rates, and the inflow of funds into the Metis network. As the Metis network’s ecosystem flourishes, sequencer income grows, and more METIS is staked to sequencer nodes, the circulating supply of METIS decreases. This scarcity may drive increasing demand for METIS in the market, fostering a positive feedback loop for Metis and the METIS token in terms of Total Value Locked (TVL), ecosystem growth, and token price. The competition for decentralized sequencers may well become a central theme in the competition among L2 solutions post the Dencun upgrade.

Token empowerment

Another critical factor determining the price of L2 tokens is their empowerment. Currently, almost all Ethereum L2s use ETH as the gas token, and their native L2 tokens serve little purpose beyond governance. Without stable value consumption scenarios, these tokens can become disposable assets at any time. Tokens with actual empowerment, such as METIS, are more likely to follow a positive spiral of L2 fundamentals and token price.

In addition to METIS being used for decentralized sequencer staking and sharing sequencer revenue, another noteworthy example is ZKF. The token ZKF of ZkFair serves not only as a gas token but can also be staked to share in the gas income of the ZkFair network. Similar to METIS, token empowerment through staking dividends is likely to stimulate a positive spiral in the market price of ZKF. Furthermore, Arbitrum Orbit has introduced the capability to support custom gas tokens.

As mentioned earlier, all Rollups that share OP Stack will share a common sequencer network. Imagine if Optimism also follows Metis by introducing staking modules for OP to become a decentralized sequencer on OP Stack, this could bring significant market demand and buying power to OP. The rising token price would, in turn, attract more funds and users to applications within the ecosystem, contributing to its prosperity. The empowerment of tokens in the context of Ethereum L2 post the bumpy Dencun upgrade is a crucial topic that demands attention.

Other

As previously discussed, the reduction in transaction fees and the increase in L2 TPS resulting from the Dencun upgrade will benefit every Ethereum L2. Apart from the projects discussed earlier, there are other projects whose performance is also worth anticipating.

Base can be considered one of the best-performing L2s in 2023. Its strong association with Coinbase allows Base to attract a significant number of users and funds from Coinbase, making it the third-ranked Ethereum L2 in terms of TVL. Base’s rise is closely related to the hype around popular projects on Base, such as Friend.tech and FrenPet. One significant characteristic of these projects is the high interaction frequency and relatively low single interaction earnings. They also attract a relatively large number of users, demanding higher performance. The positive impact of the Dencun upgrade aligns well with the requirements and characteristics of such projects. We may witness the emergence of more social and gaming-oriented lightweight applications on Base, bringing in more users and funds, and stimulating the ecosystem’s vitality.

Additionally, there are still many L2s like Manta and Blast, which have not yet launched. These L2s are accumulating strength, attracting users to participate in ecosystem interactions through coin issuance expectations and overlapping revenue marketing strategies. The Dencun upgrade can significantly reduce the cost of user interactions, further promoting the prosperity of activities on these L2 chains. However, it’s important to note that the direction these L2s will take after airdrops is unclear, and caution should be exercised with optimism in the current stage.

Data availability layer

One of the core modules introduced in the Dencun upgrade is the incorporation of blob for storing L2 data submitted to L1. However, blob data storage is not permanent; the stored data will be discarded after approximately one month. Nevertheless, this data still holds potential value for retrieval and analysis. Therefore, the storage of this data is expected to drive the demand for decentralized storage services.

ETHStorage

EthStorage is the first second-layer solution that provides programmable dynamic storage based on Ethereum data availability. It can extend programmable storage at a cost ranging from 1/100th to 1/1000th, catering to storage needs reaching several hundred terabytes or even petabytes.

ETHStorage is tightly integrated with Ethereum. The client of EthStorage is a superset of the Ethereum client Geth, implying that nodes running EthStorage can seamlessly participate in any Ethereum processes. A node can serve as both an Ethereum validator node and a data node for EthStorage.

Moreover, ETHStorage exhibits enhanced interoperability with the Ethereum Virtual Machine (EVM), ensuring perfect compatibility. For instance, when minting an NFT image, if the image is stored on Arweave, minting it as an NFT image on Ethereum would typically require three smart contract operations. In contrast, ETHStorage achieves the same result with just one operation.

ETHStorage adopts a key-value storage paradigm and supports complete CRUD operations (Create, Read, Update, Delete storage data). Positioned as the first storage Layer 2 in the Ethereum ecosystem, ETHStorage is poised to take on the L2 state data discarded by blob. Thanks to its seamless interoperability with the EVM and cost-effective storage, ETHStorage is expected to seamlessly integrate the discarded L2 state data.

Covalent

Another noteworthy decentralized storage project is Covalent. Anticipating the business opportunities in data availability after the Dencun upgrade, Covalent launched the “Ethereum Wayback Machine (EWM)” in November 2023 for long-term storage of L2 state data discarded by blob.

However, merely storing data has limited value for Covalent. Therefore, Covalent goes beyond simple storage and integrates L2 data into its existing decentralized data analytics infrastructure services. Covalent facilitates seamless user access to blockchain data, providing data service support for specific user groups such as arbitrageurs, MEV researchers, AI researchers, blockchain data websites, and more.

Regardless of how the future unfolds for modular blockchains, execution layers, settlement layers, consensus layers, and short-term data availability layers, Covalent aims to be the long-term data availability layer for all projects. It provides permanent data storage and availability services.

With the implementation of the Dencun upgrade, the data storage and availability track is expected to attract a new wave of attention. Backed by prominent exchanges like Binance and Coinbase, as well as top-tier investment firms such as 1kx and Delphi Digital, and with a solid business foundation, Covalent is well-positioned to thrive in the competitive landscape.

Filecoin, Arweave, Storj, and Other Decentralized Storage Projects

The Dencun upgrade is expected to bring more practical decentralized storage business demand to established projects like Filecoin, Arweave, and Storj. It is anticipated that these projects will also handle some of the L2 state data discarded by blob. Since this data is valuable only to specific user groups oriented towards data analysis research and does not require frequent state changes, Arweave, which emphasizes one-time payment and permanent storage, may attract more growth in L2 state data storage business compared to others.

Taking a long-term perspective, L2 also needs a dedicated data availability layer. In the future, the data stored in blob may not be the data and state submitted by L2 but rather the Merkle root of the computations in that part. This would relieve Ethereum from any additional data storage burden, returning to the fundamental consensus mechanism.

EigenDA

EigenDA is a promising solution for decentralized availability. EigenDA decouples data availability from consensus. First, Rollup needs to encode the Data blob using erasure codes and publish a KZG commitment. Subsequently, EigenDA nodes, consisting of re-stakers, need to validate the KZG commitment and provide final consensus confirmation. Only after consensus confirmation is the data submitted to the Ethereum mainnet. EigenDA’s core lies in reusing Ethereum’s consensus, abstracting the validation and final consensus confirmation stages in DA, and completing this part of the process through the reused consensus.

Polygon Avail

Polygon Avail is a project proposed by Polygon that focuses on addressing data availability in the Ethereum scaling roadmap. Avail aims to provide data availability services for various scaling solutions such as L2 and sidechains. Avail supports EVM-compatible Rollups in publishing data to Avail. Avail efficiently sorts and records transactions, offering data storage and validity verification. In terms of validity proofs, Avail adopts KZG polynomial commitments, which, compared to Celestia, can provide more concise proofs and reduce node memory, bandwidth, and storage requirements. Avail has been designed from the beginning to align with Ethereum’s upgrade and scaling roadmap, allowing developers to store data on Avail and choose to settle on the Ethereum mainnet. In the trend of modular blockchains, Avail is poised to become an underlying data availability service provider for more EVM Rollups.

RaaS

RaaS providers abstract the complex technicalities of building blockchains and assist users in rapidly deploying L2 with simple, user-friendly tools, and even in a no-code fashion. As mentioned earlier, the Dencun upgrade is expected to trigger the surge of L2. The improvement in L2 usability and performance will facilitate the emergence of more L2 solutions, thereby benefiting the underlying Rollup as a Service infrastructure.

Within the current RaaS solutions, there is an ongoing discussion about whether to choose an Optimistic (OP) or a Zero-Knowledge (ZK) approach. OP-based solutions offer better compatibility, a richer ecosystem, and lower entry barriers. ZK-based solutions provide higher customization and greater security. While in the long term, ZK-based solutions offer higher customization and unique capabilities in terms of functionality and performance, and can provide projects with a competitive edge, in the short term, OP-based solutions can leverage their low entry barriers and high compatibility to amplify the cost and performance advantages brought by the Dencun upgrade to L2. This allows for the rapid reuse of existing comprehensive Ethereum Virtual Machine (EVM) infrastructure, achieving early user and capital expansion, with more evident short-term leverage.

Caldera

Caldera is a RaaS service provider built on the OP Stack, supporting users in quickly establishing an Optimism L2 in a no-code manner. L2 issued using Caldera achieves full EVM compatibility, significantly lowering the development threshold for developers. This compatibility is advantageous for directly reusing existing EVM ecosystem projects, providing a more comprehensive infrastructure for L2. In addition to L2 itself, Caldera also configures a range of blockchain infrastructure for users, such as blockchain explorers, testnet faucets, etc., further reducing the cost and usage barriers for launching, making it plug-and-play.

Altlayer

Altlayer is another noteworthy Rollup as a Service (RaaS) solution within the Optimism ecosystem. Altlayer supports no-code deployment of L2, allowing developers to rapidly create a Rollup chain through simple graphical interface operations. Additionally, AltLayer also supports Elastic Rollup — Flash Layer. In scenarios where there is a sudden surge in demand on the mainnet, such as popular NFT projects starting minting or popular DeFi projects distributing airdrops, developers can quickly deploy a Rollup chain through Altlayer to respond to the short-term increase in performance demands. When the event concludes, and states and assets are transferred back to the base chain, the Flash Layer can be directly removed. Altlayer provides an instantaneous scaling solution that avoids resource waste, catering to more complex business requirements.

Lumoz

Lumoz (formerly Opside) is a RaaS (Rollup as a Service) solution built on Zero-Knowledge (ZK), supporting developers in deploying their own ZK-Rollup with a customized zkEVM application chain. The proliferation of numerous ZK-Rollups also leads to a significant demand for computational power for Zero-Knowledge Proof (ZKP) calculations. Lumoz has constructed a decentralized ZKP marketplace that supports ZK mining, generating zero-knowledge proofs for ZK-Rollups. In terms of practical usage, developers don’t need to understand any knowledge related to ZK; they can quickly deploy a ZK-Rollup through simple frontend operations. The computational power demands during the operation of ZK-Rollup can be addressed by Lumoz’s ZK-PoW service, significantly reducing operational barriers and costs for project operators. Notably, Lumoz also supports contracts with 0 Gas Fees, providing users with a smooth DApp experience without interaction costs. The recently popular ZKFair is one of the L2 solutions built on Lumoz.

Application layer

Previously, we thoroughly discussed the benefits of the Dencun upgrade for the Infrastructure tracks such as L2, DA, and RaaS. The improvements in L2 costs and performance brought by the Dencun upgrade are expected to drive the development and innovation of the application layer. Next, we will briefly analyze the application layer tracks that are expected to significantly benefit from the Dencun upgrade.

Perps

Overall, interactions in the DeFi space have a characteristic of low interaction frequency but high single-point interaction returns. Therefore, in a sense, DeFi does not particularly rely on higher performance, as the returns from single DeFi operations can well cover the costs of interaction. However, decentralized derivatives deviate from this norm, as the limitations in performance and the flaws of excessively high network transaction fees can be magnified exponentially in the operation of decentralized derivative protocols.

Due to the performance limitations of L2 networks, Perps-type projects find it challenging to run an on-chain order book efficiently and respond to real-time order matching needs. Additionally, the excessively high network fees greatly restrict the high-frequency trading of liquidity providers and professional traders. The existence of these issues results in lower efficiency in Perps trading, relatively higher slippage, an inability to attract deep liquidity, professional trading users, and the failure to provide users with a trading experience comparable to centralized exchanges (CEX).

We believe that the Dencun upgrade can address these issues to some extent, with the improvement in performance being crucial for derivative trading. Compared to point to pools and AMM models, the Dencun upgrade is more favorable for L2 Perps, such as ApeX Protocol, Aevo, Vertex Protocol, which employ order book models for decentralized derivatives exchanges. Similarly, the reduction in network transaction fees will further stimulate more mature point to pool model Perps like GMX, Synthetix, GNS, facilitating their trading activities.

LSD

In addition to EIP-4844, the Dencun upgrade also includes the introduction of EIP-4788. EIP-4788 will introduce the beacon block root into each EVM block. This allows the Ethereum mainnet to obtain data from the Ethereum consensus layer in a trust-minimized manner, eliminating the dependence on external oracles, thereby reducing potential security risks, oracle failures, and manipulation risks. The introduction of EIP-4788 can further enhance the security of staking protocols. Although not directly impacting users, this improvement represents a potential significant advantage for the LSD and ReStaking tracks. EIP-4788 enables liquidity staking protocols like Lido, Rocketpool, Swell, and re-staking protocols like Eigenlayer to directly access critical data such as validator balances and states from the consensus layer, significantly improving their security and operational efficiency. We still have high expectations for the development of LSD after the Dencun upgrade, especially for the ReStaking track represented by Eigenlayer. Eigenlayer has recently made frequent moves, supporting various LSTs, collaborating with Altlayer to launch Restaked Rollups, the ecosystem’s re-staking protocol Renzo is already live, and EigenDA has initiated the second phase of its testnet. Eigenlayer’s Total Value Locked (TVL) has also reached 1.7 billion and continues to rise steadily. The narrative of re-staking is just beginning, and EIP-4788 will provide a solid underlying security guarantee for re-staking.

FOCG

Full-chain gaming is one of the significant beneficiaries of the Dencun upgrade. Unlike games where only assets are on-chain, and the game logic remains in a Web2.5 environment off-chain, full-chain games have all aspects, including game content, logic, rules, and assets, on-chain. The on-chain gas fees determine the interaction costs of each gaming operation, and on-chain performance dictates the user experience for players. Clearly, due to performance limitations, previous full-chain games were limited to relatively simple turn-based strategy games. The high interaction costs and the demand for high-frequency interactions in games also made many players hesitant.

The Dencun upgrade can visibly improve the development dilemma of existing full-chain games and even give rise to more types of full-chain games. We anticipate more full-chain games built on full-chain game engines like Mud, Dojo, running on L2 solutions like Redstone and StarkNet. Existing full-chain games such as Sky Strife, Loot Survivor, Issac, Influence may capture more real players due to the improved user experience brought by the Dencun upgrade.

The landing of the Dencun upgrade will inject new vitality into the Ethereum ecosystem. Of course, besides benefiting the mentioned tracks, the Dencun upgrade will also reduce the attractiveness and core competitiveness of certain tracks such as sidechains and non-EVM scaling solutions. The significant reduction in costs for EVM ecosystem L2 and L3, along with performance improvements, will further overshadow sidechain solutions like Polygon, and non-EVM scaling solutions like BSC will also lose some appeal due to cost and performance advantages. The Dencun upgrade will refocus the market on the core of Ethereum, which is L2 and L3.

Conclusion

1. As part of Ethereum’s upgrade roadmap, Dencun upgrade, a part of “The Surge,” aims to further reduce the usage costs and enhance the scalability of the Ethereum ecosystem. The upgrade introduces EIP-1153, which includes the transient storage opcode, reducing storage costs and gas consumption on the Ethereum mainnet, thus improving scalability. Additionally, Dencun upgrade introduces EIP-4844, significantly lowering transaction costs on Ethereum L2 by introducing a new data structure called blob, enhancing L2 transaction throughput.
2. Based on the current Shadowfork test reports and the recent 178th Ethereum Core Developers’ meeting, the testing situation for Ethereum’s Dencun upgrade looks promising. The three major testnets are expected to undergo Dencun upgrade testing from January to early February. If the testnet tests proceed smoothly, the mainnet Dencun upgrade is likely to be completed in February.
3. The Dencun upgrade will further boost the prosperity of the L2 ecosystem, with a special focus on Optimism, Arbitrum, and Metis. It will also drive demand in infrastructure tracks such as decentralized storage, DA, and RaaS. Projects like EthStorage, Covalent, EigenDA, Polygon Avail, Caldera, Altlayer, Lumoz, among others, are worth monitoring for their development.
4. The Dencun upgrade will stimulate innovation and development in the application layer. Order book model Perps, represented by ApeX Protocol, Aevo, and Vertex Protocol, will benefit significantly. EIP-4788 will improve the underlying security of LSD and ReStaking protocols, especially driving the development of the re-staking track represented by EigenLayer. Full on-chain games will also provide users with a better interactive experience due to the Dencun upgrade.

Disclaimer：

1. This article is reprinted from [techflowpost]. All copyrights belong to the original author [Severin，Ian Wu，MT Capital]. If there are objections to this reprint, please contact the Gate Learn team, and they will handle it promptly.
2. Liability Disclaimer: The views and opinions expressed in this article are solely those of the author and do not constitute any investment advice.
3. Translations of the article into other languages are done by the Gate Learn team. Unless mentioned, copying, distributing, or plagiarizing the translated articles is prohibited.