One of the core upgrades of Dencun is to significantly reduce the transaction costs of Ethereum L2, increase the transaction throughput of L2, and benefit the L2 ecosystem.

Authors: Severin, Ian Wu, MT Capital

TL;DR

• One of the core upgrades of Dencun is to introduce a new data structure, blob, through EIP-4844, to store transaction data submitted by L2 to Ethereum, significantly reducing the transaction costs of Ethereum L2, increasing the transaction throughput of L2, and benefiting the L2 ecosystem.
• The Dencun upgrade also introduces a new instant storage opcode through EIP-1153, supporting smart contracts to read and call temporary storage data, thereby reducing Ethereum's storage costs and gas consumption, improving the scalability of the main network, and benefiting the main network ecosystem applications.
• According to the Shadowfork test report released on December 19 and the 178th Ethereum core developer execution meeting held on January 4, the current test situation of the Ethereum Dencun upgrade is good, and the main network's Dencun upgrade is expected to be completed by the end of February.
• The Dencun upgrade will promote the prosperity of the L2 ecosystem and drive the demand for decentralized storage, DA, and RaaS in the Infra track. For the application layer, Perps, LSD, ReStaking, and FOCG will also benefit from the Dencun upgrade.

Dencun Upgrade

Background of the Dencun Upgrade

On December 28, 2023, Vitalik published an article "Make Ethereum Cypherpunk Again," discussing his vision of encryption. Vitalik emphasized that one of the core reasons why blockchain is currently limited to asset speculation is the rise in transaction fees. The high network transaction fees have led people to shift from users of blockchain networks to speculators of blockchain networks. In order to realize the application value of blockchain, the transaction fees of blockchain networks must be reduced by an order of magnitude. Even though the emergence of L2 has reduced network fees compared to the Ethereum mainnet, it is still far from enough.

Similarly, the rapid development of the Solana ecosystem network at the end of 2023 is also closely related to its extremely low network transaction fees. Compared to the Ethereum L2's gas cost of $0.5, Solana's gas fee as low as 0.0005 is almost negligible. The extremely low network gas has promoted the prosperity of meme speculation, DeFi application interaction, and DePIN application migration on Solana. In particular, cNFT on Solana can reduce minting costs by 1000 times compared to NFT on Ethereum, which has also led to the prosperity of some DePIN projects and creator economy projects with NFT as the economic core. It can be seen that low network transaction fees have a significant promoting effect on network transaction activities and the prosperity of ecosystem applications.

Ethereum L2 still has high gas fees

source: https://l2fees.info/

Of course, Ethereum has long been aware of this issue. In Ethereum's upgrade roadmap, the next upgrade after the merge, "The Surge," aims to increase Ethereum's TPS and reduce the transaction fees of the Ethereum ecosystem network. The upcoming Dencun upgrade of Ethereum is part of "The Surge," aiming to further increase Ethereum's transaction throughput and scalability through the introduction of Proto-Danksharding.

source: https://twitter.com/milesdeutscher/status/1550315295402668032

One of the core aspects of the Dencun upgrade is the introduction of the Proto-Danksharding module. Proto-Danksharding is also preparing for Ethereum's ultimate sharding expansion. The original Ethereum expansion plan was to divide Ethereum into different shards, distribute the mainnet's computational load to various shards, and have each independent shard save a subset of transaction data occurring on Ethereum, processing transactions in parallel to increase Ethereum's TPS. The initial ETH2.0 plan eventually divided the mainnet into 64 shards to achieve 100,000+ TPS.

source: Crypto.com Research

However, the development complexity of sharding expansion itself is high, and the development progress is slow. In contrast, the Rollup expansion solution, which takes Ethereum's transaction execution to the second layer chain and relies on Ethereum for settlement, consensus, and data availability, has rapidly developed with lower transaction costs and higher throughput, to some extent meeting some of Ethereum's expansion needs. This has led Ethereum to gradually abandon the sharding-centric expansion path and instead adopt data sharding for Rollup.

Compared to the traditional sharded chain sharding expansion method, the expansion implementation path of Danksharding is relatively simpler. One of the core contents of the upcoming Dencun upgrade is the introduction of Proto-Danksharding, which will first introduce blob into the block space to optimize data availability costs and improve the scalability of L2. The Proto-Danksharding introduced by Dencun will also be the first step in Ethereum's comprehensive expansion, laying the foundation for further complete Danksharing, introducing block proposers and builders separation, and achieving data availability sampling.

Core of the Dencun Upgrade

Proto-Danksharding

Proto-Danksharding, also known as EIP-4844, is the most critical module in the Dencun upgrade. Proto-Danksharding is named after two researchers who proposed this expansion idea: Proto Lambda and Dankrad Feist, taking a part of their respective names as the naming of the upgrade content. Proto-Danksharding reduces L2 cost and optimizes L2 performance by introducing a new data storage structure, blob.

Transaction types carrying blob:

Previously, all transactions of Ethereum L2 were stored in L1's Calldata. The space of Calldata itself is relatively limited, and all data on Calldata will be processed by Ethereum nodes and permanently stored on the chain, leading to high data availability costs. Theoretically, the transaction data of L2 does not need to be permanently stored on expensive Ethereum L1, only needing to be stored for a certain period to meet verification requirements such as fraud proof. In other words, the transaction data of Ethereum L2 lacked suitable storage space in the past. From the data perspective, 80% of L2's transaction costs and gas fees come from the expensive data storage costs of Calldata.

_source: https://dune.com/optimismfnd/optimism-l1-batch-submission-fees-security-costs

Proto-Danksharing will introduce a new data storage structure, blob, in Ethereum blocks. The blob will be specifically used to store transaction data submitted by L2 to L1.

source: https://hackmd.io/@luozhu/SyleCcpti

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

source: https://a16zcrypto.com/posts/article/an-overview-of-danksharding-and-a-proposal-for-improvement-of-das/

In contrast, the current data size that each Ethereum block can accommodate is less than 200KB. With the introduction of blob, the data capacity of Ethereum blocks will significantly increase.

source: https://etherscan.io/chart/blocksize

After the introduction of blob, the transaction data submitted by L2 will no longer need to compete for storage space in Calldata, but will be directly submitted to blob for storage. Additionally, the data in blob will be automatically deleted after about a month, further reducing unnecessary storage burdens. The introduction of blob means that the transaction costs of L2 will be greatly reduced (by ~90%), and since blob effectively expands the block space for L2, the transaction throughput that L2 can submit will also be significantly increased. If the Dencun upgrade successfully achieves an average target of 3 blobs per block, the throughput of L2 will nearly double. If the ultimate goal of 64 blobs per block is achieved, the throughput of L2 will increase by nearly 40 times.

Furthermore, blob has its own fee market. Proto-Danksharing also introduces a new type of gas called blob Gas. The fee mechanism of Blob Gas in EIP-4844 is rooted in the previously introduced EIP-1559 mechanism, where the storage space of blob will be auctioned based on its own fee market. This means that the fee market of blob is completely independent of the demand for block space, thereby increasing the flexibility and efficiency of network resource allocation. The data storage cost in blob is approximately 1 data Gas per byte, while Calldata is priced at 16 data Gas per byte. Compared to Calldata, the data storage cost of Blob is significantly lower.

source: https://foresightnews.pro/article/detail/38853

With the introduction of blob, the operational process of L1 and L2 block networks will also change. First, L2 needs to publish its commitment to transaction data on the chain. Subsequently, L2 needs to submit the actual transaction data to blob. At the same time, nodes can check the validity of the commitment and verify the data. Consensus layer nodes prove that they have seen the data and that the data has been propagated on the network. After about a month, nodes will delete the data in blob, and this data can be stored in other DAs.

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

KZG Commitment

EIP-4844 also introduces the KZG (Kate-Zaverucha-Goldberg) commitment scheme as part of the blob verification and proof generation process. KZG commitment is a polynomial commitment scheme that allows submitters to use a short string to commit to a polynomial, enabling verifiers to confirm the declared commitment using a short string. In simple terms, KZG can simplify the verification of a large amount of data into the verification of small encrypted commitments.

Data blocks can be represented as polynomials, and then used with the polynomial commitment scheme to commit data. By using the polynomial commitment scheme to generate commitments to data, specific properties of data blobs can be effectively verified without the need to read their entire contents. The implementation of KZG commitment also paves the way for achieving Data Availability Sampling (DAS) in Danksharding. With DAS, validators can verify the accuracy and availability of data blobs without downloading the entire blob, thereby 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: instant storage. Previously, all storage on Ethereum was permanent, and permanent storage not only occupies block space but also incurs gas costs. However, for certain unnecessary data, such as data that is only valid during a single transaction, permanent storage is unnecessary and wasteful of resources. Therefore, EIP-1153 introduces an instant storage opcode, supporting smart contracts to read and call temporary storage data. Once the complete transaction cycle ends, the storage of that data will be cleared, thereby reducing Ethereum's storage costs and gas consumption.

2. EIP-4788: EIP-4788 will introduce the beacon block root into every EVM block. Previously, Ethereum's two core components, EVM and the beacon chain, operated independently and could not communicate directly. This means that EVM could not directly access the data and state of the beacon chain and could only capture the beacon chain's state through an externally trusted oracle. Essentially, EIP-4788 is similar to introducing a protocol-level oracle, bringing Ethereum's consensus state relay to the Ethereum mainnet. EIP-4788 will introduce a new field "parentbeaconblock_root" in the execution block header, allowing EVM to directly derive the consensus layer's state from it to obtain consensus layer data. The parent beacon block root will be stored in a circular buffer and will only be retained by the mainnet for approximately one day. Once a new parent beacon block root is added to the buffer and the buffer capacity reaches a critical value, the oldest parent beacon block root will be overwritten, achieving efficient and limited consensus storage. The introduction of EIP-4788 allows the Ethereum mainnet to obtain Ethereum's consensus layer data 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 memory data during smart contract execution. Previously, developers needed to use the MSTORE and MLOAD opcodes to copy memory data. MCOPY essentially combines these two opcodes, filling the operational gap in memory copying in the EVM. The MCOPY opcode significantly reduces the cost of copying 256 bytes of memory data from the previous 96 Gas to 27 Gas. The introduction of MCOPY will make the process of copying memory data faster, cheaper, and more efficient, allowing developers to further optimize smart contracts involving memory operations.

4. EIP-6780: EIP-6780 will restrict the functionality of the SELFDESTRUCT opcode. By limiting self-destruction, Ethereum can better manage its state size, leading to a more stable and predictable blockchain. This is crucial 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 launched on the 19th, the current status of the Ethereum Dencun upgrade testing is good. The Ethereum Foundation will continue to fork Shadowfork for intensive testing in the next two weeks. The Goerli, Sepolia, and Holsky nodes will also undergo testing on January 7th, 30th, and February 7th. If the test network runs smoothly, the mainnet's Dencun upgrade is expected to be completed in February.

Based on the Shadowfork test report, the resource usage of nodes, overall network usage, network health, and blob distribution and propagation during testing are as expected.

In terms of CPU and RAM usage, there was no significant fluctuation before and after the Dencun test fork, maintaining overall stability.

From the perspective of network usage, the network usage after the Dencun test is significantly higher than the Shadowfork baseline, as expected. With good blob usage, the network usage is expected to increase by approximately 200kbps.

Overall, the network remained stable during testing, with no client crashes and smooth client operation.

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

Blobs propagate to 95% of nodes in less than 2 seconds, and on average, most blobs propagate through the entire network within 500 milliseconds. In an ideal scenario, the propagation time of blocks is expected to increase by approximately 250 milliseconds.

1.4 Conference Call

On the evening of January 4th, the 178th Ethereum Core Developers' Meeting was held online. The meeting finalized the schedule for the Dencun upgrade on the test network. Developers agreed to conduct the Goerli, Sepolia, and Holesky test network upgrade tests on January 17th, 30th, and February 7th, respectively.

To quickly respond to and address any potential issues during the test network upgrade, developers decided to convene the 179th meeting on the day after the completion of the Goerli test network test on January 17th to discuss the test content and decide whether to update the test network upgrade schedule as needed.

Although the developers did not reach a final consensus on the upgrade schedule for the mainnet, based on the current Shadowfork test data, the test network's testing arrangements, and the timeline, the Ethereum mainnet's Dencun upgrade is highly likely to take place at the end of February.

Potential Opportunities and Favorable Tracks

L2

One of the most direct favorable tracks for the Dencun upgrade is the L2 track. The introduction of blob significantly reduces transaction costs for L2 and increases throughput to a certain extent. Dencun's stimulus for L2 lies in the ability to further compete with other Alt L1 ecosystems, attracting high-quality projects and a large user base with lower expenditure and superior performance.

source: https://www.techflowpost.com/article/detail14912.html_

The Dencun upgrade is beneficial for all Ethereum-based L2 solutions, but beyond the general benefits, we will focus on observing which L2 projects have more unique competitive advantages and can capture more dividends from the Dencun upgrade.

L2 Ecosystem

Arbitrum

Currently, the leading Ethereum L2 solutions are still Arbitrum and Optimism, but they have slightly different competitive advantages and focus on different aspects of competition. Arbitrum leads in the diversity of protocols based on Arbitrum One, while Optimism leads in the diversity of cross-chain ecosystems based on OP Stack.

Arbitrum currently has the most diverse range of protocols among all L2 solutions. According to incomplete data from DeFiLlama, there are approximately 520 protocols on Arbitrum, far exceeding the 216 on Optimism, which ranks second. According to L2beat data, Arbitrum's Total Value Locked (TVL) is approximately 11.26 billion, accounting for nearly half of Ethereum's Rollup TVL.

Additionally, network transaction activity on Arbitrum is thriving. In the past 30 days, Arbitrum has approximately 36 million in transaction volume, ranking second only to zkSync, which is still in the process of launching and has a large amount of airdrop activity. If we compare the already launched Arbitrum and Optimism, Arbitrum leads with a network transaction volume three times that of Optimism.

Overall, Arbitrum, with the highest network transaction volume, is clearly positioned to benefit more from the reduction in transaction fees and TPS optimization, which is also beneficial for high-performance protocols such as GMX and GNS. From a network fundamentals perspective, Arbitrum is undoubtedly one of the biggest beneficiaries of the Dencun upgrade. Additionally, Arbitrum is actively promoting Arbitrum Orbit and the Stylus language, supporting developers to build Rollups based on Arbitrum with both EVM and WASM VM, creating network effects based on Arbitrum.

Optimism

Unlike Arbitrum, Optimism's competitive focus is more on building the Optimism SuperChain network based on OP Stack, and its value is more dependent on the network value of Optimism SuperChain.

Since the release of OP Stack, many projects such as Base, Lyra, opBNB, Redstone, Zora, Mode, and Debank have built their own L2 solutions based on OP Stack. The Bedrock version upgrade of OP Stack further optimizes transaction costs, transaction processing within blocks, and node performance, making it more attractive to build L2 solutions based on OP Stack. 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 cross-chain messaging protocols, share a common Ethereum cross-chain bridge, and sequencer network.

If the Dencun upgrade benefits all L2 solutions, then the upgrade premium enjoyed by Optimism is the combination of the network value brought by all Optimism ecosystems. If the Dencun upgrade gives rise to more new L2 solutions, then the upgrade premium enjoyed by Optimism is the increasing adoption of L2 solutions built using OP Stack, bringing Optimism closer to the ultimate vision of the Optimism SuperChain super ecosystem.

Decentralized Sequencer

Metis

The competition between Arbitrum and Optimism is more focused on protocols, network activity, and ecosystem value. However, another pressing issue is the decentralization of L2 sequencers, which has become a significant concern. With the emergence of more L2 solutions due to the Dencun upgrade, the problems caused by centralized sequencers, such as single point of failure, malicious arbitrage, capturing MEV value, and censoring user transaction space, may become increasingly severe.

Metis has taken the lead in addressing this issue and may become the first Ethereum L2 to run a decentralized PoS sequencer.

Metis has broken the centralized pattern of sequencers, allowing nodes staking at least 20,000 METIS tokens to enter the sequencer pool as sequencer operators. Sequencers in the pool are responsible for determining the order of transactions and require signatures from at least two-thirds 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 conduct random sampling of blocks to ensure that sequencers correctly order transactions.

Metis has chosen to share profits, actively giving the most lucrative sequencer income to staking nodes. With the emergence of more staking protocols for sequencers in the future, it is foreseeable that a wider range of users will be able to participate in sequencer staking and share sequencer income. Metis' innovation in decentralized sequencers and the empowerment of the METIS token have led to an increase in the price of METIS, the staking rate of METIS, and the inflow of funds into the Metis network. As the Metis network ecosystem thrives and sequencer income grows, more and more METIS will be staked in sequencer nodes, reducing the circulating supply of METIS and increasing demand in the market, thereby promoting a positive cycle of TVL, ecosystem, and token price for Metis and the METIS token.

The competition for decentralized sequencers may become the core theme of L2 competition after the Dencun upgrade.

Token Empowerment

Another core factor that determines the price of L2 tokens is the empowerment of L2 tokens. Currently, almost all Ethereum L2 solutions use ETH as the gas token, and their own L2 tokens have no use other than governance. Without a stable value consumption scenario, the tokens in users' hands can become disposable at any time. Tokens with practical empowerment, such as METIS, are more likely to move towards a positive spiral of L2 fundamentals and token price.

In addition to the previously mentioned use of the METIS token for decentralized sequencer staking and sharing sequencer income, another case worth emulating is ZKF. The ZkFair token, ZKF, can be used not only as a gas token but also staked to share the gas income of the ZkFair network. Similar to METIS, the token empowerment through staking dividends is also more likely to promote the upward spiral of the ZKF market price. Additionally, Arbitrum Orbit has added support for custom gas tokens.

As mentioned earlier, all Rollups sharing OP Stack will share a common sequencer network. Imagine if Optimism also emulates Metis and introduces staking OP as a module for the decentralized OP Stack sequencer, this would bring significant market demand and buying power to OP. The rise in token price would, in turn, attract more funds and users to the ecosystem, contributing to its prosperity. The empowerment of tokens in the Ethereum L2 space after the bumpy upgrade is also one of the core issues that need to be closely monitored.

Others

As mentioned earlier, the reduction in transaction fees and the increase in L2 TPS brought about by the Dencun upgrade will benefit every Ethereum L2. In addition to the projects discussed earlier, there are also some other projects whose performance is worth looking forward to.

Base can be considered one of the best-performing L2 solutions in 2023. Its strong relationship with Coinbase allows Base to attract a large number of users and funds from Coinbase, making it the third-ranked Ethereum L2 in terms of TVL. The rise of Base is closely related to the hype around popular projects such as Friend.tech and FrenPet on Base. One of the characteristics of these projects is high interaction frequency and relatively low single interaction income. They also attract a relatively large number of users, with higher performance requirements. The benefits brought by the Dencun upgrade align well with the needs and characteristics of such projects. We may see more social and gaming applications appearing on Base, bringing in more users and funds, and stimulating the ecosystem's vitality.

Furthermore, there are still more L2 solutions such as Mantle and Blast that have not yet been launched. These L2 solutions attract users to participate in ecosystem interactions through coin issuance expectations and overlapping revenue marketing. The Dencun upgrade can greatly reduce the cost of user interactions and further promote the prosperity of activities on these L2 solutions. However, it is worth noting that the direction these L2 solutions will take after the airdrop is still unclear, so caution and optimism should be maintained at this stage.

Data Availability Layer

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

ETHStorage

EthStorage is the first Layer 2 solution that provides programmable dynamic storage based on Ethereum data availability, which can extend programmable storage to hundreds of TB or even PB at 1/100 to 1/1000 of the cost.

ETHStorage is highly integrated with ETH, and its client is a superset of the Ethereum client Geth. This means that when running nodes for EthStorage, they can still participate in any process of Ethereum as usual. A node can be both an Ethereum validator node and a data node for EthStorage.

Additionally, ETHStorage has stronger interoperability with EVM, achieving perfect compatibility with EVM. For example, minting NFT images stored on Arweave as NFT images on Ethereum requires three smart contract operations, while ETHStorage only requires one.

ETHStorage adopts a key-value storage paradigm, supporting complete CRUD operations (Create, Read, Update, Delete storage data). Positioned as the first storage Layer 2 in the Ethereum ecosystem, ETHStorage is expected to take over the L2 state data discarded by blob, thanks to its seamless interoperability with EVM and low storage costs.

Covalent

Another decentralized storage project worth paying attention to is Covalent. Covalent was the first to sniff out the business opportunities in data availability after the Dencun upgrade and launched the "Ethereum Wayback Machine (EWM)" in November 2023 for long-term storage of L2 state data discarded by blob.

Of course, storing data alone has limited value for Covalent. Therefore, Covalent not only provides storage but also integrates L2 data into its existing decentralized data analysis infrastructure services. Covalent supports seamless access to blockchain data, providing data services support for specific user groups such as arbitrageurs, MEV researchers, AI researchers, and blockchain data websites.

Regardless of how the future of modularized blockchains, execution layers, settlement layers, consensus layers, and short-term data availability layers unfolds, Covalent hopes to become the long-term data availability layer for all projects, providing permanent data storage and availability services.

With the landing of the Dencun upgrade, the expected data storage and availability track will continue to attract a new round of hype. Endorsed by well-known exchanges and top-tier investment institutions such as Binance, Coinbase, 1kx, and Delphi Digital, and with a solid business foundation, Covalent will not be at a disadvantage in the competition.

Filecoin, Arweave, Storj, and other established decentralized storage projects

The Dencun upgrade will also bring more practical demand for decentralized storage services to established projects such as Filecoin, Arweave, and Storj. It is expected that these projects will take over some of the L2 state data discarded by blob. Since this data is only valuable to specific groups oriented towards data analysis research and does not require frequent state changes, Arweave, which focuses on one-time payment and permanent storage, may be able to win more business for L2 state data storage.

If we look at the long term, L2 also needs a dedicated data availability layer. In the long run, what is stored in the blob may not be the data and state submitted by L2, but rather the Merkle root of that part of the computation. This would allow Ethereum to no longer bear any additional data storage and return to the most fundamental consensus.

EigenDA

EigenDA is a promising DA solution. EigenDA decouples data availability from consensus. First, Rollup needs to encode the Data blob using erasure codes and KZG commitments and publish the KZG commitments. Then, EigenDA nodes composed of re-stakers need to verify the KZG commitments and confirm the final consensus. Finally, the data confirmed by consensus will be submitted to the Ethereum mainnet. The core of EigenDA lies in reusing Ethereum's consensus, abstracting the verification and final consensus confirmation steps in DA, and completing this part of the work through reused consensus.

Polygon Avail

Polygon Avail is a project proposed by Polygon that focuses on solving data availability in the Ethereum scaling roadmap. Avail aims to provide data availability services for different scaling solutions such as L2 and sidechains. Avail supports EVM-compatible Rollups to publish data to Avail. Avail can efficiently sort and record transactions, provide data storage, and validate data. In terms of validity proof, Avail uses KZG polynomial commitments, which can provide more concise proofs compared to Celestia and reduce the memory, bandwidth, and storage requirements of nodes. From its inception, Avail has been consistent with the Ethereum upgrade scaling roadmap, supporting developers to store data in Avail and choose settlement on the Ethereum mainnet. In the trend of modular blockchains, Avail is expected to become a fundamental data availability service provider for more EVM Rollups.

RaaS

RaaS providers can abstract the complex technology of building blockchains and help users quickly deploy L2 in a simple and easy-to-use manner, even without code. As mentioned earlier, the Dencun upgrade will bring about an explosion of L2. The improvement in the usability and performance of L2 will also promote the emergence of more L2, favoring the underlying Rollup as a Service infrastructure.

In the current RaaS solutions, there is also a discussion about whether to choose the OP or ZK approach. OP-based solutions have better compatibility, a richer ecosystem, and lower barriers to entry. ZK-based solutions offer higher customization and security. Although in the long run, ZK-based solutions offer higher customization and stronger competitive advantages, providing unique empowerment in terms of functionality and performance to projects, in the short term, OP-based solutions can amplify the cost and performance advantages brought by the Dencun upgrade with their low barriers to entry and high compatibility, enabling the rapid reuse of existing complete EVM infrastructure and achieving rapid expansion of early users and funds, with more obvious short-term leverage.

Caldera

Caldera is a RaaS service provider built on the OP Stack, supporting the rapid deployment of an Optimism L2 for users in a code-free manner. L2 issued using Caldera can achieve full EVM compatibility, greatly reducing the development threshold for developers and facilitating the direct reuse of existing EVM ecosystem projects, thereby providing more complete infrastructure for L2. In addition to L2 itself, Caldera also configures a series of blockchain infrastructure for users, such as blockchain browsers and testnet faucets, further reducing the cost and usage barriers, making it plug-and-play.

Altlayer

Altlayer is another noteworthy RaaS solution under the Optimism ecosystem. Altlayer supports code-free deployment of L2. Developers can quickly create a Rollup chain through simple graphical interface operations. In addition, AltLayer also supports Elastic Rollup—Flash Layer. When there is a surge in demand for mainnet applications, 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 short-term performance demands. When the event ends and the state and assets are transferred back to the base chain, the Flash Layer can be directly deleted. Altlayer provides an instant scaling solution that avoids resource waste and can meet more complex business requirements.

Lumoz

Lumoz (formerly Opside) is a ZK-based RaaS solution that supports developers in deploying their own ZK-Rollup in a code-free manner, generating customized zkEVM application chains. At the same time, the emergence of a large number of ZK-Rollups will also create a huge demand for ZKP computation. Lumoz has also built a decentralized ZKP market, supporting ZK mining to generate zero-knowledge proofs for ZK-Rollup. In practical use, developers do not need to understand any knowledge related to ZK, and can quickly deploy a ZK-Rollup through simple front-end operations. The computational power demand issues involved in the operation of ZK-Rollup can also be addressed through Lumoz's ZK-PoW service, greatly reducing the operational threshold and cost for project parties. In particular, Lumoz also supports 0 Gas Fee contracts, providing users with a smooth Dapp usage experience with no interaction costs. The recently popular ZKFair is one of the L2 solutions built on Lumoz.

Application Layer

Previously, we discussed in detail the benefits of the Dencun upgrade for the L2, DA, and RaaS infrastructure tracks. The improvement in L2 costs and performance due to the Dencun upgrade will also promote development and innovation at the application layer. Next, we will briefly analyze the application layer tracks that can significantly benefit from the Dencun upgrade.

Perps

Overall, interactions in the DeFi track have a low frequency but high single-point interaction yield. Therefore, in a sense, DeFi does not particularly rely on high performance, as the yield from a single DeFi operation can cover the cost of interaction. However, decentralized derivatives are an exception, as the limitations of performance bottlenecks and high network transaction fees are greatly magnified in the operation of decentralized derivatives protocols.

Due to the performance limitations of the L2 network, projects like Perps are almost unable to run on-chain order books and efficiently respond to real-time order matching demands. Additionally, high network fees greatly restrict high-frequency trading for market makers and users. The existence of these issues results in lower trading efficiency for Perps, relatively higher slippage, inability to attract deep liquidity and professional traders, and an inability to provide a trading experience comparable to CEX.

We believe that the Dencun upgrade can to some extent address these issues, especially the critical improvement in performance for derivative trading. Compared to point pools and AMM mode Perps, the Dencun upgrade is more favorable for L2 Perps with order book models, such as ApeX Protocol, Aevo, Vertex Protocol. Similarly, the reduction in network transaction fees will further stimulate trading for more mature Perps using point pool models, such as GMX, Synthetix, GNS.

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 reliance on external oracles and reducing potential security risks, oracle failures, and malicious manipulation risks. The introduction of EIP-4788 can further enhance the security of staking protocols, which is a potential significant benefit for LSD and ReStaking tracks. EIP-4788 allows liquidity staking protocols such as Lido, Rocketpool, Swell, and re-staking protocols like Eigenlayer to directly access critical data such as validator balances and status 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 been active recently, supporting various LSTs, collaborating with Altlayer to launch Restaked Rollups, and the ecosystem re-staking protocol Renzo has already been launched. EigenDA has also started the second phase of the testnet. Eigenlayer's TVL has reached 1.7B and continues to rise. The narrative of re-staking is just beginning, and EIP-4788 will provide a solid underlying security guarantee for re-staking.

FOCG

Full-chain games are one of the major beneficiaries of the Dencun upgrade. Unlike asset-only on-chain games where the game logic remains in Web2.5 off-chain, full-chain games have all game content, logic, rules, and assets on-chain. The on-chain gas fees determine the interaction cost of each game operation, and on-chain performance determines the user experience for players. Clearly, due to performance limitations, previous full-chain games were limited to relatively simple turn-based strategy games. The higher interaction costs and the demand for high-frequency interaction in games have also deterred many players.

The Dencun upgrade can significantly improve the development dilemma of existing full-chain games and even give rise to more types of full-chain games. We expect to see more full-chain games built on full-chain game engines such as Mud, Dojo, running on L2 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 about by the Dencun upgrade.

The landing of the Dencun upgrade will inject new vitality into the Ethereum ecosystem. Of course, in addition to benefiting the tracks mentioned earlier, 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 the cost of EVM ecosystem L2 and L3, as well as the improvement in performance, will further overshadow solutions like Polygon and diminish the attractiveness of non-EVM scaling solutions like BSC due to cost and performance advantages. The Dencun upgrade will refocus the market on the Ethereum ecosystem with L2 and L3 at its core.

In summary:

1. As part of Ethereum's upgrade roadmap "The Surge," the Dencun upgrade aims to further reduce the usage cost of the Ethereum ecosystem and improve its scalability. The Dencun upgrade will introduce EIP-1153 to reduce storage costs and gas consumption on the Ethereum mainnet, improving its scalability. The upgrade will also introduce EIP-4844, significantly reducing transaction costs for Ethereum L2 and increasing L2 transaction throughput.

2. Based on the current Shadowfork test reports and the recent 178th Ethereum Core Developers' Meeting, the testing situation for the Ethereum Dencun upgrade is good, and the three major testnets are expected to undergo Dencun upgrade testing from January to early February as planned. If the testnet testing goes smoothly, the mainnet Dencun upgrade is expected to be completed in February.

3. The Dencun upgrade will further drive the prosperity of the L2 ecosystem, especially benefiting Optimism, Arbitrum, and Metis. The upgrade will also drive demand for decentralized storage, DA, and RaaS infrastructure tracks. The development of ecosystem projects such as EthStorage, Covalent, EigenDA, Polygon Avail, Caldera, Altlayer, Lumoz is worth paying attention to.

4. The Dencun upgrade will also promote development and innovation at the application layer, benefiting projects like ApeX Protocol, Aevo, Vertex Protocol, representing order book model Perps. EIP-4788 will improve the underlying security of LSD and ReStaking protocols, especially driving the development of the ReStaking track represented by Eigenlayer. Full-chain games will also provide a better interactive experience for users due to the Dencun upgrade.

Finally: MT Capital is very optimistic about the EVM ecosystem innovation brought about by the Dencun upgrade, and welcomes early-stage projects and entrepreneurs in tracks such as ReStaking, DA, L2, Perps, FOCG to contact us at any time. (Twitter: @0X_IanWu, @Severin0624, MT Capital Email: deck@mt.capital)

Reference:

https://vitalik.eth.limo/general/2023/12/28/cypherpunk.html

• Ethereum Cancun EIPs
• A Rollup-Centric Ethereum Roadmap
• EIP-4844
• An Overview of Danksharding and a Proposal for Improvement of DAS
• EIP-4844 Explained
• Ethereum Evolved: Dencun Upgrade Part 3, EIP-4788
• EIP-4844 Unveiled: Paving the Way for Proto-Danksharding in Ethereum
• EIP-4844: Shard Blob Transactions
• An explanation of the sharding + DAS proposal
• Ethereum’s Cancun-Deneb (Dencun) Upgrade: another milestone after the Shanghai Upgrade
• Recapping the Rollups Roadmap
• Ethereum: Dencun Upgrade and Proto-Danksharding
• Unlocking Ethereum’s Evolution: The Cancun Advancement
• ELI5 Data Availability Sampling
• Dencun-gsf-1 analysis
• Foresight News Article 1
• Foresight News Article 2
• Foresight News Article 3
• Bitpush News Article
• Tech Flow Post Article 1
• Foresight News Article 4
• Foresight News Article 5
• Tech Flow Post Article 2
• Foresight News Article 6
• Tech Flow Post Article 3
• Foresight News Article 7
• Eigenlayer Documentation
• Altlayer Documentation
• Foresight News Article 8

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