Author: Wilfred Daye, CEO of Samara Alpha Management Company, CoinDesk; Compiler: Deng Tong, Golden Finance
The Ethereum blockchain recently received a major upgrade that enhanced its scalability, efficiency, and security. These improvements solve the blockchain trilemma—the challenge of balancing security, decentralization, and scalability. These ongoing enhancements are critical to improving network performance while keeping costs low.
Upcoming Ethereum The Cancun-Deneb (“Dencun”) hard fork upgrade will be deployed on the mainnet on March 13. This upgrade will prioritize scalability, efficiency, and security through various Ethereum Improvement Proposals (EIPs), specifically targeting the prototype EIP-4844 - sharding. The The proposal aims to optimize gas costs and enhance network scalability.
Dencun upgrade marks Ethereum The beginning of the “The Surge” era of our roadmap, paving the way for massive scalability through Layer 2 Rollup. These rollups will make Ethereum more accessible and user-friendly, driving adoption and utility in various sectors, including DeFi 2.0.
Benefits of Layer 2 Rollup
Layer 2 Rollup through the processing chain transactions to enhance Ethereum’s scalability and efficiency while retaining the security guarantees of the main Ethereum blockchain (Layer 1). They have the following characteristics:
Off-chain execution:Processing transactions off-chain enables faster, more cost-effective throughput , without having to compete for space on the Ethereum blockchain.
Transaction aggregation: The results of multiple transactions are aggregated or bundled into a single compressed form of transaction data after being executed off-chain.
Publish to the main chain: Compressed transaction data or Rollup, then published to the Ethereum main chain (Layer 1).
Data Availability: Despite off-chain processing, the main Ethereum blockchain ensures that all participants can access and verify transactions related data.
Security:Layer 2 Rollup maintains the security guarantee of the Ethereum network through various encryption technologies.
The significance of EIP-4844 for Proto-Danksharding
EIP-4844 or Proto-Danksharding Designed to significantly enhance the scalability of the network by introducing temporary data blobs attached to blocks. This innovation reduces processing costs and increases throughput by:
Temporary Data Blocks: These storage spaces attached to Ethereum blocks allow additional data to be included in transactions without interacting directly with the Ethereum Virtual Machine (EVM).
Reduced processing costs: Efficient processing of transaction data through blobs can reduce gas fees for users, potentially bringing average transaction costs below $0.01.
Improving throughput: EIP-4844 enables higher transaction throughput, potentially reaching speeds of 100,000 transactions per second (TPS).
Promote Layer 2 solutions: This proposal is expected to benefit Layer 2 scaling solutions, such as Rollup, by providing additional temporary storage space.
Trade prospects surrounding Cancun-Deneb upgrade
The Ethereum network transitioned from Proof-of-Stake to Proof-of-Work ("merged") in 2022, making Ethereum a deflationary asset. Currently, more than 25% of the total Ethereum supply is locked in staking platforms, which significantly reduces the supply available for trading or investing. This shock coincides with the burn mechanism, which reduces the ETH supply by 0.21% per year.
Dencun is expected to be a positive catalyst for ETH. Ethereum holders moved more than $1.3 billion worth of ETH into private wallets, significantly increasing their Reduces exposure to exchanges. Recent data from Bloomberg shows the ETH/BTC spot ratio falling back to 0.5, reminiscent of post-Luna/Terra 2022 levels.
This provides a reasonable entry point for Ethereum enthusiasts. Additionally, there has been a surge in short-term bullish buying of ETH, with traders expecting the price to rise to $4,000 by the end of March. Traders are also favoring a strategy of buying March 2024 calls and selling April 2024 calls. The bullish sentiment among traders is evident in the market, with ETH call and ETH put options having nominal values of approximately $2.5 billion and $1 billion respectively.
Looking forward, in addition to Ethereum, other high beta names in Layer 2 are also expected to benefit from the Dencun upgrade. For example, Layer 2 networks such as Arbitrum (ARB) and Optimism (OP) are expected to gain significant advantages from the introduction of data blobs by bundling transactions before publishing them back to the main chain.
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