The Dencun Upgrade: A New Era for Ethereum

Ethereum, the second-largest blockchain platform by market capitalization, is on the brink of a transformative leap with the eagerly anticipated Dencun upgrade, slated for activation on March 13th.

As a hub for a myriad of decentralized applications (dApps) and a hotbed for blockchain innovation, Ethereum has faced its share of challenges, notably in scalability and the burden of high transaction costs.

This forthcoming upgrade is a watershed moment in Ethereum's evolution towards a rollup-centric future. By introducing Proto-Danksharding (EIP-4844), Ethereum is setting the stage for unprecedented scalability and efficiency enhancements, promising to address these critical challenges head-on.

Quick Highlights: Dencun Upgrade & P2P.org's Role

Upgrade Date: Ethereum's Dencun upgrade is set for March 13th, marking another significant leap in Ethereum's scalability.
Core Features: Proto-Danksharding (EIP-4844), aimed at drastically cutting transaction costs and enhancing scalability through innovative "blob" data storage.
Impact on Layer 2: The upgrade promises more efficient Layer 2 solutions, directly benefiting the Ethereum community.
P2P.org's Involvement: Our engagement in testnets showcases our commitment to Ethereum's development and ensures readiness for the upgrade. (read more in the paragraphs below!)
Staking Dynamics: Finally, we tried to anticipate how the upgrade would impact Staking, LSTs, and what's ahead.

User Advisory: No immediate action is needed from P2P.org users; we're set to guide you through this transition smoothly.

Proto-Danksharding

At the heart of the Dencun upgrade is EIP-4844, a groundbreaking proposal promising to dramatically enhance Ethereum's scalability. It's designed to significantly enhance Ethereum's scalability by introducing a new type of data storage called "blobs." These blobs allow for efficient, short-term storage of extensive data sets off the main blockchain while ensuring their processing availability. This mechanism reduces the overall transaction costs and paves the way for more scalable Layer 2 solutions by creating a separate space for batch processing of transactions. Proto-Danksharding is a critical step towards Ethereum's vision of achieving high transaction throughput, aiming to accommodate over 100,000 transactions per second.

Pavel Yashin, a leading data analyst and researcher at P2P.org, shares his insights on this upgrade's impact on the Ethereum ecosystem.

"EIP-4844 will create a separate blockspace for L2 batch processing, resulting in a two-dimensional fee market," explains Yashin. "This means Layer 2 solutions will have their own EIP-1559-like market, optimizing the costs of uploading data and potentially leading to a drastic decrease in L2 fees. The implications for the blockspace markets and the staking economy are profound."

The Impact on Blockspace Markets

Currently, L2 smart contracts are among the top consumers of gas on Ethereum, utilizing approximately 12-15% of blockspace primarily for batch uploading. Introducing a separate blockspace for these operations will alleviate this pressure, lowering base fees until new consumers fill the gap.

Data from Dune Analytics gathered by Pavel Yashin

The Dencun upgrade heralds a significant improvement for Layer 2 (L2) solutions, as they will gain independence from the congestion and fee spikes of Layer 1 (L1). Only local congestion within L2s will influence their operation, making Ethereum's blockspace more efficient and user-friendly.

This independence from L1 congestion ensures that L2 solutions can offer a more consistent and predictable fee structure, significantly enhancing the user experience on the Ethereum network.

"Despite being huge gas consumers, L2s are nowhere near a major source of priority fees: most batch posting transactions occur at the bottom of the block. The last 3 months' data shows that L2 payments to proposers were around only 1.6% of total EL rewards," says Pavel Yashin

Staking Economy and Priority Fees

While the upgrade is poised to bring significant benefits to L2 users, its impact on stakers might be less pronounced. "For stakers, the change may pass by mostly unnoticed, affecting only a fraction of APR from priority fees income," Yashin notes. "However, the decrease in base and priority fees could make Ethereum more attractive to a broader user base." (original Tweet by Pavel Yashin)

P2P.org: Leading Ethereum's Charge Towards Scalability

P2P.org's involvement in Ethereum's development extends beyond theoretical contributions. Our engagement is exemplified by our active participation in all three testnets, where we've consistently pushed the boundaries of Ethereum's capabilities.

A testament to our technical dedication is the development of the Dirk Key Converter (DKC). This pivotal tool enhances node operators' tooling by facilitating the migration to the vouch/dirk schema. It significantly boosts security levels by adopting threshold signatures, underscoring our commitment to advancing Ethereum's infrastructure. As a genesis node operator for the Holesky testnet, we've underscored our technical prowess by managing over 100,000 keys, demonstrating our capability to conduct large-scale operations with unmatched precision and reliability.

Moreover, our collaborative endeavors with leading projects such as Obol, SSV.network, Lido, and EigenDA further highlight our role in fortifying Ethereum's ecosystem. By actively engaging in testing setups for these initiatives, we contribute to the overall robustness and efficiency of the network.

Our involvement goes beyond mere participation as we actively contribute to shaping Ethereum's scalable, secure, and efficient future, showcasing our unwavering commitment to the platform's advancement.

The Dencun upgrade, with EIP-4844 as its cornerstone, symbolizes more than a technical milestone; it represents a significant stride toward fulfilling Ethereum's scalable, efficient, and user-centric vision.

"P2P.org is proud to be at the vanguard of Ethereum's evolution, contributing to a foundation that will make L2 users' experiences more affordable and set the stage for true sharding," Yashin asserts. "More scalability for the scalability god."

The Dencun upgrade exemplifies the community's dedication to innovation as Ethereum continues its journey and enhances its scalability. With P2P.org's involvement and the expertise of Pavel Yashin, the upgrade is not merely a step forward for Ethereum but a giant leap for the broader blockchain ecosystem.

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Strategic Adjustments in Ethereum's Staking Dynamics

As Ethereum continues to evolve with the Dencun upgrade, a strategic adjustment is set to refine the staking dynamics within the network.

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Scheduled for implementation in Q1 2024, alongside the Dencun update, is a pivotal change encapsulated in EIP-7514, which proposes setting the maximum churn limit to 8.

This initiative is driven by the motivation to mitigate the potential negative impacts of an excessively high total ETH supply being staked, pending a more comprehensive solution to adjust the rewards curve. Essentially, this measure is designed to temper the growth pace of staked ETH, acknowledging the complexities involved in modifying the reward structure.

Implications for Staking

With the current churn limit at 13, the adjustment to a churn limit of 8 represents a significant deceleration in stake growth—by approximately 40%. This recalibration aims to cap the annual growth of the staking ratio to around 17.5% of the total supply. Such a slowdown is anticipated to foster a more competitive landscape for staking providers, as the effective addressable market contracts by a corresponding margin.

Notably, since October 15th, 2023, the activation limits have been under no pressure, with queues seldom reaching 50% of the daily activation capacity. However, as of February 2024, a resurgence in queue congestion has been observed, likely spurred by positive market sentiment and an influx of long-term investments or anticipation of forthcoming updates.

This scenario underscores the importance of making timely staking decisions, especially if the positive outlook on Ethereum's macroeconomic environment persists, potentially leading to queue lengths surpassing those observed post-Shapella.

Impact on Liquid Staking Tokens (LSTs)

In the event of heightened demand for staking and the emergence of queues, it's conceivable that interest may partially shift towards Liquid Staking Tokens (LSTs). Although this shift would likely result in a reduced yield on LSTs, their appeal remains intact, suggesting that LSTs could be pivotal in Ethereum's staking ecosystem moving forward.

Looking Ahead

This adjustment is envisioned as a temporary measure, awaiting a definitive stance from the Ethereum Foundation on key staking parameters, such as the target staking ratio and inflation considerations. It represents a thoughtful approach to balancing growth with sustainability, ensuring Ethereum's long-term resilience and scalability.

Contact Us:

Please read the original tweet on Dencun Upgrade by Pavel Yashin.
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