Ethereum Activates Dencun Upgrade, Ushering New Era For Layer 2 Scalability

Ethereum’s long-awaited Dencun hard fork is now complete, significantly bolstering the scalability of its booming Layer 2 ecosystem.

Dencun went live on March 13, paving the way for a significant reduction in the costs associated with transacting on Ethereum L2s by replacing gas-intensive calldata with lightweight Binary Large Objects (blobs) via EIP-4844 — also known as proto-danksharding.

Unlike calldata, blobs do not compete with Ethereum transactions for gas and are pruned from the blockchain after roughly 18 days, dramatically improving data availability and lowering costs for Layer 2 rollups. Domothy, an Ethereum Foundation researcher, noted that several protocols will plan to host blob data indefinitely moving forward during a March 13 live-stream.

David Silverman, the VP of Product at Polygon Labs, described blobs as a temporary storage space facilitating cheap and temporary data storage for rollups and decentralized applications. For rollups, Silverman said blobs mitigate the need for data compression and other “roundabout methods” employed by Layer 2s to bring costs down.

0xVEER, the head of DevRel at Mantle, said data publication costs accounted for between 73% and 90% of rollup transaction fees prior to Dencun’s activation.

Layer 2 team anticipate huge fee reductions

IntoTheBlock, a crypto data analytics provider, estimated Dencun would reduce the price of swapping tokens using Layer 2-based decentralized exchanges by 80%.

Philippe Schommers, head of infrastructure at Gnosis, also predicted a cost reduction of at least 80%, but noted that handling blob data is “complicated” and may not be easily achievable by all types of L2s.

Karl Floersch, the CEO of OP Labs and co-founder of Optimism, said Dencun will reduce Layer 2 transaction costs by at least 90%.

Declan Fox, the Global Product Lead for Linea, said EIP-4844 could reduce the data availability cost of rollups by up to 90%, suggesting post-Dencun fee savings of between 65% and 80%.

However, Fox noted that the new fee market for blobs may still suffer from congestion-induced fee volatility. “If Rollups compete to have their batches included in L1 at a similar time in the day and the blob target of 3 per block is exceeded, then the price of blobs and therefore the L2 transaction prices will start to exponentially increase,” Fox said.”

Despite the optimistic projections from many Layer 2 teams, others are holding back on estimating Dencun’s impact until after the upgrade has taken full effect.

Ed Felten, the co-founder and chief scientist at OffChain Labs, the team behind Arbitrum, told The Defiant that there are too many variables informing transaction costs to make an accurate estimate regarding post-Dencun fee savings.

“There is a lot of uncertainty around the eventual price of EIP-4844 data blobs,” Felten said. “We’re confident that data posting will be cheaper than before, but there are too many variables to make even a ballpark estimate. We’ll just have to see how things develop over the days and weeks after the upgrade.”

Silverman said Polygon is also reluctant to try and quantify Dencun’s impact, suggesting the transaction loads used to model EIP-4844 on testnets are lower than what the team expects Layer 2s to handle on mainnet.

Silverman also noted that many rollups still need to deploy their own upgrades implementing infrastructure supporting EIP-4844 before post-Dencun cost-reductions are realized in full.

“I think it's going to take about two months [before] we can really understand the impact of transaction fees, but we expect significant reductions across all of the L2s,” he said.

Layer 2 activity surges

The upgrade follows a recent uptick in on-chain activity and transaction fees on Layer 2 amid bullish market conditions, with average fees jumping by between 100% and 800% across leading Layer 2 ZkSync Era, Arbitrum, and OP Mainnet since mid-October, according to GrowThePie.

The total value locked in Layer 2 networks is also at an all-time high of $39 billion after growing 262% in five months, according to L2beat.

Tom Ngo, the executive lead at Metis, described Dencun as creating more transaction supply to handle the increasing throughput demands of Layer 2.

“Think of it as devs enabling more space on Ethereum for L2s to store their data,” Ngo said. “Since now there will be more space, L2s don’t have to compete (bid) as hard against each other to fit these transactions, which reduces their costs.”

Ngo added that projects leveraging third-party data availability solutions won’t be impacted by the introduction of data blobs. Metis will soon migrate its data availability to EigenDA, with Ngo claiming the move will facilitate lower fees than other Layer 2s.

Stani Kulechov, the creator of Aave Protocol and CEO of Avara, emphasized that Dencun will reduce the barrier to users engaging with DeFi by lowering fees on Layer 2s.

“This is an important upgrade that will be felt by end-users in the form of lower fees that promote accessibility, especially for decentralized finance,” Kulechov said. “By reducing these barriers, Dencun paves the way for innovation, adoption, and growth of Ethereum."

Ethereum developers turn attention to Pectra

Looking ahead, Ethereum core developers have already begun work towards Pectra, Ethereum’s next major upgrade and hard fork.

Pectra will focus on introducing Verkle Trees — a data structure paving the way for Ethereum to become stateless, meaning clients will not need to store Ethereum’s entire state history to validate blocks. The update, also known as “The Verge”, will significantly reduce the hardware requirements for validators, bolstering the network’s decentralization.

“I'm really looking forward to Verkle trees,” Vitalik Buterin, Ethereum’s co-founder and chief scientist, recently tweeted. “They will enable stateless validator clients, which can allow staking nodes to run with near-zero hard disk space and sync nearly instantly.”

In January, Ethereum client developers estimated Verkle Trees could take between 18 and 24 months to realize, meaning Pectra is likely to go live in 2025.

Developers are also discussing the inclusion of other Ethereum Improvement Proposals alongside The Verge for Pectra.