Unveiling the Ethereum Cancun Upgrade - The Next Hundred Billion Market Cap Opportunity?
[TL;DR]:
After a year of suppression, Ethereum finally embarked on a new narrative. The Goerli test network upgrade in Cancun has been successfully completed, and the main network upgrade is expected to be completed by the end of February.
The most notable is the EIP-4844 proposal, where developers are trying to provide more scalability for blockchain by introducing a new transaction type called Blob, thus reducing transaction fees for Layer 2 blockchains.
Ethereum Layer2, data availability layer, decentralized storage, and various DAPP sub-sectors may benefit from this upgrade.
Introduction
After the approval of the spot Bitcoin ETF, the long-suppressed Ethereum gradually became the core topic: the launch of the Ethereum spot ETF in May, the Constantinople upgrade, Restaking, and the most eye-catching is the first landing of the Constantinople upgrade. This article will introduce the time schedule of the Constantinople upgrade, the upgrade theme and its impact on the future market.
Cancun Upgrade Schedule
Actually, as early as the end of April last year, the Ethereum Foundation confirmed the next important change, which is the Cancun upgrade. At that time, during the 160th core developer conference call, it was pointed out that the plan was expected to be officially launched in November of that year.
But it was later delayed to the end of 2023 due to technical issues. In fact, due to the failure of the test network launch in September and the inability to release the Cancun upgrade in Holesky in October, it had to be postponed to 2024.
On December 28th of last year, Vitalik published an article titled ‘Make’. Ethereum The article “Cypherpunk Again” shares his vision for the future of cryptocurrency.
He emphasized that one of the main reasons for the limitation of blockchain technology is the continuous rise in transaction fees. The high cost of network transactions makes people more inclined to become speculators of the blockchain network rather than actual users. In order to achieve widespread application and implementation of blockchain technology, transaction fees must be significantly reduced. Although the emergence of Layer 2 has reduced network fees, it is still not enough compared to the Ethereum mainnet.
Therefore, Vitalik believes that Ethereum needs to take more measures to lower transaction fees in order to promote the popularization and application of blockchain technology. It can be said that this article sets the tone for the KanKun upgrade as proposed by Vitalik.
The plan has finally fixed the timetable recently. On the evening of January 4th, the Ethereum core developer ution meeting (ACDE #178) was held online, which finally confirmed the proposed test network Dencun upgrade timetable put forward in ACDE #177 on December 21, and prioritized the discussion of the subsequent Pectra upgrade plan.
According to the meeting schedule, the Dencun upgrade on the Goerli test network has been completed on the 17th of this month and has successfully resumed normal operation. Next, developers will respectively complete the Sepolia test network and Holesky test network upgrades on January 30 and February 7.
Developers announce the success of the goerli testnet Figure 1 Source: @parithosh_j
Once the above three testnets run smoothly, the mainnet launch will be arranged quickly.
However, most developers believe that the schedule is somewhat tight. For example, developer potuz1 has questioned this, suggesting that the upgrade interval (13 days) between the Goerli test network and the Sepolia test network may be too short to observe potential issues.
It is worth noting that the meeting minutes of the lightclient did not mention the schedule for the mainnet upgrade. However, in the discussion of ACDE #177, developers mentioned deploying the upgrade to the mainnet as early as the end of February. Since ACDE #178 did not postpone the schedule for the testnet upgrade, we can still maintain this time expectation.
The core of the cost upgrade, EIP-4844, focuses on reducing costs and expanding capacity.
In fact, we had already posted a blog in late September last year, “ What investment opportunities can the delayed Cancun upgrade bring?》The basic introduction to the key points of the Cancun upgrade in 》中 was made, and this article will further explain it in plain language.
The upgrade is highly anticipated by the Ethereum community, as it will play a key role in scaling Ethereum, including reducing Layer2 costs and increasing efficiency, greatly enhancing Ethereum’s competitiveness on Layer2.
Among the five Ethereum Improvement Proposals (EIPs) involved, the proposals that have received more attention include the core EIP-4844, as well as EIP-1153 and EIP-4788.
EIP-4844, as the core proposal of this upgrade, is the key to Ethereum scalability. In simple terms, developers are trying to provide more scalability to the blockchain by introducing a new transaction type called Blob, which reduces transaction fees for Layer 2 blockchains.
Comparison chart of various L2 fees 2 Source: l2fees.info
The original plan of Ethereum to improve transaction processing speed through sharding technology was difficult to develop and slow in progress. In contrast, the Rollup expansion plan has developed rapidly, meeting some expansion needs, leading Ethereum to focus on data sharding for Rollup. The Dencun upgrade will introduce Proto-Danksharding, which will first introduce blob into the block space, optimize the cost of data availability, and improve the scalability of L2.
Proto-Danksharding is not only the core content of Dencun upgrade, but also the first step in the comprehensive expansion of Ethereum. It lays the foundation for subsequent complete Danksharding, the introduction of block proposers and builders separation, and the realization of data availability sampling.
Block Upgrade Changes Figure 3 Source: a16zcrypto.com
According to preliminary estimates by market observers, transaction costs may decrease by 10-100 times.
As a result, the title of the EIP-4844 improvement protocol has been changed from ‘Proto-danksharding’ to ‘Shard Blob Transactions’, which means ‘shard blob transactions’.
In addition, there are other important proposals:
EIP-1153 adds transient storage opcodes to solve intra-block communication problems, with the advantage of low gas fees.
EIP-6780 modifies the functionality of the SELFDESTRUCT opcode to prepare for the future Ethereum application Verkle Tree architecture.
EIP-4788 exposes the beacon chain block root in the Ethereum Virtual Machine, which helps in use case development and protocol improvements.
EIP-5656 introduces the MCOPY instruction, which is used to copy memory areas and is useful for computationally intensive operations.
EIP-7516 introduces the BLOBBASEFEE opcode, which returns the basic fee for Blob according to the EIP-4844 protocol.
Which sectors will benefit from the Cancun upgrade?
With the improvement of data storage efficiency and the reduction of costs, the gas fees for Layer2 users have also decreased accordingly. This change will bring more attention to Ethereum Layer2, data availability layers, decentralized storage, and various DAPPs, and these areas may have better development opportunities due to the reduction of gas fees.
L2 public chain
Arbitrum remains the leader in the Ethereum L2 market, along with Optimism Each has its own competitive advantages. Arbitrum leads in protocol diversity based on Arbitrum One, while Optimism leads in interchain eco diversity based on OP Stack.
ARB price trend chart 4 Source: Gate.io
Arbitrum currently has the richest variety of protocols and its trading volume is three times that of Optimism. Therefore, considering Arbitrum’s high trading volume and TPS optimization, it will be one of the biggest beneficiaries of the Dencun upgrade. Arbitrum is also actively promoting Arbitrum Orbit and Stylus languages to enhance its network effects.
Optimism focuses on the Optimism SuperChain network built on the OP Stack, whose value is closely related to the network value of the network. The upgrade premium enjoyed by Optimism is a combination of network value brought by its eco. If the upgrade of Dencun gives birth to more new L2s, these new L2s may choose to build on the OP Stack, thus pushing Optimism closer to its ultimate vision of a super eco.
Cloud storage
It can be foreseen that the Cancun upgrade will bring Filecoin, Arweave Old-fashioned decentralized storage projects such as Storj bring more practical demands for decentralized storage businesses. In fact, Arweave, which focuses on one-time payment and permanent storage, may be able to win more growth in L2 state data storage business by accepting some of the L2 state data that is discarded by blobs.
Sorter
The problem with centralized sorters has always been a focal point of market criticism, and it has been heavily criticized for multiple crashes during the inion craze last year. The upcoming Dencun upgrade may exacerbate risks such as single point of failure.
To address this issue, Metis takes an innovative approach to become the first decentralized PoS sequencer on Ethereum L2. Nodes staking 20,000 METIS tokens can become sequencer operators, and data can only be uploaded to L1 through collaborative signatures. In addition, validators are sampled to ensure the correct transaction order.
A series of DAPPs based on L2
Some DeFi, DAO, Game, RWA applications based on L2 will also gain value due to low cost and high efficiency networks. We have discussed the investment opportunities in ‘What investment opportunities can the delayed Cancun upgrade bring?’ and will not repeat them here.
Summary
After completing the consensus conversion of the Paris upgrade and the equity realization of the Shanghai upgrade, Ethereum is about to focus on dealing with the scalability issue in the Cancun upgrade. Currently, the most eye-catching EIP4844 reduces user fees by temporarily storing and retrieving off-chain data, thereby further improving the scalability and efficiency of Ethereum.
Returning to the secondary market, in fact, a series of Cancun upgrade concept coins such as ARB, OP, METIS have already received a wave of enthusiasm recently, while the recent downward pressure of Bitcoin has formed a certain suppression on this sector.
Nonetheless, we are still highly anticipating the upcoming Cancun upgrade, while Bitcoin ETF is heading towards the mainstream and expanding real-world adoption. We believe that Ethereum’s steady upgrades will also bring innovative driving forces to the prosperity of the crypto market.
