Much Lower Fees Following The Dencun Update

Ethereum, the second-largest cryptocurrency, remains the most actively developed blockchain platform. The upcoming upgrade, named ‘Dencun,’ targets enhanced scalability and significantly reduced transaction fees. Dencun includes upgrades at the consensus and execution layers, introducing a critical feature called ‘proto-danksharding.’ This innovation is expected to reduce costs on Ethereum’s major layer-2 rollup solutions by up to 90%.

Rollups Key to Ethereum’s Ongoing Evolution

Rollups are independent blockchains that use the Ethereum mainnet to periodically post transaction data while handling large volumes of transactions off-chain. This method allows them to avoid the congestion and high costs seen on Ethereum’s base layer while benefiting from its robust decentralization and security.

The two most utilized rollups are Arbitrum and Optimism, which facilitate billions of dollars in value transfer each week for a tiny fraction of the fees required for similar transactions directly on the Ethereum mainnet.

Rollups have proven to be the most suitable method for scaling Ethereum thus far, and enhancements that improve their efficiency and affordability will strengthen the growing decentralized finance (DeFi) ecosystem blossoming across platforms like Arbitrum and Optimism.

Proto-Danksharding Compresses Data to Cut Fees

The functionality introduced in Dencun that will reduce rollup costs is called ‘proto-danksharding.’ When data is posted to the Ethereum blockchain, it utilizes ‘calldata’ that takes up substantial space. The more space a transaction occupies, the higher the network fee.

Proto-danksharding enables a new compressed ‘blob’ data storage mechanism that uses 80-90% less space than calldata. This update slashes the accompanying costs by dramatically shrinking the amount of data rollup transactions posted to Ethereum.

Nebojsa Urosevic, a core developer at Optimism, highlighted in a tweet that rollup fees could drop by up to 90% thanks to blob data compression. However, Urosevic emphasized that only rollup transaction costs would benefit, while layer-1 fees on Ethereum’s base blockchain would remain largely unaffected.

Recent Testing Hits Snag, But Outlook Remains Positive

Despite encountering a bug during a recent dress rehearsal on the Goerli testnet, the Dencun upgrade for Ethereum remains on track. The bug, originating in the Prysm client used for Ethereum proof-of-stake validation software, was promptly identified and patched by Prysmatic Labs.

The development team has already released a hotfix update, and plans for Dencun are broadly unaffected. Developers are set to rerun tests on a testnet, including Ethereum’s Sepolia test network, to ensure a smooth transition with the patched Prysm software. The final testing ground for Dencun will be Ethereum’s Holesky test network before it is deemed ready for mainnet rollout.

While the timeline for the mainnet release remains flexible pending successful testing, progress continues, and the targeted launch for Dencun is still anticipated in 2024.

Proactive Updates to Support Ethereum’s Growth Trajectory

The Dencun upgrade is crucial for Ethereum, handling over $1.6 trillion in DeFi. It improves capabilities and reduces network issues with rollup-enhancing features like proto-danksharding. Despite ongoing deployment work, its anticipated fee reduction for platforms like Arbitrum and Optimism is eagerly awaited.

True Scalability Requires Layer-2 Action

Bitcoin and Ethereum face scaling challenges, hindering global adoption due to limited transaction rates and fluctuating fees. To bridge the efficiency gap in traditional payment systems like Visa and Mastercard, layer-2 rollup solutions like Arbitrum offer increased throughput and affordability. Ethereum’s focus on expanding rollup functionality aligns with its roadmap for global scalability, aiming to become a consumer-friendly smart contract platform.

The Next Step: Transitioning to Full Danksharding

The Dencun upgrade introduces proto-danksharding, a step toward compressing rollup data on Ethereum. The ultimate goal is danksharding, a scaling breakthrough that eliminates the need to post data to Ethereum’s layer-1, thereby freeing rollup transactions.

Danksharding, however, requires an intermediate phase using blobs to organize transaction data on Ethereum. Blobs pave the way for sharding Ethereum’s database, unlocking a significantly higher transaction capacity at negligible costs.

This advancement is crucial for Ethereum, handling transactions for major corporations and over $100 billion in decentralized finance. If executed successfully in future upgrades, danksharding presents a holy grail solution for achieving boundless scalability at a low cost.

Conclusion

As Ethereum approaches its tenth year, it faces congestion and high fees. Upgrades, including Dencun with proto-danksharding, aim to enhance scalability by cutting up to 90% of rollup fees. Despite a recent bug, Dencun remains on track for a 2024 launch, showcasing Ethereum’s commitment to innovation for a more scalable future.

Mr. Pratik chadhokar is an Indian Forex, Cryptocurrencies and Financial Market Advisor and analyst with a background in IT and Financial market Strategist. He specialises in market strategies and technical analysis and has spent over a year as a financial markets contributor and observer. He possesses strong technical analytical skills and is well known for his entertaining and informative analysis of the Financial markets.