Ethereum Ecosystem Update: Fee Reductions on the Horizon for Major Networks

Last Updated on March 7, 2024

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Key Takeaways:

  • Scheduled for next week, this major Ethereum upgrade aims to significantly lower costs for layer-2 networks, particularly through enhancements in rollup technology.
  • The upgrade is expected to lower the operational costs for layer-2 networks, with these savings likely passed down to users in the form of decreased transaction fees, though exact savings remain speculative.
  • Entities like Polygon, Arbitrum, and StarkWare express varied expectations for post-Dencun impact, highlighting the upgrade’s potential but noting the difficulty in precise cost reduction forecasting.
  • StarkWare CEO projects a dramatic decrease in transaction costs due to cheaper data storage with blobs, possibly by a factor of ten for the bulk of user costs associated with data on layer-1.
  • Base’s head predicts initial significant fee reductions, potentially by 90-95%, but expects an equilibrium fee rate to emerge as demand increases, aiming for “sub-cent” transaction costs in the long term.

Ethereum’s ecosystem is on the brink of a significant transformation with the impending Dencun upgrade, slated for next week. This pivotal update is set to introduce Dencun, marking a monumental shift towards reduced operational costs for layer-2 blockchains, notably rollup networks designed for enhancing transaction speed and cost-efficiency over the primary blockchain.

The crux of the Dencun upgrade is EIP-4844, colloquially known as “proto-danksharding.” This introduces a novel transaction category aimed at lowering the expense of data transaction publishing on rollups by incorporating data “blobs” – designated storage within transactions for temporary data holding by rollup networks or protocols, likened to a “side car” for auxiliary space.

The integration of more blobs is anticipated to substantially decrease the costs for layer-2 networks to store data on Ethereum, with expectations of these savings trickling down to users through reduced fees.

Scissor cut the fee word

However, the precise impact remains a topic of speculation among Ethereum experts. Queries directed at major layer-2 teams, including Polygon, Arbitrum, StarkWare, and Coinbase’s Base, have yielded insights into their expectations post-Dencun, albeit with varying degrees of certainty.

Polygon’s co-founder, Jordi Baylina, suggested at the ETHDenver conference that the expansion in data availability on Ethereum should logically lead to lower prices due to increased supply.

However, he noted the difficulty in predicting the exact reduction, emphasizing the upgrade as a crucial step in Vitalik Buterin’s roadmap for scaling the blockchain through rollup-centric activity. Polygon’s approach, particularly with its recent emphasis on ZK rollups, stands to benefit differently compared to optimistic rollups, according to Brendan Farmer, another Polygon co-founder.

Steven Goldfeder of Offchain Labs, associated with Arbitrum, highlighted the upgrade’s potential to elucidate the intricate dynamics of layer-1 and layer-2 fee structures, underscoring the unsustainable nature of pricing layer-2 fees at nominal rates.

StarkWare’s CEO, Eli Ben-Sasson, pointed out the significant potential for cost reduction attributable to blobs, especially given that data costs on layer-1 constitute the bulk of transaction expenses for users. StarkNet, developed by StarkWare, has been meticulously prepared for the proto-danksharding implementation, aiming for immediate compatibility upon the upgrade’s activation.

ethereum virtual currency activated

Coinbase’s Jesse Pollak, discussing the Base layer-2 network, projected that proto-danksharding could initially lower transaction costs by 90-95%, assuming no surge in usage. However, he anticipates a balance between reduced costs and increased demand, possibly settling transaction fees at two to five times less than current rates, potentially reaching sub-cent levels.

The Dencun upgrade, particularly with its introduction of proto-danksharding and the concept of blobs, stands as a testament to Ethereum’s continuous evolution. It aims not only to enhance the efficiency and scalability of layer-2 networks but also to substantially lower transaction costs for users, albeit with the exact outcomes yet to unfold.

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