TrendX Research Institute: An Overview of Cancun Upgrades and Positive Project Analysis

Author: veDAO Research Institute

Why Pay Attention to the Cancun Upgrade?

On January 12, the U.S. SEC announced the approval of a Bitcoin spot ETF, a highly anticipated event seen as a milestone with significant implications. However, the crypto market reacted tepidly, and Bitcoin's price began to decline, dropping from a high of $46,000 to below $40,000 in nearly half a month, a decrease of -13%. The previously inflated bubble effect of the ETF event has burst, leading a large amount of capital to flow into other public chains and project protocols with new narratives.

The Bitcoin ETF game has temporarily come to a close, and the market's focus has shifted to Ethereum's spot ETF, with current market analysis estimating a 50% probability of approval by May this year. After the strong price surge during the Bitcoin ETF hype, early positioning in Ethereum should not be missed for the next major token rally.

In addition, Ethereum's next upgrade—the Cancun upgrade—is approaching, expected to be completed as early as the end of February. The primary goal of this upgrade is to expand the Ethereum main chain, enhancing the scalability, security, and usability of the Ethereum network, increasing the main chain's TPS and reducing gas fees, which is highly beneficial for the Ethereum L2 ecosystem and will drive its vigorous growth.

Based on the above two points, this issue will explain the Cancun upgrade and analyze the favorable projects.

What is the Cancun Upgrade?

The Cancun upgrade is another upgrade to the Ethereum main chain following the Shanghai upgrade. The name Cancun comes from a seaside city in Mexico, a world-renowned vacation destination, and one of the host cities for the Ethereum Developers Conference (EthCC).

The core issue that the Cancun upgrade aims to address is the transaction fees of the Ethereum blockchain network. In a December 2023 article titled "Make Ethereum Cypherpunk Again," Vitalik Buterin stated that one of the core reasons blockchain is limited to asset speculation is the rising transaction fees. High network transaction costs have shifted users from being participants in the blockchain network to speculators. To realize the application value of blockchain, transaction fees must be reduced by an order of magnitude. Even though the emergence of L2 has already reduced network fees compared to the Ethereum mainnet, this is still far from sufficient.

The Cancun upgrade is expected to provide several enhancements to the Ethereum network:

• Scalability Improvements: The introduction of Proto-Danksharding is expected to increase transaction processing speed and volume, particularly benefiting L2 solutions built on the Ethereum main blockchain.

• Gas Fee Reduction: By integrating data blobs and activating EIP-4844, transactions will become more cost-effective.

• Security Advances: The implementation of EIP-6780 in this upgrade aims to improve network security measures, providing stronger protection for user data and investments.

• Optimized Data Storage: The implementation of EIP-1153 in this upgrade will bring more efficient blockchain data storage, improve operations, and reduce costs, benefiting second-layer solutions that rely on simplified data management.

• Cross-Chain Enhancements: EIP-4788 in this upgrade aims to improve the usability and security of cross-chain interactions, supporting enhanced interoperability with second-layer solutions.

The core content of the Cancun upgrade is the EIP-4844 protocol—introducing Proto-Danksharding, which is a precursor to Danksharding. This protocol could reduce L2 transaction fees by 10 to 100 times.

Danksharding is a solution that describes how L2 data can be designed as a separate data type called a blob (specifically for storing transaction data submitted from L2 to L1), separating it from Layer 1's calldata. This way, blob data only needs to be accessible for verification within a certain timeframe, without requiring the Layer 1 execution layer to execute everything, significantly alleviating the burden on Layer 1.

The Proto-Danksharding introduced in the Cancun upgrade is the first step towards comprehensive scaling for Ethereum. Each blob introduced in this phase is 128 KB in size, with each Ethereum block planned to contain 3-6 blobs (0.375 MB - 0.75 MB), gradually expanding to 64 in the future. In contrast, the current data capacity of each Ethereum block is less than 200 KB. With the introduction of blobs, the data capacity of Ethereum blocks will significantly increase. Therefore, Proto-Danksharding will lay the foundation for further realizing complete Danksharding, introducing block proposers and builders separation, and achieving data availability sampling.

Specific content of the Cancun upgrade (completed technical improvements):

• Introduction of Blob Transactions: Blob is short for Binary Large Object. Blob transactions are a new type of transaction that will be used in future sharding.

• Introduction of all execution layer logic required for implementing future complete sharding.

• Introduction of all cross-validation logic between the execution layer and consensus layer required for implementing future complete sharding.

• Implementation of layered validation between beacon block verification (i.e., Ethereum Layer 2 data) and blob data availability sampling.

• Introduction of most of the logic required for implementing future complete sharding in beacon blocks.

Sharing Favorable Projects from the Cancun Upgrade

This upgrade is beneficial for the entire L2 ecosystem. According to data from I2fees.info on December 11, 2023, the introduction of blobs has significantly reduced L2 transaction fees and improved throughput to some extent. It has also further promoted the development of the Restake and DA project tracks.

1. Arbitrum

As the leader of Ethereum L2, Arbitrum currently has the most diverse range of protocols. We believe that Arbitrum will greatly benefit from this upgrade for the following reasons:

• Numerous Protocols: According to incomplete data from DeFiLlama, there are approximately 520 protocols on Arbitrum, far exceeding the 216 on the second-ranked Optimism.

• Large TVL: According to L2beat data, Arbitrum's TVL is approximately $10B, accounting for 49.26% of Ethereum Rollup's TVL.

• High Transaction Volume: Based on L2beat data, in the past 30 days, Arbitrum had about 28M transactions, ranking second only to zkSync, which has not yet issued tokens but has a lot of yield farming activities, and leading Optimism's network by nearly three times in transaction volume.

Considering these three points, Arbitrum, which firmly holds the leading position in scale, will undoubtedly reap more benefits from the reduction in transaction fees. The optimization of TPS will also benefit the ecosystem of protocols on Arbitrum that require higher performance, such as GMX and GNS. From the perspective of network fundamentals, Arbitrum is undoubtedly one of the biggest beneficiaries of the Cancun upgrade.

2. Optimism

Unlike Arbitrum, Optimism's competitive focus is more on building the Optimism Super Chain network based on OPStack. The value of Optimism is more dependent on the network value of the Optimism Super Chain. Since the release of OP Stack, many projects such as Base, Lyra, opBNB, and Debank have built their own L2s based on OP Stack. The upgrade of the OP Stack Bedrock version has further optimized transaction costs, transaction processing within blocks, node performance, and other aspects, making it more attractive to build L2 based on OP Stack.

If the Cancun upgrade benefits all L2s, then the upgrade premium enjoyed by Optimism is the network value combination brought by all Optimism ecosystem chains. If the Cancun upgrade can give rise to more new L2s, then the upgrade premium enjoyed by Optimism will be that more L2 chains may adopt OP Stack for construction, bringing Optimism closer to the ultimate vision of the Optimism SuperChain ecosystem.

3. EthStorage

EthStorage is focused on solving Ethereum's dynamic storage problem, providing a programmable storage layer 2 solution at a lower storage cost based on Ethereum's data availability.

Since blob data can only be stored temporarily, there are issues with calling historical data. Therefore, decentralized storage protocols will have a new development channel, and L2 scaling solutions will also need to use data availability layers. EthStorage will significantly reduce the storage costs of a large amount of data on Ethereum, saving costs by 100 to 1000 times.

4. THORChain

THORChain is a decentralized cross-chain AMM trading protocol. The protocol aims to decentralize cryptocurrency liquidity through a network of public nodes and ecosystem products, allowing any individual, product, or institution to access its local and cross-chain liquidity.

As a cross-chain bridge project, THORChain mainly benefits from the upgrades of EIP-4788 and EIP-4844 in this Cancun upgrade, with gas fees and confirmation times for cross-chain bridges experiencing unexpected improvements. Considering that a large amount of capital has flowed into the BTC chain over the past six months, and recently due to the Bitcoin ETF hype, this capital may flow back into the Ethereum chain, making this sector likely to gain Alpha returns.

5. Metis

Metis is an Ethereum L2 Optimistic rollup platform developed based on Optimism. Metis provides scalability and high-performance solutions for Ethereum through the introduction of powerful L2 technology, offering users and developers a fast, efficient, and low-cost trading experience.

As the Cancun upgrade brings more L2s to life, issues such as single points of failure, malicious arbitrage, capturing MEV value, and censoring user transaction space caused by centralized sequencers may become increasingly severe. It is foreseeable that the competition for decentralized sequencers will become a core theme of L2 competition after the Cancun upgrade.

Metis may become the first Ethereum L2 to operate a decentralized PoS sequencer. It has broken the centralized pattern of sequencers, allowing nodes that stake at least 20,000 METIS tokens to enter the sequencer pool and become sequencer operators. Sequencers entering the pool will be responsible for determining the order of transaction packaging, and at least 2/3 of the sequencers must sign to package and upload data to the L1 mainnet. Additionally, to further prevent sequencer malfeasance, Metis has introduced the role of validators to sample blocks to ensure the correct ordering of transactions by sequencers.

6. EigenLayer

The staking volume of Ethereum continues to rise, and the demand for re-staking is becoming increasingly prominent. EigenLayer allows users to re-stake ETH, lsdETH (liquid staked ETH), and LP Tokens on other sidechains, oracles, middleware, etc., as nodes and receive validation rewards, enabling third-party projects to benefit from the security of the Ethereum mainnet while ETH stakers can earn more rewards.

Moreover, EigenLayer has announced re-staking services for Cosmos, allowing Cosmos to gain Ethereum's security while opening up a new world of incremental earnings for Ethereum stakers.

7. Kelp DAO

Kelp DAO is a Restaking project by the multi-chain LSD project Stader Lab, belonging to the Liquid-LSD Restaking type mentioned above. It currently allows deposits of Lido's stETH and Stader's ETHx, but deposits are currently paused due to the full quota of EigenLayer LST.

Although Stader Lab has already issued tokens, Kelp DAO has launched a points system, and as a sub-project of Stader Lab, Kelp DAO is expected to launch its own token. There is also anticipation for the synergistic effect between SD (Stader Lab's token) and Kelp DAO.

8. ether.fi

ether.fi is a product of the Liquid Native Restaking type, which previously raised $5.3 million in seed funding from BitMEX founder Arthur Hayes. Unlike Lido, ether.fi adopts a decentralized, non-custodial approach to ETH staking and has announced re-staking services. Since it is native ETH re-staking, it is not affected by EigenLayer LST limits and can still be deposited, and its collateral token eETH (wrapped token weETH) is one of the few liquid LRT collateral tokens available.

9. Celestia

Celestia adopts a modular architecture, deconstructing the blockchain into data, consensus, and execution. Most blockchains still bundle consensus and execution functions into one layer, building smart contracts on that layer. Users bound to this execution environment greatly limit the potential for optimization and specialization for specific use cases.

Celestia's modular architecture allows the execution layer to exist on its own blockchain, enabling optimization and specialization for specific use cases. Developers building decentralized applications based on this architecture will enjoy more complete security and scalability on the original blockchain execution layer. Additionally, data availability sampling is achievable in Celestia's modular blockchain, allowing nodes to verify a block with a small sample while using devices with lower hardware configurations, such as home computers and mobile phones.