A comprehensive understanding of which performances will be improved by the Cancun upgrade for Ethereum?

Author: Grapefruit, ChainCatcher

Editor: Marco, ChainCatcher

The Cancun upgrade (Dencun) is undoubtedly the most noteworthy event for the Ethereum network in 2024, marking another significant update following last year's Shanghai upgrade (Shapella), which is expected to be completed by the end of February.

According to a blog post on Ethereum dated January 24, the Cancun upgrade was activated on the Ethereum Goerli test network on January 17, with plans to activate the Sepolia testnet and Holesky testnet upgrades on January 30 and February 7, respectively.

Once the Dencun upgrade successfully runs on these three test networks, it will then be activated on the Ethereum mainnet, with an expected activation time at the end of February.

As each Ethereum upgrade carries numerous opportunities, keeping track of the upgrade process has become a top priority for the crypto community. In September 2022, Ethereum completed its merge upgrade, transitioning from PoW to PoS, making ETH a deflationary asset; in May last year, Ethereum opened up staking withdrawal features to users through the Shanghai upgrade, leading to a surge in related staking projects like Lido and SSV Network.

So, what exactly is the Cancun upgrade? What performance changes will this upgrade bring to Ethereum? What is the EIP-4844 proposal? Which projects and sectors will benefit from this upgrade? What are the potential trading opportunities?

What is the Cancun Upgrade?

The full name of the Cancun upgrade is "Cancun-Deneb," which is a combination of the Cancun and Deneb upgrades, abbreviated in English as "Dencun." The Chinese term "坎昆升级" actually only represents the first half "Cancun," omitting the Deneb part; the complete name is "坎昆-Deneb" upgrade.

Each upgrade name in Ethereum corresponds to a specific layer of the Ethereum network. The Cancun upgrade aims to improve the performance of the Ethereum execution layer, while the Deneb upgrade focuses on the consensus layer.

To better understand these concepts, it's essential to first grasp the current architecture and state of Ethereum.

Before the Ethereum merge, the Ethereum network primarily consisted of two parts: the "execution layer and the consensus layer," which operated independently.

The execution layer is mainly responsible for processing the logic execution of smart contracts, where transaction calculations occur. It is the original Ethereum mainnet, also known as "Ethereum 1.0," and it maintains the state of the Ethereum network and executes Ethereum Virtual Machine (EVM) code.

Execution layer upgrades are named after the cities that hosted previous Devcons: Berlin -> London -> Shanghai -> Cancun -> Prague -> Osaka -> Bogotá.

The consensus layer primarily ensures that all transactions and smart contracts are validated through staking PoS, achieving consensus among all nodes and clients and reaching state consistency. It is the beacon chain formed after merging with the execution layer, also referred to as "Ethereum 2.0."

Each consensus layer upgrade is assigned a name of a star, chosen in alphabetical order: Altair -> Bellatrix -> Capella -> Deneb -> Electra -> (F)unknown.

After the merge, Ethereum's execution and consensus layers run in parallel, communicating through the engine API interface. The engine API allows execution clients to request block information from consensus clients and enables consensus clients to send new blocks or request execution validity proofs to execution clients.

The upgrade of the execution layer is called Cancun, while the upgrade of the consensus layer will be called Deneb, making the entire upgrade's name Cancun-Deneb. Although the upcoming Cancun upgrade and Deneb upgrade differ technically, they are implemented simultaneously, hence the use of the compound term "Dencun" to refer to this combined upgrade.

Significantly Reducing On-Chain Data Costs

The Cancun upgrade is a follow-up upgrade to the Ethereum main chain after the Shanghai upgrade, aiming to address previously criticized issues such as low performance, high costs, and network congestion. It seeks to enhance the main chain's TPS and reduce user gas fees by promoting Ethereum's scaling process while improving scalability and security.

Based on the naming of the Dencun upgrade, it is evident that this upgrade will primarily improve and optimize issues related to smart contracts, EVM, and data consensus and state alignment in the Ethereum network's execution layer. In this upgrade, the Ethereum community has proposed a series of improvement proposals (EIPs), with six technical specifications decided for implementation after discussions, testing, and voting by community members.

Among them, EIP-4844 is the core of the Cancun update. EIP-4844, also known as the proto-danksharding proposal, is the initial version of the sharding Danksharding scaling solution and serves as a temporary scaling solution.

By implementing temporary storage and access for off-chain data, it reduces the gas costs for Layer 2 data published to the Ethereum mainnet, especially for Rollup solutions, which can lower their gas fees for data publication to the mainnet to less than one-thousandth of the current cost, thereby reducing user gas fees.

The EIP-4844 proposal introduces a new transaction type called Blob, which is a new data format that helps scale Ethereum, representing data returned from Layer 2 and distinguishing it from the native data Calldata generated on Layer 1 Ethereum. The data carried by the Blob is only downloaded and stored by the Ethereum consensus layer but does not support execution EVM access, and this data is time-sensitive, with a validity period of about 18 days.

The Blob serves as an external temporary storage, not truly storing Layer 2 transaction data on Layer 1, and it will periodically expire, significantly reducing data storage costs.

In simple terms, the Blob is a separate channel built by the Ethereum mainnet for Layer 2 network transaction data to go on-chain. In this channel, Ethereum Layer 2 data completes transmission, storage, and verification services, with gas fees and storage costs being customized and unrelated to the activity level of the Ethereum network.

The primary goal of EIP-4844 is to lower Layer 2 gas fees by using the new Blob data format to carry transactions, making the transition to full sharding easier, as all future upgrades will occur solely on the consensus layer.

At the product architecture level, EIP-4844 introduces Blob-carrying transactions, marking the first time Ethereum has built a separate data layer for L2, laying the groundwork for future complete sharding Danksharding;

At the economic model level, EIP-4844 will introduce a new fee market for Blobs, representing Ethereum's first step toward a multidimensional market;

At the user experience level, the most intuitive perception for users is the significant reduction in L2 fees, which will provide an important foundation for the explosion of L2 and its application layer.

As StarkWare co-founder Eli Ben-Sasson stated, this upgrade will lower the data availability costs for all L2s.

What Other Performance Improvements Will the Cancun Upgrade Bring to the Ethereum Network?

In addition to EIP-4844 reducing the on-chain costs of Rollup data, there are also proposals like EIP-6780 and EIP-5656 to improve EVM efficiency, EIP-7044 to enhance the staking experience, and EIP-4788 to optimize communication between the consensus layer and execution layer.

In terms of the execution layer EVM, the EIP-6780 and EIP-5656 proposals improve the security and processing efficiency of smart contracts by modifying related code functionalities.

EIP-6780 enhances the security of smart contract code by changing the functionality of the SELFDESTRUCT opcode in smart contracts, restricting its execution to certain conditions.

SELFDESTRUCT, also known as self-destruct code, primarily functions to automatically destroy smart contracts, allowing them to delete themselves from the blockchain.

When a contract executes the self-destruct operation, any remaining Ethereum in the contract account is sent to a specified target, and its storage and code state are also deleted. While this feature can help developers remove smart contracts in emergencies and transfer the balance within the contract to a designated address, it can also be exploited by malicious actors, making it a potential attack vector.

The EIP-6780 proposal aims to reduce the risk of vulnerabilities in smart contracts by limiting the SELFDESTRUCT opcode functionality that could compromise them. For example, the smart contract will only execute the self-destruct operation when called by the developer, sending the remaining ETH in the account to the caller.

EIP-5656 primarily involves minor upgrades to the EVM code, introducing a new opcode called MCOPY, which optimizes the process and performance of data copying in memory during smart contract execution. MCOPY simplifies the operation instructions in the EVM data processing process, improving the efficiency of data movement within the EVM and reducing gas fees associated with data processing operations.

In the current EVM architecture, existing opcodes copy large segments of data, resulting in excessive operation instructions, inefficiency, and high costs. Under EIP-5656, using MCOPY to copy 256 bytes of memory only costs 27 gas, while the previous method required 96 gas, representing a reduction of one-quarter in gas fees.

Additionally, faster memory operations mean faster contract execution, giving developers an advantage when handling large data structures or complex operations involving memory.

Although EIP-5656 and EIP-6780 do not change Ethereum's overall direction, they improve the efficiency of Ethereum developers in smart contracts by modifying or introducing EVM-related opcodes and reducing vulnerabilities.

In terms of the Ethereum consensus layer, the community has proposed EIP-7044 and EIP-7045 to improve the processes related to validators and staking, making Ethereum staking safer.

EIP-7044 aims to simplify and improve the exit mechanism for Ethereum staking, ensuring that voluntary exits signed before the Capella (Shanghai) upgrade remain permanently valid.

Currently, the Ethereum staking market primarily relies on delegated staking, where users delegate their 32 ETH or multiples thereof to validator operators, who manage the technical and operational aspects of running Ethereum validators. When users exit Ethereum validators, they need to use the validator's signing key to sign a so-called "voluntary exit" or "voluntary exit operation" application, and the signed voluntary exit is only valid for two upgrades. Once the Deneb upgrade occurs, it will become invalid. This means that if the Cancun upgrade does not change this rule, users wishing to exit their staked Ethereum with validators will need to comply with the new rules set by the validator operators.

EIP-7045 increases the inclusion range in the Ethereum block proof slot to reduce block confirmation times and minimize user delays.

Additionally, there are EIP-4788 to resolve communication issues between the execution layer and consensus layer, and EIP-1153 focused on reducing data storage costs.

EIP-4788 primarily addresses cross-chain information communication issues between the Ethereum execution layer and consensus layer, placing a consensus layer beacon chain block root in the execution layer EVM, summarizing information from parent blocks, to transmit Ethereum's consensus state on the Ethereum mainnet EVM layer without relying on third-party information and data, eliminating the need for external oracles to provide this data, thereby reducing potential failures or manipulations and improving the interoperability and stability of the Ethereum network.

EIP-4788 essentially introduces a protocol-level oracle that transmits Ethereum's consensus state to the Ethereum mainnet, meaning that smart contracts and protocols deployed on the Ethereum mainnet will no longer require trusted oracle solutions to obtain information about Ethereum's consensus state.

This change is particularly beneficial for liquid staking protocols like Lido and Rocket Pool, as well as Eigenlayer's re-staking solutions and cross-chain bridges, because these smart contracts deployed on the Ethereum mainnet can directly access critical data such as consensus layer validator balances and states, reducing trust assumptions in re-staking and enhancing security and operational efficiency.

The EIP-1153 proposal focuses on reducing data storage costs during contract execution and optimizing block space, making transactions more cost-effective and efficient.

The Cancun upgrade will focus on reducing the costs of on-chain data for Layer 2 networks, improving execution layer EVM performance, and optimizing the Ethereum staking experience.

Timeline for the Cancun Upgrade

According to the roadmap provided at the earlier Ethereum ACDE meeting, the Cancun upgrade testing will proceed in the order of Goerli, Holesky, Sepolia, and other testnets.

As of January 24, the Cancun upgrade process published on the Ethereum blog indicates that the Cancun upgrade was activated on the Ethereum Goerli test network on January 17. It is planned to activate the Sepolia testnet and Holesky testnet upgrades on January 30 and February 7, respectively.

Once the Dencun upgrade is completed on all three testnets, it will then be activated on the Ethereum mainnet, with an expected activation time at the end of February.

However, during the latest ACDE Ethereum core developer conference call on January 18, when asked about developers' confidence in the Dencun Layer 2 upgrade, a developer known as "Protolambda" from the Optimism L2 network stated that the Optimism team aims to start testing on Goerli within a few weeks. While the Optimism team seems capable of supporting Dencun, there are concerns about the readiness of infrastructure and tools for Blob transactions, and there are also many infrastructure updates needed on Layer 1 Ethereum.

How Will the Cancun Upgrade Affect Developers and Users?

The Cancun upgrade, through the implementation of proposals such as EIP-4844 and EIP-1153, optimizes network transaction throughput, data storage, and block space to reduce Ethereum's transaction fees and improve processing speed, providing a seamless experience for developers and users, and will also open new milestones for Ethereum's on-chain ecosystem applications.

Additionally, the introduction of the Blob concept promotes the progress of Ethereum's Danksharding sharding plan. It is reported that through proto-danksharding, Ethereum's throughput is expected to increase by more than 100 times, with Layer 2 transaction costs dropping below $0.001. It will also reduce the gas fees for Rollup-based Layer 2 networks to one-thousandth.

So, how will the Cancun upgrade affect developers, users, and the broader Ethereum ecosystem?

For users, the Cancun upgrade reduces the costs of on-chain data for Layer 2 networks by introducing Blobs for storing and retrieving off-chain data, allowing users to enjoy low gas fee transactions and more on-chain use cases on Layer 2 networks, as low gas fees and high throughput will foster more diverse use cases, especially those with high-frequency trading demands, such as gaming and derivatives.

Moreover, according to the community's current plan, Ethereum will soon attempt the Danksharding sharding solution. If this plan succeeds, combined with Layer 2 and other Rollup technologies, Ethereum's TPS will see a significant increase, opening up new narratives.

For developers, EIP-4844 will enable them to develop Ethereum applications more flexibly, innovatively, and diversely.

Developers will be able to utilize proto-danksharding to store and retrieve on-chain data, supporting more Layer 2 solutions and application scenarios. They will also be able to prepare for the future complete danksharding, leveraging more shard resources and functionalities.

Improvements from proposals like EIP-6780 and EIP-5656 will provide developers with a more efficient and cost-effective platform for deploying and developing smart contracts, allowing them to focus more on product development rather than performance improvements in infrastructure.

Optimizations in the performance of Rollup-based networks will make it feasible for developers to handle high-frequency and complex transaction scenarios, enabling them to integrate more complex functionalities in smart contracts or DeFi applications.

For the Ethereum ecosystem, first, the Cancun upgrade optimizes the performance of Ethereum Layer 2 networks, which will promote the prosperity of its on-chain applications and drive the explosion of the ecosystem. Additionally, optimizations in data storage and availability will promote the development of applications like DA and decentralized storage, while improvements in the staking experience will benefit the development of LSD and LSDfi applications.

Next, ChainCatcher will summarize "What Projects Will Benefit from the Cancun Upgrade?" which will include content on Rollup-based Layer 2 networks, Raas service providers for building Layer 2 networks, DA layers for solving data availability, and projects in the LSD and re-staking sectors.