A Brief Discussion on the Potential Impact of the Ethereum Cancun-Deneb Upgrade

Recent upgrades to the Ethereum blockchain have significantly enhanced its scalability, efficiency, and security. This addresses the blockchain's trilemma—balancing security, decentralization, and scalability. These major upgrades are crucial for continuously improving network performance while maintaining low operational costs.

The upcoming Ethereum Cancun-Deneb ("Dencun") hard fork upgrade will be deployed on the mainnet on March 13. This upgrade will optimize network scalability, efficiency, and security through various Ethereum Improvement Proposals (EIPs), particularly the EIP-4844 proposal for native sharding. The proposal aims to reduce transaction fees and improve network scalability.

The Dencun upgrade marks the arrival of the "The Surge" era in Ethereum's roadmap, paving the way for large-scale scalability through layer-two rollups. These rollups will make Ethereum more accessible and enhance user experience, thereby driving broader adoption across various sectors, including DeFi 2.0.

Advantages of Layer 2 Rollups

Layer 2 Rollups enhance Ethereum's scalability and efficiency by processing transactions off-chain while retaining the security of the Ethereum main blockchain (Layer-1). They feature the following characteristics:

• Off-chain transactions: Off-chain transactions enable faster and more efficient throughput without occupying space on the Ethereum blockchain.

• Transaction aggregation: After execution off-chain, the results of multiple transactions are summarized or bundled into a compressed form of transaction data.

• Publishing to the main chain: The compressed transaction data or rollup is then published to the Ethereum main chain (Layer-1).

• Data availability: Despite off-chain processing, the main Ethereum blockchain ensures that all participants can access and verify data related to transactions.

• Security: Layer 2 Rollups maintain the security of the Ethereum network through various cryptographic techniques.

Significance of EIP-4844 for Proto-Danksharding

EIP-4844, also known as Proto-Danksharding, aims to significantly improve network scalability by introducing temporary data blocks called Blobs connected to blocks. This innovation reduces processing costs and increases throughput in the following ways:

• Temporary data blocks: These storage spaces connected to Ethereum blocks allow for additional data to be included in transactions without directly interacting with the Ethereum Virtual Machine (EVM).

• Reduced processing costs: Efficiently processing transaction data through Blobs can lower users' gas fees, with average transaction costs expected to be below $0.01.

• Increased throughput: EIP-4844 can enhance transaction throughput, reaching speeds of up to 100,000 transactions per second (TPS).

• Supporting Layer-2 solutions: The proposal is expected to support the development of Layer-2 solutions, such as Rollups, by providing additional temporary storage space.

Trading Outlook Surrounding the Cancun-Deneb Upgrade

The Ethereum network transitioned from Proof-of-Work (PoW) to Proof-of-Stake (PoS) ("Merge") in 2022, making Ethereum a deflationary asset. Currently, over 25% of Ethereum's total supply is locked in staking platforms, significantly reducing the supply available for trading or investment. This impact coincides with a burning mechanism that reduces Ethereum's supply by 0.21% annually.

Dencun is expected to act as a positive catalyst for Ether. Ether holders have transferred over $1.3 billion worth of Ether to private wallets, significantly reducing their risk exposure on exchanges. Recent data from Bloomberg shows that the ETH/BTC spot ratio has fallen back to 0.5, reminiscent of the crash following the 2022 Luna/Terra events.

This provides a reasonable entry point for Ethereum enthusiasts. Additionally, there has been a surge in short-term bullish options buying for ETH, with traders expecting the ETH price to exceed $4,000 by the end of March. Traders are also inclined to buy bullish contracts for March 2024 and sell calendar strategies for April 2024. The bullish sentiment among traders is evident, with the notional value of ETH bullish contracts around $2.5 billion and the notional value of ETH airdrop contracts around $1 billion.

ETH/BTC Cross Exchange

Looking ahead, other high-beta Layer 2 networks, in addition to Ethereum, will also benefit from the Dencun upgrade. For example, second-layer networks like Arbitrum (ARB) and Optimism (OP) bundle transactions before publishing them back to the main chain, and they are expected to gain significant benefits from the introduction of data Blobs.