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All You Need To Know About Ethereum Dencun Upgrade - Simplified

All You Need To Know About Ethereum Dencun Upgrade - Simplified

2024-01-17 | 10m

Cryptocurrency is undoubtedly the most famous use case of blockchains, but with Vitalik and Ethereum devs, it's more important to improve blockchain design so that they can truly become the solution for almost everything.

Blockchains Are The Solution For Almost Everything

Blockchain what?

As the name suggests, we have blocks that are chained together to form a blockchain. Information is collected and translated into something process-able called data, and dividing data into blocks of the same size is the act of making data accessible in an efficient, fast, and reliable manner. Data is crucial in this day and age because it helps individuals, businesses, and governments make informed decisions to achieve their full potential.

Data on blockchain must be stored in a linear, chronological order, meaning new blocks can only be added to the so-called 'end' of the existing chain of data. It's important to note that once a new block is generated, content of previous blocks can't not be altered as the block hash of each one, i.e. their 'unique digital identity', will change correspondingly and require validation from the majority of a network. To a certain extent, this results in the well-known immutability, trust, transparency and traceability of blockchain.

L1s, L2s, Rollups

Blockchains are Layer 1 projects (L1s): Bitcoin, Ethereum, Litecoin, Ripple, Solana, Binance Chain, Tron, etc. Take a look at the blockchain trilemma of security, decentralisation and scalability, and we know that as the OGs like Bitcoin and Ethereum choose to focus on security and decentralisation, they will therefore struggle with scalability. Why is transaction fee on Ethereum so high? The blockchain's capacity is not proportionate to user demand, hence users have to kind of 'bid' for their transactions to be processed during peak hours, and the transaction fees go up because of this bidding process. Furthermore, the processing speed of blockchains is not yet optimum for world-scale adoption: Ethereum's current maximum transaction per second (TPS) is 62.34 compared to Visa's 1,700.

Upgrades/extensions per se of blockchains are referred to as Layer 2 (L2s). L2s are built on L1s so that they can relocate the transactions that are supposed to be processed on L1s to their network for a faster, more efficient flow. Rollup is the way to realise this 'relocation' of data and thus a scaling solution. Knowing all this will help us get familiar with the next part much easier.

Ethereum Merge And Forward

Ethereum Merge

Ethereum Merge is the event where Ethereum parted ways with the good ol' Proof-of-Work (PoW) consensus mechanism to fully implement Proof-of-Stake (PoS). It is a pragmatic compromise on security and decentralisation for the sake of scalability, because PoS is second to PoW only, especially considering the number of validators on Ethereum with regards to other L1s, and allows for much more efficient (energy-wise) and higher data throughput. Ethereum is the biggest blockchain ecosystem, home to projects with varied purposes and applications, the infrastructure to some of the most widely used L2s (Polygon, Arbitrum, Optimism), so an improvement in the efficiency of Ethereum will, by all means, benefit all stakeholders of the blockchain.

Ethereum Merge took place almost two years after the launch of the Beacon Chain, which was then the PoS layer besides the original PoW of Ethereum. This dual-layer design is unchanged with The Merge, but the Beacon Chain is now Ethereum's consensus layer and the other the execution layer (where transactions happen).

The Dencun upgrade

The latest Ethereum upgrade was the Shapella upgrade in April 2023, which enables unstaking for validators, and the Dencun upgrade is the next big thing for Ethereum in Q1 2024. In the Shapella upgrade, the one that took place on the Beacon Chain is named after the Capella star, and the one on the execution layer after the city of Shanghai.

Now that Ethereum is working on improving their scalability, they've got to find ways to do so. The initial proposal is Sharding, which describes the process of splitting the blockchain into a total of 64 shards - smaller in size, easier to access, better, faster, cheaper to process. In addition, validators are assigned to shards pseudorandomly and reshuffled after each epoch, i.e. after a specific event will have occurred. This serves as an enhanced security barrier for the blockchain.

However, Ethereum dev team took note of rollups' rising popularity and decided to move their focus to supporting rollups for the next few years. The idea is now to help L2s 'communicate' or send data to Ethereum in the most efficient way, and the answer to this is proposed by Ethereum Foundation researcher Dankrad Feist, hence the name Danksharding: instead of splitting the whole blockchain into smaller bits, it is data storage that will be 'sharded'.

To get to Danksharding, we need to prep and prime the blockchain first or, in other words, work on an early version (proto in Greek) of Danksharding. Throw in the name of another researcher of EIP-4844 and there's Proto-Danksharding for the Dencun upgrade. The upgrade will take place on both layers, Deneb on the Beacon Chain and Cancun on the execution layer. A new type of transaction called blob-carrying transaction will be introduced to the execution layer, and the Beacon Chain will store blob data for a limited time period. Blob, short for Binary Large Objects, is unstructured data in binary form. When rollups interact with Ethereum, they will send the transaction information in the form of a blob instead of a calldata (the read-only memory used for transaction data storage), and remember that blob data is stored on the Beacon Chain, and for a limited time because they are separated from calldata already. This relieves the congestion on both layers, most importantly on the execution layer, and consequently is estimated to improve rollup speed and fees.

The outcome: most beneficial for rollup teams because they don't have to do the extra work for the Danksharding transition, 10-100x better speed, and lower Ethereum data fees, which makes up 90% of L2 transaction fees. Logically speaking, the ones to take more advantage of the Dencun upgrade shall be L2 tokens such as OP and ARB. However, ETH value could also rise. Don't forget that L2s are dependent on Ethereum, so when they thrive, the Ethereum ecosystem will grow, too!

Disclaimer: The opinions expressed in this article are for informational purposes only. This article does not constitute an endorsement of any of the products and services discussed or investment, financial, or trading advice. Qualified professionals should be consulted prior to making financial decisions.