What is the Dencun upgrade?

Dencun describes two upgrades that took place at the same time on Ethereum. The name combines the “Cancun” upgrade of the execution layer and the “Deneb” upgrade on the consensus layer. The latter refers to how network users agree on the state of the blockchain, while the former refers to how transactions are processed.

In technical terms, the upgrade is the result of a new Ethereum Improvement Proposal (EIP) called “proto-danksharding,” or EIP-4844, which improves the blockchain’s propensity to handle data from secondary networks.

Gathering of the five families in London for the Dencun upgrade pic.twitter.com/4cyxFSQoVh

— David Mihal.eth (@dmihal) March 13, 2024

Why did Dencun come about in the first place?

The upgrade will lower gas fees for the growing number of networks built on top of Ethereum that are known as Layer 2 (L2) or “rollups.” This is important since gas fees have historically soared whenever there is a surge of activity on the blockchain, making it unviable to use at a large scale. Roll-ups help address this by processing transactions separately, and then stamping them to the main Ethereum blockchain in batches.

While roll-ups have already made Ethereum more efficient, one issue that is that, post-compression, nodes processing transactions hold on to L2 data infinitely, requiring a greater volume of hardware as time goes on. This has meant that over 90% of the fees on rollups are used for this data storage.

The upgrade means L2 data will be added to the base Ethereum network via fleeting, more efficient “blobs” rather than data held indefinitely. Instead, “blob data” will be stored for 18 days.

What about the main Ethereum network?

The overall effect should be lower costs, but users on the main blockchain (L1) won’t enjoy these lower fees until at least 2026-27, says Pitchbook’s crypto analyst Robert Le, until there is “full danksharding,” referring to a rollup scaling method which provides extra storage for increased transactional capacity.

“Over the next couple of years, you’ll see less and less individual users, whether retail or businesses, transact directly on Ethereum. More will move to L2s and the only ones transacting on Ethereum will be the rollups,” he said.

EIP-4844 marks the beginning of the “Surge” phase for Ethereum, outlined by the network’s co-founder Vitalik Buterin in December. The aim of this phase is to reach 100,000 transactions per second. 

How much will Dencun lower fees?

Gas fees had risen to an average of 98 gwei (a denomination worth one-billionth of an Ether, the native cryptocurrency for the Ethereum blockchain) the week before the upgrade, a level not seen since early May 2023, according to Ethercan data. A swap would cost users $87.45 in gas fees on average, while nonfungible token (NFT) sales average $147 in gas.

After the Ethereum Dencun upgrade this week, EIP-4844 will reduce L2 gas fees. According to IntoTheBlock statistics, for a DEX swap, the gas fee for Aribitrum will be reduced from $2.02 to $0.4, Optimism will be reduced from $1.42 to $0.28, Base will be reduced from $0.58 to… pic.twitter.com/0x6jGDYF5z

— Wu Blockchain (@WuBlockchain) March 11, 2024

L2 fees will drop by a factor of 10 after the upgrade. Swapping tokens on decentralized exchanges, which currently costs $1-2, should fall to around 10-20 cents, and could even go as low as a fraction of a cent.

What does Dencun mean for the price of Ether?

Ether (ETH) has climbed over 150% since October. Last week it broke $4,000, for the second time ever, where it has hovered since, indicating it could soon pass its all-time-high of $4,878.26, reached in November 2021. 

The price surge is part of a broader bull crypto bull market spurred by the approval of Bitcoin ETFs in January, and optimism that regulators will approve Ethereum ETFs too this year. But experts told Fortune they foresee the upgrade having a continued, positive impact on ETH’s price that could be more significant than ETFs, as investors bet on the network’s development potential.

It will be an “absolute game changer” for the token, and is the “bigger story right now,” Matt Hougan, Bitwise’s CIO, told Fortune. 

“There are a billion applications you can build if transactions are below a penny that you can’t build if they range from 10 to 50 cent,” said Hougan. “Once we get them reliably free to people, you will see financial applications, DeFi and NFT’s, but you will also see non-financial applications. I think we’re gonna see this massive explosion of mainstream uses,” he said.

“We’re building a new type of technology, a new type of platform. I think that’s what ETH has going for it on the sentiment side, and why it’s doing so well,” Vance Spencer, founder of Framework Ventures, added.