Here’s Why Ethereum Dencun Upgrade Is a Big Deal

The Ethereum network is poised for a significant transformation with its latest software update, Dencun. This update, dated March 13th, is expected to reduce operational costs, especially on Layer 2 networks. Such development may open the door for open access that could breed unprecedented innovation within the Ethereum ecosystem, affecting decentralized finance (DeFi), gaming, and many other applications.

Dencun Upgrade Impact on Layer 2 Networks

The Dencun upgrade presents a mix of the “Deneb” and “Cancun” updates, representing an innovative way of data storage inside the Ethereum network. In the past, Layer 2 blockchains, such as well-known chains like Arbitrum, Polygon and Base (of Coinbase Global Inc.), have been using Ethereum for data storage.

This approach, though safe, has resulted in significant costs associated with the indefinite storage of data in all Ethereum nodes. Introducing “blobs” as a new data store, such expenses are expected to fall, reducing transaction costs from a dollar to cents and sometimes to less than a cent.

This decrease is a technical enhancement and a major change expected to improve the end-user experience greatly. Roberto Bayardo, an engineer at Coinbase on the Base team, says that unlike other updates, such as the September 2022 Merge, which reduced Ethereum’s energy consumption, these do not directly affect users. On the other hand, the impact of Dencun is direct to consumers and may lead to application innovation and user involvement in the long run.

Expanding the Ethereum Ecosystem

The introduction of blobs and the consequent decrease in Layer 2 network costs will allow for growth in the Ethereum ecosystem. Ed Felten, retired professor and co-founder of Offchain Labs (developers of Arbitrum), points to the possibility of advanced AI-driven behaviours in gaming and DeFi applications, previously hampered by high costs. This Ethereum Dencun upgrade may also stimulate the development and release of more Layer 2 chains, thereby reducing the barriers to introducing new projects.

Jim McDonald, one of the co-founders of Attestant, predicts the possibility of a “huge Layer 2 chains explosion” in the following months. Such operational chains could be much cheaper and enable the introduction of innovative products, like single-event or use-specific chains, which will help create a diverse and dynamic blockchain ecosystem.

Implementation and Outlook

For many Layer 2 chains, the switch to blob is expected to be very fast, while some, like Arbitrum will need a short time to discuss governance and voting. Despite these immediate benefits, the cost savings are obvious, but there are no guarantees that they will last long. As demand for blob storage increases, so will its cost, potentially eroding the current cost advantage. However, this period of low costs is expected to last several months, providing a significant window for innovation and growth within the Ethereum ecosystem.

Karl Floersch, co-founder of the Optimism project, warns that the initial fee reduction will spur development and adoption, but the system must brace up for eventual cost increment. However, the Dencun upgrade is an important moment in developing Ethereum and its associated networks, which will bring in a more broad, innovative, and accessible blockchain environment.

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