With the Dencun upgrade, Ethereum is adopting a new strategy that promotes growth via enhanced layer-2 support.
Ethereum’s most recent update seems to be meeting and, in some cases, exceeding expectations one week after Dencun’s launch.
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On March 13, Dencun made its debut, promising to bring in a new era of more affordable and rapid transactions. Dencun focuses on scaling with the help of layer 2s because Ethereum has historically had trouble keeping up with demand for its base layer speed.
The update comes just in time, according to Partisia blockchain co-founder Brian Gallagher, as rival blockchains pose a threat to Ethereum’s market dominance.
Gallagher recently stated, “The timing for Ethereum to launch its Dencun update [couldn’t] wait any longer.” Unquestionably, Solana is gaining ground on Ethereum in the market share department, especially in the areas where retail traders are more likely to congregate—on-chain DEX (decentralized exchange) swaps and NFT (nonfungible token) arenas.
“As an alternative, Solana is rising to the occasion, as it is simply far too expensive to make on-chain transactions on Ethereum,” Gallagher continued.
As Gallagher notes, Ethereum is not currently doing well in the fees comparison. On Ethereum, typical fees range from $1 to $20. In comparison, Solana has fees that are a fraction of a cent. March 5 was the most recent date that Ethereum fees exceeded $30.
Ethereum fees are a persistent issue
The scaling problems with Ethereum are not new. The problem became more serious when transaction fees increased from less than $1 to $5 in September 2020, then to more than $20 by the end of 2021 and into 2022. The average fee reached an all-time high of $197 on April 30, 2022.
The speed and scalability of Ethereum’s base layer have been targeted for improvement in previous network upgrades. The Merge, which took place on September 15, 2022, and finished Ethereum’s switch from proof-of-work to proof-of-stake, was the most important of these.
Ethereum may have become more energy-efficient as a result of the Merge, but any slight decreases in transaction fees were short-lived. By March 2023, the fees were starting to rise again.
Dencun is not like that. Dencun concentrates on enhancing and decreasing the cost of interactions with layer 2s, like Optimism and Arbitrum, rather than trying to make Ethereum’s base layer more scalable. Theoretically, users should be encouraged by Dencun’s enhancements to divert traffic away from Ethereum’s layer 1 and onto other networks.
Even though Dencun is still in its early stages, the initial responses are positive. Dencun pledged to reduce layer 2 fees by a factor of ten. According to data from Dune Analytics, it has achieved that goal and in some cases even exceeded it. Transaction costs on Arbitrum and Optimism are now less than $0.01, according to L2 Fees.
Why Dencun is Worth Celebrating
Many members of the Ethereum community are clearly excited about Dencun’s performance right out of the gate.
One of the people applauding the development is Nick Johnson, the creator and principal developer of the Ethereum Name Service (ENS).
“The Dencun upgrade ushers in a new era for Ethereum, in terms of economic sustainability,” Johnson said in an interview. Layer 2 developers have been unable to access the network for a long time due to expensive transaction fees. The Ethereum development team at ENS is excited about enhanced accessibility.
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Regarding the layer 2s that Johnson mentioned, there has been a noticeable buzz coming from their camps.
Dencun, “one of the biggest upgrades to support layer 2s in scaling Ethereum,” was announced by Arbitrum on X, and Optimism added, “Today is going to be a good day.”
Dencun has already reduced transaction costs by over 90%, so it seems reasonable that the overall optimism is well-founded.
More work to be done
Dencun may have achieved its first objectives, but what happens next will be decided by the market. Arbitrum, Optimism, zkSync Era, Loopring, Polygon, and other projects will have to entice users away from the Ethereum foundation in order for Dencun to succeed in the long run.
Here too, the early indications are promising. In the last seven days, the volume of transactions on Arbitrum has increased by 145%, according to data from GrowThePie, while optimism has increased by 144%. Over the same time frame, the volume of on-base transactions has increased by 203%.
According to Gallagher, once Dencun is operational, the focus “will be on DeFi [decentralized finance] and how this upgrade potentially increases speed and lowers cost” in the long run. If it is unable to drastically reduce costs, I think other chains with faster turnaround times and lower prices will continue to gain market share.
Gallagher’s cautionary note serves as a reminder not to get complacent because Dencun hasn’t yet been put to the test against everything the cryptocurrency market can throw at it. However, as of right now, Ethereum’s most recent update appears to be a solid effort.
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