Ethereum (ETH), the second-ranked crypto by market cap, has had a breakout month as Ether price has climbed from $2,165 on Jan. 23 to hit a high of $3,033 on Feb. 20, representing a gain of 40%.
While many have attributed the price increase to speculation about the approval of the first spot Ether exchange-traded fund (ETF) – as the final deadline for the SEC to rule on several applications expires in March – several technical developments, including the Dencun upgrade, are also helping to boost its price as investors anticipate improvements to the network.
To get an understanding of what this upgrade entails, Kitco Crypto reached out to experts in the field, who provided insights into what the Dencun upgrade means for the Ethereum community and why ETH holders see it as a bullish development.
According to Kerel Verwaerde, the Chief Marketing Officer for Cryptology.com, “The Dencun upgrade, which is divided into two upgrades – one in the execution and one in the consensus layers – is a continuation of the efforts to make Ethereum more scalable, especially using layer 2s (L2), which paves the way for the continuation of Ethereum being the undisputed king of utility blockchains.”
“When looking at the growth we've seen in the Layer 2 space over the past year, it's clear the underlying infrastructure is primed for explosive growth if we can further reduce costs,” said Jesper Nielsen, Chief Operating Officer at Northstake. “Developer activity on L2 networks increased by 133% and the number of contracts grew by 303% – that's tremendous momentum. But right now, settlement costs still pose a barrier.”
“The Dencun (EIP-4844) upgrade could reduce those costs by an order of magnitude or more,” Nielsen said. “Imagine if a company like Slack, which spends an estimated $85 million per year on cloud fees, could see those costs reduced 10x to just $8.5 million annually. Those kinds of savings could be transformative and help spur the uptake of decentralized solutions.”
He noted that “Previous Ethereum upgrades tended to solve narrow problems — things like reducing gas price volatility,” but said EIP-4844 “could take Ethereum to the next level by fundamentally improving its scaling and efficiency through vastly lower settlement fees. That doesn't just close gaps – it enhances Ethereum's core capabilities.”
“If EIP-4844 can deliver on its promise of reducing costs by 10x or 100x as hoped, it could ignite a Cambrian explosion of activity and use cases across Layer 2 networks,” Nielsen concluded. “The future is bright if we can unleash the pent-up potential of the burgeoning L2 ecosystem.”
“The Dencun upgrade is going to bring scalability and cheaper transactions to Ethereum L2s, and, in consequence, to Ethereum as well,” said Miguel Prada, co-founder and Tech Lead at Diva Staking. “It provides new features that enable novel trustless applications that were not possible, especially those related to Ethereum staking, for which Diva Staking, a new liquid staking protocol, is especially excited about.”
Prada said the improvements to scalability will make “the network more suitable for day-to-day applications and potentially attract new crypto users who find the current ecosystem excessively costly or convoluted.”
He added that while this upgrade “may attract some speculation from institutional traders, crypto prices rarely move based on fundamentals, and we should not expect to see any notable changes in the price of Ether. Price might be the indicator everyone wants to know, but it's impossible to predict.”
According to Zachary Friedman, Chief Strategy Officer at Secure Digital Markets, “the Dencun upgrade is set for deployment at block 8626176, which is at approximately 13:55 UTC on March 13th.”
“The crux of the upgrade is the implementation of Proto-Danksharding, which has been architected to improve Ethereum's scalability,” he said.
Proto-Danksharding is a new feature that “enables Ethereum rollups to process transactions more cost-effectively,” Friedman added. “There will be a buffer period while the ecosystem waits for developers to build new applications that leverage proto-danksharding. However, the market is expected to quickly respond to this protocol upgrade, especially as speculators have already turned their attention to Ethereum, which has been the best-performing asset among the top 15 over the past seven days.”
Jeff Owens, Co-Founder of the Haven1 Foundation, told Kitco Crypto that “Dencun introduces a new data format called ‘blob’ transactions (short for Binary Large Object), which will allow for transaction data to be stored on the consensus layer temporarily before being deleted.”
“This will make the whole process cheaper and reduce congestion, thereby increasing throughput on Ethereum layer2 networks, like Arbitrum and Optimism, and reducing their fees by up to 90%,” he said. “For now, this only applies to layer2s – full-scale ‘sharding’ will apply to the Ethereum network itself. But we have to wait until the major Ethereum 2.0 upgrade for this to be implemented.”
Owens added, “With activity on Ethereum picking up, it’s particularly important to alleviate the fee pressure from the main network right now. We anticipate that the Dencun upgrade, when it goes live on March 13, will increase the adoption of ETH layer2’s for DeFi and NFTs, and will almost certainly help drive the price of ETH to a new all-time high before the end of the year.”
Jesse Leclere, a Blockchain Analyst at CertiK, used the metaphor of a city to help explain the Dencun upgrade.
“Imagine the Ethereum network as a large, bustling city, like New York or Hong Kong. The Decun upgrade for Ethereum is like a city-wide renovation project that comprises a number of simultaneous projects,” he said. “Just like a city upgrade might include fixing roads (the execution layer, with the Cancun upgrade) and improving the power grid (the consensus layer, with the Deneb upgrade), Decun aims to make Ethereum more efficient and cost-effective.”
Leclere said proto-danksharding is like “introducing a new, faster, and cheaper public transportation system into a city. Right now, Ethereum uses ‘calldata’ for transactions, which is like using taxis for every single person in the city. It works, but it can get pretty expensive and congested at times of high demand.”
He went on to compare “blobs” to “buses that can carry a lot of people (or data) at once.”
“These blobs will be used by L2s – which can be thought of as different neighborhoods or suburbs around the main city, he added. “Instead of each person from the suburbs driving their own car into the city (which is what happens with calldata), they can now take one of these new buses (blobs). This is expected to save a lot of gas – not the kind you put in cars, but the fees you pay for making transactions on Ethereum.”
“So, the Decun upgrade is a city planner's dream: it's going to make travel (transactions) cheaper by introducing an efficient bus system (blobs) for the suburbs (L2s) while also making improvements to the roads and power grid (with the Cancun and Deneb upgrades), Leclere said. “This should make living in and around Ethereum City much more pleasant and affordable for everyone.”
Also offering technical insight was Alejo Pinto, co-founder at Pontem, who told Kitco Crypto that “The Dencun upgrade is an iterative improvement for Ethereum affecting the opcodes (the machine language instructions) of the Ethereum Virtual Machine (EVM).
“I would think of it like upgrading our vocabulary with improved or new words to make communication with other humans better,” Pinto said. He included the following breakdown of two of the main improvements:
“1) MCOPY is a new instruction used for moving data around more efficiently. This will make scaling L2s more efficient since less gas will be needed to process information,” he said. “2) SELFDESTRUCT was kind of a dumb idea from the start since it has led to various hacks. Dencun deprecates this for future smart contracts.”
“Dencun is going to shake up how Ethereum developers build smart contracts,” said Richard Meissner, co-founder of Safe. “It's giving them tools to create more efficient, more secure applications.
“One example is ‘transient storage,’” he said. “Think of it like a temporary workspace within a transaction; after the transaction, the workspace is gone. This opens up new ways to protect smart contracts from exploits by allowing developers to store temporary data, preventing attacks like reentrancy and front-running.”
“The trade-off is that transient storage is enabled at the Ethereum level, not the user-operation level,” Meissner noted. “Theoretically, you can have multiple user operations within one Ethereum transaction, which could lead to conflict. Our team looked at this upgrade, and it's a worthwhile change since it puts a focus on smart contract security.”
Gracy Chen, Managing Director of Bitget, noted that the Dencun upgrade “will be unlocking Layer 2 scalability and improving security for validators and node operators – two of the ecosystem's most pressing issues that will influence the ETH price highly – if solved.”
“The Dencun upgrade's goal is to make Ethereum usage faster and, most importantly, cheaper (!) through sharding, which allows distributing the network workload into smaller parts,” said Ilya Stadnik, CEO of Zent. “However, despite these constant efforts, Ethereum still faces challenges and criticism.”
“While Ethereum remains the leading platform for decentralized applications, it must contend with the looming competition,” he said. “Predicting Ethereum's market positions based on these updates is quite difficult, considering the previous updates did not significantly alter the trajectory.”