As Ethereum prepares for the upcoming Dencun upgrade on the mainnet, the price of ETH goes beyond the $3,000 mark for the first time in nearly two years.
A recent research report from Grayscale delves into the plans of the world’s second-largest blockchain to become a more secure and scalable settlement layer for decentralized applications (dApps) deployed on its network. The upgrade promises to reduce data costs and improve margins for Ethereum-based Layer 2 scaling solutions.
Ethereum is Taking a Modular Approach to Address Scalability and Security Issues With EIP-4844
The report suggests that with the Dencun upgrade, Ethereum is taking a modular approach to address the blockchain’s long-standing scalability and security challenges by dividing it into specialized segments.
Ethereum developers say these divisions will allow for focused innovations and updates in specific areas that won’t impact the entire network. Grayscale calls the upgrade a strategic move to enhance Ethereum’s scalability while preserving its security.
Grayscale’s report also sheds light on how Ethereum 2.0, with its shift to a modular network, has led to the development of Layer-2 scaling solutions like Optimism (OP) and Arbitron (ARB), and data availability solutions like Celestia (TIA).
These scaling projects have demonstrated significant growth in the Total Value Locked (TVL) and user engagement on Ethereum, also improving the network’s scalability. Grayscale points out that the proliferation of such projects could lead to increased competition and innovation within the ecosystem, enriching Ethereum’s overall functionality.
Dencun Upgrade to Enhance the Efficiency of Layer 2 Networks Deployed on Ethereum
Analysts say that ‘Dencun’ or Ethereum Improvement Proposal (EIP) – 4844 is a critical upgrade that will further enhance the efficiency of Layer-2s by providing them with dedicated storage space. This could potentially reduce transaction costs by over 20 times.
Grayscale also highlighted significant milestones on the roadmap of Ethereum 2.0, which refers to the blockchain’s transitioning from a proof-of-work (PoW) to a proof-of-stake (PoS) consensus mechanism with “The Merge” upgrade in September 2022.
The report pointed out that last year’s boom in the rate at which Layer-2 solutions were deployed on Ethereum has provided an early validation for the mainnet’s modular strategy.
Layer-2s have significantly improved Ethereum’s transaction throughput and reduced costs by facilitating transactions off the mainnet and batching them so that it is only settled when necessary. These networks were able to achieve the feat all the while leveraging the foundational security offered by Ethereum.
Layer-2 TVLs Supass Entire Blockchains
According to the report, as of February 20, the TVLs in Layer-2 networks, including zkSync, Arbitrum, Optimism, and Base, have grown significantly over the past year, surpassing some of Ethereum’s Layer-1 rivals. Grayscale analysts note that this traction has not only attracted substantial liquidity but also helped onboard new users to Ethereum.
Duncan upgrade is poised to provide Layer-2 networks with designated storage spaces on the mainnet. This is said to reduce data costs while improving their margins. Although it is not clear how the EIP-4844 will impact end-user transaction costs, Grayscale estimates a potential reduction of over 20x.
Analysts say the strategic upgrade could narrow the cost disparity between Ethereum-based Layer-2s and their competitors. This could potentially triple the operating margins of the scaling solutions, alleviating concerns about these protocols seeking alternative data availability services.
The Dencun upgrade is set to go live on the Ethereum mainnet in two weeks.
At the time of writing, ETH is trading at $3,107 – up 0.1% in the last 24 hours.
