Ethereum’s Dencun Upgrade Expected to Dramatically Lower Costs for Layer 2 Blockchains

Using the world’s most commercially successful blockchain ecosystem is about to get much cheaper after the latest software upgrade of the Ethereum network.

Referred by developers as Dencun, the update slated for March 13 is expected to dramatically lower expenses for so-called Layer 2 networks — dozens of chains like Arbitrum, Polygon and Coinbase Global’s Base that link to Ethereum. A transaction that might have previously cost $1 to post may now cost one cent; another that used to cost cents would now be a fraction of a cent.

The upgrade is being hailed as the most significant change in Ethereum ecosystem’s end user experience ever — and it will be much more noticeable to consumers than the well-known September 2022 Merge, which dramatically slashed Ethereum’s energy consumption. Ethereum handles more transactions than the Bitcoin network.

“This one is going to overshadow them all,” said Roberto Bayardo, an engineer working on Base at Coinbase. “The Merge was super critical and super important, but users didn’t notice much. From the perspective of the end user, this change is going to be much more dramatic and spur much more innovation on the application side.”

With Dencun — a combination of the “Deneb” and “Cancun” named portions of the update — Ethereum will introduce a new system of storing data. Currently, most Layer 2 blockchains store data on Ethereum. Because that data is stockpiled forever, on every Ethereum node, that storage often adds up to about 90 percent of the Layer 2s’ costs, which they usually pass on to applications, and they in turn charge consumers. With Dencun, Layer 2s will be able to store their data in a new type of repository called blobs. Blobs will be cheaper because the data will only be warehoused for about 18 days.

As blobs gain traction, there will be more space left on Ethereum for other transactions, so the network should become clogged less often. On the other hand, it will no longer store a complete record of everything forever.

“You don’t get something for nothing, but I think it’s an excellent tradeoff for Ethereum to make,” said Ed Felten, a retired professor at Princeton University who co-founded Offchain Labs, which develops Arbitrum.

The shift could promote the use of artificial intelligence in games, where non-player characters will now be able to exhibit sophisticated behavior driven by an AI model — something that would have been prohibitively expensive before, Felten said. In decentralized finance, where users can trade and borrow directly from one another, automated market makers may also start embedding complex, AI-driven trading strategies.

“In general it allows much more complex and sophisticated behavior from applications than what’s possible today,” Felten said.

The upgrade could also spur the launch of more Layer 2 chains, which can now be operated much more cheaply. Whereas a Layer 2 project previously needed to garner millions of dollars in venture-capital backing to launch and operate, it may now be able to accomplish the same feat with a skeletal crew. It may be cost-effective to launch new Layer 2 chains for a single vote, for a single day, said Jim McDonald, co-founder of Attestant, which helps operate the Ethereum network. A chain could be created for purposes such as to issue tickets for a single event.

“What we’ll actually see is a real explosion of Layer 2 chains,” McDonald said. “I would certainly expect to see hundreds of L2s turn up over the next year to 18 months. They don’t necessarily have to be long lived.”

It could take Layer 2 chains hours to days to start using blobs. Arbitrum, for instance, expects to move to blobs “in a day or two” after the upgrade, as the change needs to be discussed and voted on by Arbitrum’s decentralized governance system, Felten said. Meanwhile, the chains can still use Ethereum’s traditional transactions setup.

The blobs’ cost will go up over time, as demand for them increases, so the cost advantage may eventually disappear.

“Eventually the fees will go back up again,” said Karl Floersch, co-founder of the Optimism project, whose technology is used in numerous Layer 2 chains like Base. “Based on some rough analysis, it will be many months. Will it be many years? I would say absolutely not.”

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