Ethereum’s Dencun upgrade: Understanding proto-danksharding and layer-2 scalability

The rise of Ethereum and its applications

When Russian-Canadian programmer Vitalik Buterin was working on the Mastercoin project in late 2013, he envisioned a blockchain that was more than a payment system. Ethereum, the fruition of this idea, set the platform for the rise of novel applications like smart contracts, nonfungible tokens (NFTs) and decentralized finance (DeFi). The idea gained traction within the crypto community, and Ethereum went on to become the second-largest blockchain after Bitcoin.
However, rapid user growth clogged the network, leading to surging transaction costs; users had to pay more for gas (a unit used to measure the computational effort required for a transaction on the blockchain network). As the network progressed, the use cases of Ethereum expanded, including verticals like supply chain management, banking and gaming, among others. But it also pushed the gas price to ridiculous levels.
Back in January 2021, sending an ERC-20 token could cost over $60. One could end up spending between $60 and $100 for each transaction to complete a simple Uniswap trade. If one wanted to complete a complex smart contract interaction, they could end up paying $100–$200.
Below is a graph from YCharts regarding the gas prices on Ethereum for the past several years:
Ethereum developers have been consistently working to find solutions to the problems related to gas fees. Layer-2 solutions built on Ethereum were an attempt to de-clog the network and reduce transaction costs. The Dencun upgrade on Ethereum, which recently went live, was also implemented with the same objective: faster transactions, better scalability and lower fees.
This article discusses what scalability is in blockchain and why Ethereum needs it, the limitations of existing layer-2 solutions, the Dencun upgrade and proto-danksharding, how it improves layer-2 scalability, the benefits of the Dencun upgrade for users, and post-upgrade scenario.

What is scalability in blockchain, and why does Ethereum need it?

Scalability refers to a blockchain’s ability to handle a growing transaction volume effectively. As blockchain networks mature and user demand increases, maintaining performance while scaling becomes crucial. Blockchains address scalability issues with a slew of strategies, including layer-2 (L2) solutions, sharding and improvements to consensus algorithms. 
L2 solutions refer to projects that address scalability issues to improve the usability of applications and boost the adoption of blockchain technology. While L2 solutions like the Lightning Network’s payment channels unload transactions from the main chain, sharding divides the network into partitions (shards) to execute transactions in parallel. 
Upgrades to consensus algorithms increase throughput. For blockchain technology to become widely used, scalability issues must be resolved so that large-scale applications can be supported without sacrificing decentralization, speed or security -– the “blockchain trilemma.”

Ethereum’s scalability struggles

Ethereum’s scalability problems became evident when popular projects were built on it. CryptoKitties, a game built on Ethereum, was launched in October 2017, and it became a viral sensation, clogging up the Ethereum network. There was a six-fold increase in total network requests just in the first week of December 2017, and many thought CryptoKitties would pin down Ethereum.
CryptoKitties wasn’t an isolated incident, however. The rise of DeFi in 2020 and NFTs in 2021 further strained Ethereum, causing transaction delays and exorbitant fees. Scalability and high transaction fees hinder blockchain usage and adoption. 
When the gas fee is too high, it restricts accessibility and discourages the number of transactions one may be inclined to execute. Exorbitant fees also restrict the growth of decentralized applications (DApps) as developers seek less expensive alternatives. Therefore, new users are hesitant to join the ecosystem, which hinders the widespread adoption of blockchain technology.

Limitations of existing layer-2 solutions

L2 scaling solutions reduce congestion on the Ethereum mainnet either by handling transactions off-chain or aggregating them before finalization on the mainnet. These solutions, such as rollups and sidechains, maintain the Ethereum network’s security standards while increasing transaction throughput.
Some popular L2 solutions on Ethereum are Arbitrum, ImmutableX, Optimism and Polygon zkEVM. Arbitrum and Optimism leverage optimistic rollup technology, bundling the data of hundreds of transactions into a single Ethereum layer-1 transaction. ImmutableX and Polygon zkEVM leverage cryptographic zero-knowledge (ZK) proofs to club a large array of transactions off-chain and later verify these transactions in a single batch on the mainnet.
To think that L2 solutions have purged all issues out of Ethereum will be far from reality. For general users, L2 solutions make the ecosystem more complex, as they need to understand different chains and technologies to use these solutions optimally. Some L2 solutions might also bring in centralization risks if they only have a limited number of validators. Finally, users may incur a high fee for moving data back to the mainnet.

The Dencun upgrade and proto-danksharding, explained

The Ethereum Shanghai upgrade, carried out on April 12, 2023, optimized the Ethereum Virtual Machine (EVM) and introduced various protocol enhancements. The Cancun-Deneb (Dencun) upgrade denotes the next phase in Ethereum’s evolution, upgrading the execution layer (Cancun) and the consensus layer (Deneb) of the network. The objective of the upgrade is to provide a more robust infrastructure for DApps and smart contracts and, subsequently, enhance the scalability and security of the blockchain.

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The Cancun upgrade focuses on the execution layer and incorporates several Ethereum Improvement Proposals (EIPs) targeted at refining gas efficiency and enhancing scalability. Notably, EIP-1234 adjusts the block reward and delays the difficulty bomb to facilitate a smooth upgrade. The Deneb upgrade is largely focused on improving security and streamlining consensus methods to strengthen Ethereum’s consensus layer.

EIPs incorporated in the Dencun upgrade

The Dencun upgrade comprises several EIPs, all focused on enhancing the networ’s scalability. These EIPs include:

EIP-2322

EIP-2322 brings forth a revision to the Ethereum proof-of-stake (PoS) consensus algorithm, enhancing its robustness and efficiency.

EIP-1559
EIP-1559 sets up a pricing structure to improve the user experience and reduce transaction fees. It simplifies charge calculation and relieves congestion by introducing a dynamic base cost.

EIP-2929
EIP-2929 seeks to strengthen the security of the Ethereum network by making prospective assaults more expensive and less tempting to hostile actors.

EIP-2537

EIP-2537 proposes to create a new Ethereum-specific opcode that will make it easier for contracts to verify signatures using elliptic curves, making the Ethereum ecosystem more scalable and private.

EIP-4844

One of the most remarkable EIPs in the Dencun upgrade is EIP-4844, which introduces danksharding and proto-danksharding.

Danksharding and proto-danksharding

Danksharding proposes a novel approach to scaling Ethereum by dividing the blockchain into smaller units called “blobs.” These blobs function as containers for transaction and smart contract data. By processing these blobs in parallel, the network can handle a significantly higher volume of transactions, improving overall scalability and throughput.
Blobs stand for “binary large objects” and represent data collections in binary format, not necessarily adhering to a specific file structure. Within the Ethereum network, these blobs act as autonomous segments, contributing to the network’s overall processing power.
Proto-danksharding, implemented via EIP-4844, builds upon danksharding by introducing additional storage space within the Ethereum network. This increased storage capacity allows for more efficient processing of larger data sets, further enhancing scalability.

How does proto-danksharding improve layer-2 scalability?

EIP-4844 introduces a game-changer for layer-2 (L2) solutions: blobs. These act as supplementary storage within the network, offering a more cost-effective alternative to traditional call data. Unlike call data, which permanently stores information on the mainnet, blobs can temporarily store large data chunks alongside regular transactions. This data becomes inaccessible after a set period (typically three weeks).
Blobs can hold a larger volume of data, including transaction details, smart contract code and related metadata. This allows efficient handling of substantial data loads within each blob. By enabling L2 solutions to store data in blobs instead of expensive call data, EIP-4844 paves the way for quicker transactions and significantly reduced fees. 
Vitalik Buterin himself estimates a staggering 60x cost reduction, with 125 kilobytes of call data costing around 0.06 Ether 
ETH
$3,509
 ($200.45) compared to a predicted cost of only 0.001 ETH ($3.34) for a similar-sized blob.The Dune Analytics data tracking platform has revealed that the L2 median transaction fee in United States dollars has fallen sharply. The figures are reported in the table below.

Benefits of the Dencun upgrade for users

The introduction of proto-danksharding offers a significant cost reduction for L2 rollups. This innovative solution allows L2 platforms such as Optimism, Arbitrum and zkSync to store transaction data in “blobs” instead of relying on expensive call data. Blobs act as temporary storage containers, reducing processing costs and ultimately leading to lower transaction fees for Ethereum users. 
With more space available for data blobs, the overall user experience becomes more economical and efficient. Danksharding paves the way for Ethereum’s future danksharding, and its initial implementation through proto-danksharding represents a major leap forward for Ethereum. 
These advancements enable the network to handle a significantly higher volume of transactions and smart contracts. This increased capacity is crucial for the widespread adoption and growth of DApps built on the Ethereum blockchain. By addressing scalability challenges, danksharding lays the groundwork for a more scalable and sustainable Ethereum network. 
The Dencun upgrade, encompassing both the Shanghai and Cancun-Deneb upgrades, tackles key barriers such as scalability and high transaction fees. This comprehensive approach paves the way for innovation, broader adoption and sustained growth within the Ethereum ecosystem. By laying the groundwork to address these longstanding challenges, the Dencun upgrade positions Ethereum for a brighter future.

How does the Dencun upgrade empower different players in the Ethereum ecosystem?

The Dencun upgrade brings exciting developments for various stakeholders within the Ethereum ecosystem. Let’s explore how it benefits each group:

For regular users

The Dencun upgrade is a welcome gift for regular Ethereum users. Transactions will be significantly faster, thanks to optimized processing. Additionally, users can expect substantial savings on transaction fees due to the upgrade’s efficiency improvements. This translates to a more cost-effective and user-friendly experience. Furthermore, the upgrade enhances network stability and security, ensuring a more robust platform for your interactions.

For validators

The Dencun upgrade holds significant value for the validator community. Protocol optimization will address existing issues, leading to improved speed and efficiency for validators. As scalability increases, the network’s capacity for transactions expands, potentially leading to better staking payouts for validators. This improved network efficiency and the potential for higher rewards will incentivize validators to maintain Ethereum’s security.

For developers

Existing and upcoming projects built on Ethereum can leverage the Dencun upgrade’s enhanced functionalities to create more advanced and scalable applications. Faster transactions and lower fees will encourage wider adoption of these projects, fostering a thriving development environment within the Ethereum ecosystem.

The future 

While Ethereum users have increasingly flocked to L2 solutions for faster and cheaper transactions in recent years, these layer-2 options themselves aren’t entirely inexpensive alternatives. As a result, several projects decided to move to blockchains like Solana to avoid paying high gas fees.
The Dencun upgrade is likely to alter this scenario. It will not just de-clog transactions on the Ethereum mainnet and slash gas costs, but it will also ease out transaction fees on L2 solutions. The Dencun upgrade significantly reduces the cost of settling transactions from L2 solutions back to the Ethereum mainnet. This could incentivize users to stay within the Ethereum ecosystem, potentially reducing the appeal of migrating to other blockchains.
Dencun can be expected to hold the migration of users from Ethereum to other blockchains. It might give a boost to DeFi, NFTs, GameFi, SocialFi and metaverse applications built on Ethereum. Additionally, the network will lower the barrier to entry for new users. These factors may invariably lead to broader adoption and bring Ethereum closer to the financial mainstream.