Ethereum’s next major upgrade has just gone live, ushering in one of the biggest user experience improvements that the network has seen yet.
Background
For most of Ethereum’s life span it has been thought of as the old, slow, and expensive blockchain. This has mostly been due to the development team taking a secure and reliable roadmap over the “move fast and break things” approach.
Currently, most of Ethereum’s activity takes place on layer2 networks, which roll up big batches of transactions and send them to the main Ethereum blockchain as a single transaction. This approach has allowed for a major increase in activity.
However, there is now so much activity on layer2s – with a combined 3.5 million users – that even they are now becoming expensive. For example, transaction fees on the leading layer2, Arbitrum, have been hitting 4 to 5 dollars which is quite extreme when you contrast that with fees on the Solana network which are generally less than 5 cents.
The Upgrade
The most notable Improvement of the “Dencun” update is the introduction of proto-danksharding. This innovation will essentially add extra space – more commonly known as data availability – in each block specifically for layer2s, called blob space.
The addition of this extra data availability will make transactions on layer2s immensely cheaper, likely taking gas fees from a few dollars to just a few pennies. As Ethereum already possesses many of the best protocols and applications in crypto, Dencun could be a major catalyst in attracting users back to the ethereum ecosystem.
What's Next For Ethereum
While the dencun upgrade should bode well for ETH, we expect that it will be more bullish for layer2s.
Simply put, the layer2 business model is essentially value-added blockspace. Meaning layer2s resell blockspace from Ethereum, while making transaction execution faster and cheaper for users than if they were to use the layer1. So now, if layer2s are paying less for the commodity of blockspace and simultaneously seeing an increase in demand, that means more profits.
Currently, Ethereums layer2 activity has been growing steadily reaching a local peak of 4 million weekly active users, up from less than 900k at the start of 2023. This is staggering growth considering crypto was still in a bear market up until october of 2023.
The upgrade should drive more growth in activity to the network as Ethereum layer2 fees will be much more competitive with alternative layer1s. This could lead to layer2s hitting over 5 million users pretty soon.
ETH/BTC Technical Analysis
Right now, ETH/BTC is consolidating, and as Bitcoin hits all-time highs, we could see Ethereum pick up some momentum, especially if the narrative around a potential ETH ETF gets some traction.
That being said, ETH is still teetering on a key support level at 0.0500 which it will have to hold above if we’re going to see a resurgence. A loss of the 0.0500 support, while unlikely, could mean ETH is entering very negative territory relative to Bitcoin.