What to Expect From Ethereum’s Cancun-Deneb Upgrade

The Ethereum blockchain has seen significant upgrades in recent times, enhancing its scalability, efficiency, and security. These improvements address the blockchain trilemma — the challenge of balancing security, decentralization and scalability. These ongoing enhancements are crucial for improving network performance while keeping costs low.

The upcoming Ethereum Cancun-Deneb (“Dencun”) hard fork upgrade is set to be deployed on the mainnet on March 13. This upgrade will prioritize scalability, efficiency and security through various Ethereum Improvement Proposals (EIPs), notably EIP-4844 for proto-danksharding. This proposal aims to optimize gas fees and enhance network scalability.

The Dencun upgrade marks the beginning of “The Surge” era in Ethereum’s roadmap, paving the way for achieving mass scalability through layer-two rollups. These rollups will make Ethereum more accessible and user-friendly, driving adoption and utility across various sectors, including DeFi 2.0.

The Benefits of Layer-2 Rollups

Layer-2 rollups enhance Ethereum’s scalability and efficiency by processing transactions off-chain while preserving the security assurances of the main Ethereum blockchain (Layer-1). They have the following characteristics:

Significance of EIP-4844 for Proto-Danksharding

EIP-4844, or Proto-Danksharding, aims to significantly enhance the network’s scalability by introducing temporary data blobs attached to blocks. This innovation reduces processing costs and increases throughput by:

Trading Outlook around the Cancun-Deneb Upgrade

Ethereum’s network transitioned from Proof-of-Stake to Proof-of-Work in 2022 (the “Merge”), with ether becoming a deflationary asset as a result. Currently, more than 25% of Ethereum’s total supply is locked in staking platforms, significantly reducing the available supply for trading or investing. This shock coincides with a burning mechanism reducing ETH supply by 0.21% per year.

Dencun is expected to act as a positive catalyst for ETH. Ether holders have significantly reduced their exposure to exchanges by transferring more than $1.3 billion worth of ETH into private wallets. Recent data from Bloomberg shows the ETH/BTC spot ratio retracting to 0.5, reminiscent of post-Luna/Terra levels in 2022.

This presents a reasonable entry point for Ethereum enthusiasts. Moreover, there has been a surge in short-term call buying for ETH, with traders anticipating a move towards $4,000 by the end of March. Traders also favor buying March 2024 calls and selling April 2024 calendar strategies. Traders’ bullish sentiment is evident in the market, with approximately $2.5 billion worth of ETH calls and $1 billion worth of ETH puts in notional value.

ETH/BTC Cross

As we look ahead, in addition to ether, other high beta names in Layer 2 are also poised to benefit from the Dencun upgrade. Layer 2 networks like Arbitrum (ARB) and Optimism (OP), which bundle transactions before posting them back to the main chain, are expected to reap significant advantages from the introduction of data blobs, for instance.