Ethereum Dencun (Cancun-Deneb) Upgrade Explained

What is the Ethereum Dencun (Cancun-Deneb) Upgrade?

The Ethereum Dencun Upgrade is one of Ethereum’s most impactful updates in its road to full scalability, security, and transaction efficiency. Building on recent milestones like the Merge and Shanghai, Dencun solidifies Ethereum’s progress toward a rollup-centric roadmap that can support the next generation of decentralized applications.

Known as Dencun (a blend of Deneb and Cancun), this upgrade targets both the execution and consensus layers. Cancun, focused on the execution layer, introduces innovations like Proto-Danksharding (EIP-4844) for data efficiency. On the other hand, Deneb focused on the consensus layer, improving staking and validator operations.

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When Did Dencun Go Live?

The Ethereum Dencun upgrade was activeted on March 13, 2024, after extensive testnet validation on Goerli, Sepolia, and Holesky, introducing key features like Proto-Danksharding for reduced fees and enhanced scalability.

Within days, Layer 2 networks, such as Arbitrum and Optimism, reported fee reductions of up to 90%, seriously easing transaction costs for users. After several months, blob usage is near target and there are discussions for expansion in blob capacity aims to keep fees manageable.

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Key Benefits of the Dencun Upgrade

The Ethereum Dencun Upgrade has introduced several critical advancements, each designed to improve scalability, efficiency, and security on the network:

• Enhanced Scalability: Proto-Danksharding (EIP-4844) introduced "blobs" for efficient data storage, accelerating transaction speeds and increasing network capacity, especially benefiting Layer 2 rollups.
• Gas Fee Reduction: Blob storage from EIP-4844 has led to substantial fee reductions across Layer 2 networks, making Ethereum transactions more cost-effective for users.
• Strengthened Security: Enhancements in EIP-6780 and EIP-4788 have fortified Ethereum’s security by improving the Proof-of-Stake (PoS) protocol and cross-chain data integrity.
• Optimized Data and Gas Efficiency: EIPs like EIP-1559, EIP-2929, and EIP-1153 reduce on-chain data costs and streamline gas usage, improving transaction affordability and resource efficiency.
• Foundation for Future Innovation: By laying the groundwork for full Danksharding, the Dencun upgrade supports Ethereum’s rollup-centric roadmap, paving the way for further advancements in decentralized applications and smart contracts.

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Ethereum Dencun EIP List

The Dencun upgrade incorporates nine essential EIPs designed to improve Ethereum’s performance. The primary EIPs in Dencun are as follows:

• EIP-4844 (Proto-Danksharding): Introduces "blobs," temporary data units that increase Ethereum’s transaction capacity and reduce costs, especially beneficial for L2 rollups.
• EIP-1153: Reduces on-chain data expenses by optimizing the way block space is allocated, lowering overall storage costs.
• EIP-4788: Enhances cross-chain and staking security by creating secure communication channels between Ethereum's consensus and execution layers.
• EIP-5656: Boosts Ethereum Virtual Machine (EVM) efficiency by refining operational performance, streamlining contract execution.
• EIP-6780: Disables the "SELFDESTRUCT" function, closing potential loopholes and reinforcing smart contract security.

Collectively, these EIPs elevate Ethereum’s functionality, cost-efficiency, and security. Tim Beiko, an Ethereum core developer, emphasized the importance of these EIPs in a previous post in 2024.

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What is EIP-4844 and Proto-Danksharding?

EIP-4844, or Proto-Danksharding, is key to Ethereum’s Dencun upgrade. It introduces “blobs,” 125 KB temporary data segments stored for 18 days using KZG commitments in the Beacon Chain’s consensus layer (CL), not directly accessible to the execution layer (EL), also known as the Ethereum Virtual Machine (EVM).

This approach reduces Layer 2 transaction storage costs, as blobs are pruned after two weeks, keeping data affordable while retaining availability. Proto-Danksharding serves as a bridge toward full Danksharding, optimizing Ethereum’s scalability for future growth. We've covered more on EIP-4844 and blobs in a separate article.

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What are the Risks of the Dencun Upgrade?

While Dencun was a critical upgrade to improving Ethereum and the rollup-centric roadmap, it also introduced some risks. Some of these include:

• Reliance on Layer 2s: The upgrade’s heavy dependence on Layer 2 chains could destabilize Ethereum's ecosystem, possibly challenging its primary role.
• Validator Limitations: Dencun caps new validator entries to 8 per epoch, which might create competition for slots, limiting access for smaller stakers.
• Centralized Sequencer Vulnerability: Many Layer 2s depend on centralized sequencers, which introduces potential security and trust risks inconsistent with Ethereum's decentralization goals.
• Fragmented Fee Markets: Blobs for Layer 2s operate under a separate fee structure, which could lead to volatile mainnet fees during high Layer 2 usage.

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What is the Result of the Dencun?

The Dencun upgrade has slashed Layer 2 gas fees to fractions of a cent, making transactions nearly free for users and sustaining this low-cost environment seven months after launch. Meanwhile, Ethereum's supply has started increasing post-upgrade, shifting closer to an inflationary trend on the ultra sound money chart.

A major shift has been the introduction of the blob fee market, sparking ongoing debate among Ethereum developers and Layer 2 networks over its impact on scalability and costs.

Price-wise, the response has been underwhelming. Ethereum recently hit a 3.5-year low against Bitcoin as it has a 38.5% decline since Dencun. Layer 2 tokens have performed even worse, with notable declines such as Arbitrum (-75.7%), Optimism (-64.1%), Polygon (-74.1%), and StarkNet (-86.2%), as highlighted in the graph below.

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Bottom Line

Reflecting on the March 13, 2024 launch, the Dencun Upgrade has disrupted Ethereum by drastically reducing Layer 2 fees. It introduced a new blob fee market which has redefined Ethereum’s cost structure and supply dynamics forever.

However, ongoing debates around blob fees and inflationary effects, highlight the complex impacts of these major Ethereum updates. The upcoming Prague-Electra upgrade (Pectra), scheduled for early 2025 aims to build on top of Dencun and is the next big thing that we will be monitoring.