Ethereum’s Dencun upgrade lowers layer 2 fees by as much as 98%

Ethereum’s Dencun upgrade went live yesterday, lowering fees on top layer 2 networks by as much as 98%.

Dencun is a series of nine different Ethereum Improvement Proposals, or EIPs. The most important is EIP-4844, which dramatically cuts the costs of interacting on layer 2 networks.

Although it went live yesterday at 1:55 pm London time, it took some time for layer 2s to integrate Dencun, and some still have yet to implement it.

“Layer 2 operators are tasked with updating their systems to accommodate the new data posting method introduced by the upgrade” Marianna Angelou, an analyst with digital asset risk-management firm Metrika, told DL News.

In the hours following the highly anticipated upgrade, only two layer 2 networks, ZkSync and Starknet, adopted the new data posting method, which uses “blobs.”

Blobs present a novel transaction format for Ethereum, distinguishing between everyday user transactions on Ethereum’s main network and those initiated by layer 2 networks.

This concept can be likened to a highway system, where layer 2 networks enjoy the advantage of a dedicated lane, while the rest of the users navigate the shared main highway.

As activity increases on this digital highway, meaning more transactions occur on Ethereum, congestion can build up, leading to higher gas, or transaction, fees. Layer 2 networks, however, remain unaffected by that congestion, thanks to their exclusive access to a private lane.

Other top layer 2 networks such as Base, Optimism, and Arbitrum have enabled blobs on their chains as of today.

The median transaction costs for layer 2 networks Base, Optimism, Arbitrum, and ZkSync are now only $0.026, $0.027, $0.051, and $0.108.

That comes out to a reduction in transaction costs of 96%, 95%, 95%, and 65%, respectively.

The largest reduction in cost belongs to Starknet. Just before it enabled blobs, the median transaction cost was about $1.35, and now, the median transaction cost is $0.0196 — a 98% decrease.

“It’s going to make it easier and cheaper for developers to build applications that were previously too costly due to high operational expenses,” Angelou said.

One such example of this is with Overtime Markets, a sports-betting protocol on Optimism. Its founder said that if gas prices remain as low as they are after Dencun, Overtime Markets will have three times as many markets for users to bet on.

But some argue it may still be too early to make any assumptions. Some layer 2s, like Blast, have yet to enable blobs, and as more layer 2s start to use blobs, the fees could increase.

Although blobs provide layer 2s with a dedicated lane for posting transactions, that lane could also become congested over time. As the number of layer 2s using blobs increases, they may find themselves competing for access to the same exclusive lane.

What about the Ethereum mainnet?

While transaction fees on layer 2s dropped significantly, transaction fees on Ethereum mainnet remain elevated.

Although the upgrade was designed to lower transaction fees on layer 2s, it may help lower fees on Ethereum mainnet, as well.

“By eliminating the need for L2s to compete for mainnet block space, we expect this upgrade to reduce demand pressures on the mainnet in the short term” Angelou said.

Now that layer 2s have their own dedicated lane for transactions, it will naturally free up more room on the Ethereum mainnet.

Layer 2s accounted for about 13% of transactions on Ethereum mainnet in the last 30 days.

In the 30 days leading up to the upgrade, Ether rallied 44%, but since the upgrade went live, Ether is down 5.08%, falling to $3,776.

Got a tip about DeFi? Reach out at ryan@dlnews.com.