The Ethereum blockchain has successfully implemented a major network upgrade known as Dencun. This represents the most significant change to the protocol in over a year and is designed to address the network's long-standing challenges with scalability and high transaction costs. By introducing a new method for handling data, the upgrade primarily benefits Layer 2 networks, leading to substantially reduced gas fees for users on those platforms.
What Is the Dencun Upgrade?
The term "Dencun" is a combination of two simultaneous upgrades: "Cancun" on the execution layer and "Deneb" on the consensus layer. The execution layer is responsible for processing transactions, while the consensus layer governs how network participants agree on the state of the blockchain.
Technically, the upgrade is implemented through a new Ethereum Improvement Proposal (EIP) called EIP-4844, also known as "proto-danksharding." This proposal enhances the blockchain's ability to manage data from secondary networks, known as Layer 2s or rollups, by introducing a new, more efficient data storage mechanism.
Why Was the Dencun Upgrade Necessary?
Ethereum has historically struggled with network congestion, which causes gas fees—the cost required to process transactions—to spike during periods of high activity. This has made the network impractical for many small-scale and frequent transactions.
Layer 2 rollups help alleviate this problem by processing transactions off-chain and then submitting them in batches to the main Ethereum blockchain. While this has improved efficiency, one persistent issue has been the indefinite storage of compressed L2 data by nodes, which demands increasing hardware resources over time. In fact, more than 90% of the fees on rollups have been attributed to this data storage cost.
The Dencun upgrade introduces "blobs," a new type of temporary data storage that is more efficient. Instead of storing L2 data permanently, blob data is maintained for only 18 days. This significantly reduces the storage burden and, consequently, the associated fees.
How Does Dencun Affect the Main Ethereum Network?
While the upgrade brings considerable fee reductions for Layer 2 users, those transacting directly on the main Ethereum blockchain (Layer 1) may not experience lower fees until 2026 or 2027. According to Robert Le, a crypto analyst at Pitchbook, this full benefit will only be realized after the implementation of "full danksharding," a further expansion of data storage capacity.
He predicts that over the next few years, more users—both retail and institutional—will migrate to Layer 2 solutions for their transactions, with the main Ethereum network primarily being used by rollups for batch processing.
EIP-4844 also marks the beginning of the "Surge" phase for Ethereum, a scaling milestone first outlined by co-founder Vitalik Buterin. The goal of this phase is to achieve a throughput of 100,000 transactions per second.
How Much Will Fees Be Reduced?
In the week preceding the upgrade, the average gas fee on Ethereum had risen to 98 gwei—a level not seen since May 2023. This translated to approximately $87 for a token swap and around $147 for an NFT transaction.
Post-upgrade, gas fees on major Layer 2 networks have fallen dramatically—often by a factor of 10 or more. For example:
- Token swaps on decentralized exchanges that previously cost between $1 and $2 now average just 10 to 20 cents.
- Some networks are reporting fees as low as a fraction of a cent for certain operations.
This reduction is a direct result of the lower data storage costs afforded by the new blob mechanism.
What Does This Mean for the Price of Ether?
Ether (ETH), the native cryptocurrency of the Ethereum network, has seen a significant price increase of over 150% since October 2023. It recently broke the $4,000 mark for only the second time in its history and is approaching its all-time high of nearly $4,900.
This rally is partly due to a broader bull market in crypto, fueled by the approval of Bitcoin spot ETFs and speculation around potential Ethereum ETF approvals. However, many analysts believe the Dencun upgrade could have a more profound and lasting impact on ETH's value by strengthening the network's fundamental utility.
Matt Hougan, Chief Investment Officer at Bitwise, described the upgrade as an "absolute game changer." He argued that transaction costs below a penny unlock a wave of innovation, enabling applications in decentralized finance (DeFi), non-fungible tokens (NFTs), and even non-financial use cases that were previously not economically feasible.
Vance Spencer, co-founder of Framework Ventures, echoed this sentiment, noting that the upgrade reinforces Ethereum's position as a pioneering technology platform, which in turn boosts investor confidence and positive market sentiment.
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Frequently Asked Questions
What is the main purpose of the Dencun upgrade?
The primary goal of the Dencun upgrade is to significantly reduce gas fees on Ethereum Layer 2 networks. It achieves this by introducing a new, temporary data storage system called "blobs," which makes data handling more efficient and less costly for rollups.
Will the Dencun upgrade lower fees on the main Ethereum network?
Not immediately. Users transacting directly on the Ethereum mainnet (Layer 1) will not see a significant reduction in fees until the full implementation of danksharding, which is expected in 2026 or 2027. The current benefits are mostly enjoyed by users on Layer 2 solutions.
How much cheaper are transactions on Layer 2s after the upgrade?
Fees on major Layer 2 networks have been reduced by a factor of 10 or more. Common operations like token swaps that previously cost a few dollars now often cost just a few cents, making micro-transactions and everyday use much more viable.
What is proto-danksharding?
Proto-danksharding, formalized as EIP-4844, is the core technical innovation of the Dencun upgrade. It introduces a new transaction type that carries large packets of data (blobs) that are stored only temporarily, dramatically reducing the long-term storage costs for Layer 2 data.
Could the Dencun upgrade affect the price of ETH?
Many analysts believe so. By improving Ethereum's scalability and utility, the upgrade makes the network more attractive for developers and users. This increased fundamental value and positive sentiment can contribute to a stronger long-term value proposition for the ETH token.
What are 'blobs' in the context of Ethereum?
Blobs are a new data format introduced with EIP-4844. They are large packets of data that Layer 2 networks can send to the main Ethereum chain. The key difference is that this blob data is only stored for a short period (18 days) instead of indefinitely, which is the main reason for the fee reduction.