One week after the launch of Dencun, Ethereum’s most recent update seems to be meeting expectations and, in some cases, exceeding them.
Dencun was launched on March 13 with the promise of bringing about a new era of faster and cheaper transactions. Historically, Ethereum has struggled to increase the speed of its base layer to keep up with demand, so Dencun shifts its focus by scaling with the help of layer 2s.
According to Brian Gallagher, co-founder of Partisia blockchain, the update couldn’t have come at a better time, as competition from rival blockchains threatens to erode Ethereum’s market dominance.
“The timing for Ethereum to launch its Dencun update couldn’t wait any longer,” Gallagher told Cointelegraph. “It’s undeniable that Solana is gaining market share away from Ethereum, especially in areas like token launches, decentralized exchanges, and NFTs, where retail traders tend to be.”
Gallagher added, “Making on-chain transactions on Ethereum is simply too expensive, so alternatives like Solana are stepping up to the challenge.”
As Gallagher points out, the comparison of fees currently does not favor Ethereum. Typical fees on Ethereum range from $1 to $20, while on Solana, fees are only a fraction of a cent. In fact, on March 5, fees on Ethereum even soared above $30.
Ethereum’s scaling issues have been a long-standing problem. Transaction fees started rising from under $1 to $5 in September 2020, then above $20 by the end of 2021 and into 2022. On April 30, 2022, the average fee reached an all-time high of $197.
Previous upgrades to the Ethereum network have attempted to improve the speed and scalability of its base layer. The most significant of these was the Merge, which happened on September 15, 2022, and completed Ethereum’s transition from proof-of-work to proof-of-stake. While the Merge made Ethereum more energy-efficient, any small reductions in transaction fees didn’t last, as fees began to rise again by March 2023.
Dencun takes a different approach. Instead of trying to make Ethereum’s base layer more scalable, Dencun focuses on improving interactions with layer 2s, such as Arbitrum and Optimism, making transactions cheaper. In theory, Dencun’s improvements should incentivize users to shift their traffic from Ethereum’s layer 1 to other networks.
While Dencun is still in its early stages, the initial feedback is encouraging. Dencun promised to reduce fees on layer 2s by a factor of 10, and data from Dune Analytics shows that it has succeeded in that aim and even exceeded it in some cases. Transaction costs on Optimism and Arbitrum are now below $0.01, according to L2 Fees.
With Dencun delivering positive results right from the start, there is a sense of excitement within the Ethereum community. Nick Johnson, the founder and lead developer of the Ethereum Name Service (ENS), is among those praising the development. Johnson believes that the Dencun upgrade brings a new era of economic sustainability to Ethereum by improving accessibility for layer 2 developers who have been burdened by costly transaction fees.
The layer 2s, such as Arbitrum and Optimism, have also shown enthusiasm for Dencun. Arbitrum called it “one of the biggest upgrades to support layer 2s in scaling Ethereum,” while Optimism stated, “Today is going to be a good day.”
However, Dencun’s success ultimately depends on whether it can attract users away from Ethereum’s base layer to layer 2s like Arbitrum, Optimism, zkSync Era, Loopring, and Polygon. Early signs indicate positive results, as transaction volumes on Arbitrum have increased by 145% and on Optimism by 144% in the last seven days. On-base transaction volume has also increased by 203% over the same period.
Gallagher believes that the focus in the long term will be on DeFi and how the Dencun upgrade can potentially increase speed and lower costs. If it fails to significantly reduce costs, then other chains that are faster and more affordable will continue to gain market share.
While Dencun has yet to face all the challenges of the crypto market, Gallagher’s caution serves as a reminder against complacency. But for now, Ethereum’s latest upgrade seems to be a job well done.