T-1 to Ethereum's New Upgrade

A few hours separate us from Ethereum’s second-biggest upgrade: Dencun.

March 13th marks a pivotal day for the cryptocurrency community, with ETH in the focus.

Experts are calling it one of the most important events for the network, ever since the Merge. However, unlike previous upgrades, analysts believe Dencun won’t mean much for ETH holders.

Recommended Read: Decoding the Dencun Upgrade

“This marks a significant shift in the focus of Ethereum, going from servicing users directly to servicing blockchains directly,” said Fidelity Digital Assets Research Analyst Max Wadington.

Let’s go into more detail now.

Dencun is set to introduce EIP 4844, also known as “protodanksharding”, which will usher in lower gas fees on Ethereum L2 networks.

What’s an EIP? Learn all about it here.

More specifically, it will allow L2 transactions to settle on Ethereum throughout a new transaction type called “blobs”, which temporarily store large amounts of data in a more gas-efficient manner than it did before.

Polygon, Arbitrum, and Optimism will be the direct beneficiaries of the upgrade, as they process transactions in batches called “rollups” before settling them to Ethereum.

At the moment, L2 submission fees account for roughly 10% of all L1 fees, but should significantly decrease after the upgrade goes live.

Layer-2 solutions improve scalability and reduce transaction costs by processing transactions off-chain, and then settling these on Ethereum at a later stage. The current process to settle these transactions is done by posting batches of L2 transaction information through calldata.

The cost to post through calldata is very expensive. According to Dune Analytics, Arbitrum has spent over $6.44m to publish transaction batches on Ethereum in March.

Layer-2s are almost hitting a total spend of $30m for March, having spent over $30m in February and December 2023.

 

What does Dencun Mean for Layer-2s?

The majority of Layer-2 expenses are from settlement costs to the base layer and as Dencun will reduce the settlement cost exponentially through the use of blob transactions, we should see the Layer-2 sector drastically change as they will have more capital to deploy for development and growth in their individual projects.

The BitDelta Research Team expects assets such as Arbitrum, Base, Polygon and Optimism experience massive gains over this cycle due to the effects of Dencun.

Dencun vs. Merge

Unlike the Merge that took place in September 2022, which completed Ethereum’s transition from PoW to PoS and reduced energy consumption by 99.95%, Dencun does not feature any “number-go-up” technology such as the “triple halving”.

Additionally, it won’t feature a new yield mechanism for ETH as a currency either.

However, JPMorgan analysts had predicted that this upgrade could be a catalyst for ETH to outperform BTC in 2024.

With Bitcoin testing new all-time high levels – currently trading at approx. $72,000 – Dencun upgrade might offer an opportunity for ETH to re-assert itself and eventually recapture market share within the crypto ecosystem. This, in turn, will improve ETH network activity, and push the world’s second-largest cryptocurrency to outperform.

Price Action Analysis

Ethereum has recently demonstrated formidable strength, with its price steadily increasing.

The upcoming Dencun upgrade and potential ETH ETFs are most likely to contribute to Ethereum’s surge.

• Ethereum has recently hit a 4% surge, and surpassed the $4,000 mark – a level not seen since December 2021.

• ETH has seen significant gains, with a 62.39% rise over the last 30 days.

On March 11th, the second-largest cryptocurrency by market cap has broken above $4,000 – the highest point since December 28, 2021.

While Bitcoin is grabbing the headlines, Ethereum has also been making its way up.

• The Moving Average Convergence Divergence (MACD) indicator of ETH shows a bullish crossover, suggesting continued upward momentum for the coin.

• The Relative Strength Index (RSI) is currently hovering around 64.26, which indicates that the market is gaining strength, which is typically bullish.

Did you know? Over the past month, the RSI has seen a notable increase from 73 to 82. This rise is a sign that Ethereum has been experiencing strong buying pressure.

However, it remains important to be cautious if the RSI climbs near 70, as this could indicate that the market is starting to become overvalued and ripe for a pullback.

Although, a pullback could be a healthy correction before another price increase.

Ethereum’s price is up almost 85% since the start of the year, and is not showing any signs of stopping, with bulls maintain a strong presence in the market.

Enhanced buyer momentum post-Dencun could see Ethereum extend the gains past the $4,500 threshold before reclaiming its $4,868 peak last tested in November 2021.

The coin is now holding stable above the $4,000 psychological level, triggered by both the speculations surrounding the spot ETH ETFs and the Dencun upgrade.

Traders will be closely eyeing Ethereum’s performance this week, with a possibility of a new records being witnessed.