Ethereum's Dencun upgrade: what's next for ETH and liquid staking

This overview was originally published in October 2023. It was updated in November 2023 to reflect developments in Dencun planning.

• Ethereum's Dencun upgrade is expected to take place during Q1 of 2024.
• EIP-4844: Shard Blob Transactions sets the stage for Danksharding, a long-awaited improvement with the potential to greatly improve Ethereum’s scalability.
• EIP-4788: Beacon block root in the EVM is an improvement with the potential to make liquid staking protocols and other staking innovations more efficient and automated, reducing the need for certain oracle services that currently present third-party risks.
• EIP-7514: Add max epoch churn limit will cap the churn limit for Ethereum validator activations at 8 per epoch.
• A number of Ethereum community resources provide regular updates on Dencun’s development so that anyone can stay in-the-know while the upgrade progresses.

Ethereum’s next network upgrade, named “Dencun” (combining the ‘Deneb’ consensus layer upgrade and the ‘Cancun’ execution layer upgrade into one hard fork) is currently moving through devnet testing. Ethereum’s core developers and researchers expect Dencun to be executed during Q1 of 2024, though it was previously projected for Q4 '23.

The EIPs, or Ethereum Improvement Proposals, slated for the Dencun upgrade may have significant impacts on the efficiency of liquid staking protocols, and on Ethereum’s scalability as a whole. Let’s explore the EIPs included in the upgrade along with their potential impact on Ethereum and liquid staking.

EIP-4844: Shard blob transactions

EIP-4844, named ‘Proto-Danksharding’ after the two researchers who proposed the original solution (Protolambda and Dankrad Feist), will make it less expensive for rollups to add data to Ethereum’s blocks.

Proto-Danksharding is the first step toward Danksharding, a rollup-based scaling solution with the potential to allow Ethereum to “support hundreds of individual rollups with ease and make millions of transactions per second a reality,” according to the Ethereum Foundation.

There are a few technical concepts that are helpful for understanding EIP-4844:

• Sharding is a database management concept that increases how many transactions can be processed per second by breaking the database into smaller, more manageable pieces (shards). Each shard can individually and simultaneously process transactions, then posting those transactions in bulk on the core network. This reduces the computational load required of the core network by moving minor transaction processing to the parallel shards.
• Rollups have become the most prominent scaling solution on Ethereum today, represented by networks like Polygon, Optimism, zkSync, and others. Rollups allow users to execute transactions off of the main Ethereum blockchain on a faster, cheaper network, which then “rolls up” the data from those transactions and posts them to Ethereum in one larger, bulk transaction.
• Proto-Danksharding (EIP-4844) is an improvement that makes it more affordable for rollups to add data to Ethereum blocks by introducing data blobs that can be sent and attached to blocks.
• Danksharding is considered the endgame for Ethereum’s rollup scalability. Once fully implemented, Danksharding will expand the capacity of the blobs introduced in Proto-Danksharding to create more space for a large number of rollups to post transactions quickly and cost-effectively.

Today, rollups have to post their transactions to Ethereum using CALLDATA, which is an expensive transaction as it is processed by all Ethereum nodes and lives onchain forever—though for the purposes of the rollup’s functionality this data only needs to be stored on Ethereum for a minor period of time. EIP-4844 will introduce data blobs for rollups to post to, which are cheaper to transact with and are automatically deleted after a fixed period of time.

What EIP-4844 means for ETH and liquid staking

• Increased scalability and throughput: The introduction of Proto-Danksharding will improve Ethereum’s rollup landscape and the cost of transacting on rollups, potentially leading to an increase in transaction activity. This increased throughput could potentially lead to more staking and validator activities as the network becomes more efficient and can handle more transactions at a lower cost for end users.
• Changes to Ethereum’s fee market: Proto-Danksharding will have unique gas parameters for how blobs are added to blocks. Once EIP-4844 is live, block builders may develop new strategies for optimizing execution layer fees in a landscape of both block and blob production.
• Short-term data storage: The automatic deletion of blobs after a fixed period means that, in the long run, the Ethereum network won’t be as data-heavy as it is today. The potential for reduced storage and computational burdens on validators could lead to cost savings for validators and liquid staking networks.
• More use cases for LSTs: Liquid staking tokens (LSTs) allow participants to stake on Ethereum while using their LST, such as LsETH, to participate in DeFi and other web3 applications. The increased scalability and reduced cost of transacting on rollups after EIP-4844 could increase the number of use cases for LSTs, as Ethereum-based rollups will be able to offer more efficient innovations for, and support more users of, EVM-based tokens.

Learn more about EIP-4844 in the proposal here.

EIP-4788: Beacon block root in the EVM

EIP-4788 will make certain consensus layer data available in the execution layer. This will reduce the “trust” required to bring consensus layer data into smart contracts by allowing the data to be pulled in natively, increasing the security of liquid staking protocols, smart contract-based bridges, restaking solutions, and more.

There are a few technical concepts that are helpful for understanding EIP-4788:

• Hash tree roots in the Beacon Chain's blocks are cryptographic accumulators that allow a proof to verify data from the consensus state (such as validator balances, validator liveness, and more).
• Oracles are entities that provide data to blockchains from external sources, allowing smart contracts to programmatically execute actions based on data inputs that they do not have direct access to.

Today, if a smart contract needs to execute based on data from the consensus layer it has to rely on an oracle to provide that data. The oracle reads the data from the consensus layer (calculating that data from the Beacon Chain’s hash tree root) and must be trusted to report the data correctly in the execution layer.

EIP-4788 will commit the hash tree root of each Beacon Chain block in the corresponding execution layer header. This will allow the ecosystem to develop solutions for smart contracts to validate the consensus layer state data natively, reducing the need to rely on external oracles for this data.

What EIP-4788 means for ETH and liquid staking

• Reducing trust dependencies for liquid staking protocols: Today, liquid staking protocols rely on oracles for crucial data that their smart contracts need to execute, such as the balances on validators in a liquid staking protocol’s active set. Once EIP-4788 brings this data to the execution layer, liquid staking protocols will be able to remodel their offchain oracle processes, introducing the possibility of developing trust-minimized infrastructure such as a native ‘trustless oracle’ configuration. This can support the security of liquid staking protocols by reducing some of the technical risk introduced by oracles. It may also provide an opportunity to improve the efficiency of protocol operations. It’s important to note that these improvements will not come automatically with the introduction of EIP-4788; liquid staking protocols (and the smart contract ecosystem at large) will need to develop new solutions for calculating the data from the hash root efficiently and accurately, and for handling that decrypted data.
• Enhanced smart contract security: As external entities, oracles can introduce potential points of failure or manipulation to smart-contract based systems. By reducing the reliance on external oracles EIP-4788 may improve the security of smart contract platforms by reducing the risk that malicious or incorrect data is fed into the system.
• Increased flexibility and functionality: With direct access to the block root's data, liquid staking protocols can introduce new features or functionalities that were previously challenging due to oracle limitations. For instance, they could implement more dynamic staking or reward mechanisms with consensus-layer data cryptographically validated for correctness onchain. Beyond liquid staking EIP-4788 will benefit protocols like smart contract-based bridges and restaking solutions, allowing them to operate more securely and efficiently for a more robust and interconnected Ethereum ecosystem.

Learn more about EIP-4788 in the proposal here.

EIP-7514: Add max epoch churn limit

Ethereum's churn limit is a parameter that caps how many validators can be processed by the activation or exit queues within a window of time (per epoch, or ~6.4 minutes). This helps ensure that Ethereum’s validator set remains stable. Currently, the churn limit is determined by how many validators are active on Ethereum (you can learn more about how it works in our post on activation and exit queues).

EIP-7514 caps the churn limit for Ethereum activations—but not exits—at 8/epoch. This creates a maximum of ~1800 validators/day that can be activated to stake on Ethereum, although the number of exits that can be activated/epoch will remain scalable alongside the active set’s size. The proposal for EIP-7514 notes the strain that an ever-growing number of validators could have on the efficiency of Ethereum’s consensus mechanism, stating that EIP-7514 could help slow any theoretical exponential spike in ETH staking while other solutions to negate validator bloat are considered as needed.

What EIP-7514 means for ETH and liquid staking

• Cap on staking activations in a given window: EIP-7514 will slow the number of Ethereum validator activations by over 1,000/day from the current rate, putting a hard limit on the amount of stake that can be onboarded at any given time. However, the current activation queue length is only ~28 hours, as the spike in demand to stake post-Shapella has slowed. Overall the immediate impact of this EIP is expected to be low due to the current stability of activation demand.
• Smoothing spikes in demand: Stable activation demand for now doesn’t necessarily mean stable activation demand for always. At the time of writing in November 2023, Ethereum’s churn limit sits at 13, meaning that ~2,925 validators can be activated to stake on Ethereum per day. When we first covered how Ethereum’s churn limit works, just over 6 months ago in April 2023 (before Ethereum’s Shapella upgrade), the churn limit was at 8, meaning that ~1800 validators/day could be activated to stake at that time. EIP-7514 is in part a response to the surge in staking demand prompted by the Shapella upgrade, which unlocked staking withdrawals for the first time. Should another surge in staking demand occur, the fixed churn limit of 8 per epoch, as proposed by EIP-7514, would result in a longer wait time in the activation queue, since the rate of activations would not scale with the increased demand as it did in Q3 2023.
• Could support liquidity proposition for LSTs: LSTs could offer a solution to any liquidity problems caused by the churn limit’s lower cap on activations. By capping the activation churn limit, EIP-7514 could indirectly support the role of LSTs in providing liquidity and flexibility in a more predictable, rate-limited staking activation environment.

Learn more about EIP-7514 in the proposal here.

Other EIPs in the Dencun upgrade

EIP-1153: Transient storage opcodes

EIP-1153 introduces transient storage opcodes, which allow for the manipulation of a state that behaves identically to storage except that it is discarded after every transaction. The motivation behind this EIP is to provide a gas-efficient solution for inter-frame communication during Ethereum transactions, which is currently expensive.

Learn more about EIP-1153 in the proposal here.

EIP-5656: MCOPY - Memory copying instruction

EIP-5656 provides an efficient EVM instruction for copying memory areas, a basic operation used by languages such as Solidity and Vyper to build data structures. In its current form the operation has significant overhead; EIP-5656 aims to reduce the cost and complexity of memory copying by introducing the MCOPY instruction.

Learn more about EIP-5656 in the proposal here.

EIP-6780: SELFDESTRUCT only in same transaction

EIP-6780 introduces changes to the SELFDESTRUCT opcode. The current design of the opcode, which is no longer heavily used, will not be practical in the future with other planned Ethereum improvements. EIP-6780 adjusts that opcode so that some common uses of the opcode will still work while making it more practical to have in the protocol.

Learn more about EIP-6780 in the proposal here.

EIP-7044: Perpetually valid signed voluntary exits

EIP-7044 locks the validator voluntary exit signature domain on Capella to ensure that signed voluntary exits remain perpetually valid. Currently, these exits are only valid for two upgrades, which complicates some staking operations. This change requires exits to be signed using the Capella fork domain for continued validity across future forks.

Learn more about EIP-7044 in the proposal here.

EIP-7045: Increase max attestation inclusion slot

EIP-7045 extends the maximum attestation inclusion slot for validators. The change is identified as crucial for improving the underlying security of Ethereum’s PoS consensus’ LMD-GHOST protocol, which defines how the “real” chain of Ethereum blocks is determined. EIP-7045 could also set the stage for improvements to Ethereum’s block confirmation time.

Learn more about EIP-7045 in the proposal here.

EIP-7516: BLOBBASEFEE opcode

EIP-7516 supports the implementation of EIP-4844: Shard blob transactions (discussed above). EIP-7516 introduces the BLOBBASEFEE opcode, which allows smart contracts to obtain a block's blob base-fee—identical to the existing BASEFEE opcode but under EIP-4844’s new parameters.

Learn more about EIP-7516 in the proposal here.

Resources

Ethereum’s researchers and developers move fast, and many aspects of how these EIPs will be designed at a granular level may still change over the coming months.

A number of Ethereum community resources provide regular updates on the progress of Ethereum’s core devs, including:

• Ethereum Cat Herders: Dencun Upgrade: A comprehensive hub gathering development resources for the Dencun Upgrade
• EIP-4844 Readiness Checklist: Development progress toward EIP-4844’s mainnet deployment
• Week in Ethereum News: A weekly Ethereum update including regular development news

To stay up-to-date on the latest Liquid Collective news, including how Liquid Collective may implement any protocol developments in light of the Dencun upgrade, resources from across Liquid Collective’s teams and the Ethereum ecosystem, and more, sign up for monthly Liquid Collective Updates or follow Liquid Collective on X.