Ethereum's Dencun upgrade: what's next for ETH and liquid staking
A look at the changes included in Ethereum's next network upgrade, and what the EIPs could mean for liquid staking protocols.
- Ethereum's Dencun upgrade is expected to take place during Q4 of 2023.
- 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.
- 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 Q4 of 2023, with some noting that there is a desire to execute Dencun before Devconnect takes place in November (though it may take up until Q1 2024 if any roadblocks arise in development).
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 on-chain 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 it 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 calculate the consensus layer state data natively, removing the need to rely on external oracles for this data.
What it 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 consensus layer 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 based on real-time consensus layer data. 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.
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.
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:
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.
LsETH users may still be subject to slashing losses. If slashing losses were to occur, they would be socialized pro rata for all LsETH user's starting with earned but unredeemed network rewards.
Liquid staking via the Liquid Collective protocol and using LsETH involves significant risks. You should not enter into any transactions or otherwise engage with the protocol or LsETH unless you fully understand such risks and have independently determined that such transactions are appropriate for you.
Any discussion of the risks contained herein should not be considered to be a disclosure of all risks or a complete discussion of the risks that are mentioned. The material contained herein is not and should not be construed as financial, legal, regulatory, tax, or accounting advice.
By Liquid Collective
Aug 25 2023