The Protocol: Is Ethereum's Dencun Update All It's Cracked Up To Be?

The main news this week centers around today's Ethereum upgrade, Dencun, which marks the blockchain's biggest technical shift in over a year. As CoinDesk's Margaux Nijkerk reports, the upgrade could help slice fees for Ethereum users through "proto-danksharding," an upgrade that's designed to optimize the network for layer 2 (L2) rollup networks like Optimism and Arbitrum. On the other hand, some developers warn that the shift could fragment the Ethereum ecosystem and set it down a path that risks costing it its competitive edge versus competing chains.

In this week's issue of The Protocol:

This article is featured in the latest issue of The Protocol, our weekly newsletter exploring the tech behind crypto, one block at a time. Sign up here to get it in your inbox every Wednesday. Also please check out our weekly The Protocol podcast.

ETHEREUM UPGRADES: Ethereum's biggest upgrade in over a year has finally happened. The update, Dencun, contains a slate of code changes designed to improve Ethereum for developers and make it quicker and cheaper for end-users. The main one that people are paying attention to is "proto-danksharding," which will allow abstract "blobs" of data to be posted to Ethereum alongside plain-old transactions. The idea of adding new lanes to the Ethereum highway via "sharding" is not a new one, but this first stab at the technique zeroes in specifically on decreasing fees for the "layer 2" chains that are rapidly becoming the primary venues by which people transact on Ethereum, which has seen its fees soar in recent years with rising network traffic. Developers hope the change will ramp up capacity on the network, allowing L2 blockchains like Arbitrum, Optimism and Coinbase's Base network to post larger volumes of data to Ethereum without paying an arm and a leg to do so. While blobs could help slice gas fees for L2 users, there remains some uncertainty around the extent to which proto-danksharding will ease the chain's fee woes: As any city planner will warn Ethereum's core developers, adding lanes to a highway (or "shards"/"blobs" to a blockchain) may not ease congestion as intended. Some developers have also voiced concern that Ethereum's embrace of L2s and native "data availability" risk fragmenting the ecosystem, and could lose the base chain its competitive edge versus rival networks.

GOING DEEP IN ON DEPIN: Speeds are improving and fees are reducing across blockchains, but we're 15 years into the crypto "revolution" and few use cases have caught on outside of the narrow realms of memecoins and finance. One of the major trends helping to expand the crypto conversation beyond DeFi and infrastructure is "decentralized physical infrastructure networks," or DePIN, which meld the physical world with blockchains to accomplish everything from easing supply chain inefficiencies to deploying unused compute resources. Projects that bridge blockchains with physical goods are nothing new: Helium, one of the more (in)famous examples of a DePIN project, is trying to create a wireless network that rewards contributors for setting up WiFi hubs. Filecoin, a veteran data-storage blockchain, rewards people for lending their unused hard drive space and remains a go-to example of how blockchain tech can solve real-world problems. The DePIN moniker was on the tip of everyone's tongue at last week's ETHDenver conference, but one might be tempted to wave it away as yet another marketing term meant to entice investors and users to tired ideas. But things have changed recently in the DePIN space, with improved blockchain tech and AI hype – buoyed by a surge in investor dollars – fueling the rise of newer projects like the compute-focused Akash and Render networks. If nothing else, the DePIN space is one to keep an eye on because it could help present an answer to an age-old question that has plagued crypto since its inception: Where are the use cases?

ALSO:

Top picks of the past week from our Protocol Village column, highlighting key blockchain tech upgrades and news.

Image shared by a rep of Burnt Banksy's performance at XION blockchain launch in Brooklyn on Wednesday. (Burnt Banksy)

See the entire Protocol Village list from this past week here.

Ethereum's biggest update in over a year, Dencun, finally arrived on Wednesday after years of planning. It's seen as a good thing. But maybe not universally so.

Proto-danksharding, the main change coming with the Dencun update (a portmanteau of two simultaneous updates: "Deneb" and "Cancun"), marks Ethereum's first step down the road of "sharding," a method for increasing the chain's transaction capacity by adding new lanes to its proverbial blockchain highway.

The feature is specifically aimed at reducing fees for layer 2 "rollup" networks – chains like Optimism, Arbitrum and Coinbase's Base network that run on top of Ethereum and offer users the ability to transact for cheap without leaving the ecosystem entirely.

While many developers are celebrating Dencun for its potential to accelerate Ethereum towards improved affordability, others worry that it risks setting the ecosystem down a path that could, in the long run, come back to bite it.

"The Dencun upgrade is Ethereum’s response to clear needs for greater scalability," Rich Rines, an initial contributor at Core DAO, which develops blockchain infrastructure, said in a message to CoinDesk. With Dencun, Ethereum is "focusing on empowering Layer 2 solutions," but "questions remain whether this is a long-term fix."

Click here for the full interview by Sam Kessler

Rand Hindi, CEO of Zama (Zama)

Fundraisings

Data and Tokens

Data and Tokens

Regulatory and Policy

Digital asset investment funds experienced a significant surge in weekly inflows this week, reaching a new record of $2.7 billion and bringing the total for the year to $10.3 billion, as reported by CoinShares. This influx has primarily been driven by Bitcoin (BTC), which contributed $2.6 billion to the week's total. According to CoinShares, the new inflows mean the industry could potentially surpass its record annual inflow of $10.3 billion set in 2021, all less than three months into 2024. U.S.-based spot ETFs have been actively acquiring thousands of Bitcoin coins daily, coinciding with a major price rally that saw Bitcoin reaching a new all-time high of over $72,000. Additionally, Solana (SOL) saw inflows topping $24 million last week, indicating broadening interest in cryptocurrencies beyond just Bitcoin.