Author: Kernel Ventures Jerry Luo

Editor(s): Kernel Ventures Rose, Kernel Ventures Mandy, Kernel Ventures Joshua

TLDR:

  1. Ethereum has completed the first three upgrade phases, which addressed the problems of development thresholds, DoS attacks, and POS transition, respectively, and the main goal of the current upgrade phase is to reduce transaction fees and optimize the user experience.

  2. EIP-1553, EIP-4788, EIP-5656 and EIP-6780, have been realized to reduce the cost of inter-contractual interactions, to improve the efficiency of beacon chain access, to reduce the cost of data replication, and to limit the role authority of the SELFDESTRUCT byte code, respectively.

  3. By introducing blob data that is external to the block, EIP-4844 can greatly increase Ethereum's TPS and reduce data storage costs.

  4. The Cancun upgrade will have additional benefits for Ethereum-specific DAs while Ethereum Foundation is not open to DA solutions that do not utilize Ethereum at all in their data stores.

  5. The Cancun upgrade is likely to be relatively more favorable for Op Layer2 due to its more mature development environment as well as the increased demand for the Ethereum DA layer.

  6. The Cancun upgrade will raise the performance limit of the DApp, allowing it to have functionality closer to that of an app in Web2. On-chain games that haven't lost their popularity while need a lot of storage space on Ethereum are worth watching.

  7. The Ethereum is undervalued at this stage, and the Cancun upgrade could be the signal that Ethereum starts to soar up.

1. Ethereum's Upgrade

From October 16th of last year, when Cointelegraph published fake news about the pass of the Bitcoin ETF, to January 11th this year, when the ETF was finally passed, crypto market has experienced a surge in price. As bitcoin is more directly impacted by ETF, Ethereum and bitcoin's price diverged during this period. With bitcoin peaking at nearly $49,000, having recovered 2/3 of its previous bull market peak, Ethereum peaked at around $2,700, just over half of its previous bull market peak. But since the Bitcoin ETF landed, the ETH/BTC trend has rebounded significantly, in addition to the expectation of an upcoming Ethereum ETF, another important reason is that the delayed Cancun upgrade recently announced public testing on the Goerli test network, signaling that it is on the edge. As things stand, the Cancun upgrade will not take place until the first quarter of 2024 at the earliest. The Cancun upgrade is part of Ethereum's Serenity phase, designed to address Ethereum's low TPS and high transaction costs at this stage, and follows the Frontier, Homestead, and Metropolis phases of Ethereum. Prior to Serenity, Ethereum had gone through Frontier, Homestead, and Metropolis phases, which seperately addressed problems of developing thresholds, Dos attacks, and POS transition on Ethereum. The Ethereum roadmap clearly states that the main goal of the current phase is to realize cheaper transactions and a better user experience.

Source: TradingView

2. Content of the Cancun Upgrade

As a decentralized community, Ethereum's upgrades are based on proposals made by the developer community that are ultimately supported by the majority of the Ethereum community, including the ERC proposals that have been adopted and those that are still under discussion or will be implemented on the mainnet soon, collectively referred to as EIP proposals. At the Cancun upgrade, five EIP proposals are expected to be adopted: EIP-1153, EIP-4788, EIP-5656, EIP-6780 and EIP-4844.

2.1 Essential Mission EIP-4844

  • Blob: EIP-4844 introduced a new transaction type for Ethereum, the blob, a 125kb data block. Blobs compress and encode transaction data and are not permanently stored on Ethereum as CALLDATA bytecodes, which greatly reduces gas consumption, but cannot be accessed directly in EVMs.The EIP-4844 implementation allows for up to two blobs per transaction and up to 16 blobs per block. After the implementation of EIP-4844, each transaction can carry up to two blobs, and each block can carry up to 16 blobs. However, the Ethereum community recommends that each block carry eight blobs, and when the number exceeded 8, it can continue to be carried, but will face a relatively constant increase in gas cost until it reaches the maximum of 16 blobs.

In addition, two other core technologies utilized in EIP-4844 are KZG polynomial promises and temporary storage, which were analyzed in detail in our previous article Kernel Ventures: Exploring Data Availability — In Relation to Historical Data Layer Design, which explored the design of the DA and historical data layers. In summary, EIP-4844's changes to the size of Ethereum's individual block capacity and the location where transaction data is stored have significantly increased the TPS of Ethereum network while reducing its gas.

2.1 Side Missions EIP-1553

  • EIP-1553: This proposal is made to reduce storage costs during contract interactions. A transaction on Ethereum can be broken down into multiple frames created by the CALL instruction set, which may belong to different contracts and thus may involve the transfer of information across multiple contracts. There are two ways of transferring state between contracts, one is in the form of input/output, and the other is to call SSTORE/SLOAD bytecode for on-chain permanent storage. In the past, data is stored and transmitted in the form of memory, which has lower cost, but if the whole transmission process passes through any untrustworthy third-party contract, there will be a huge security risk. However, if use the SSTORE/SLOAD bytecode, it will bring a considerable amount of storage overhead and increase the burden of on-chain storage. EIP-1553 solves this problem by introducing the instantaneous storage opcodes TSTORE and TLOAD. Variables stored by these two bytecodes have the same properties as those stored by the SSTORE/SLOAD bytecodes and cannot be modified during transmission. However, the difference is that the transiently stored data will not remain on the chain after the transaction is over, but to be destroyed like the temporary variables, which realize the security of the state transmission process and the relatively low storage cost.

Source: Kernel Ventures

  • EIP-4788: In the beacon chain after Ethereum's POS upgrade, each new execution block contains the Roots of the parent beacon block, and even if the missing of some of the older Roots, it only need to keep some of the latest Roots during the process of creating a new block due to the reliability of the Roots that have been stored by the Consensus Layer. However, in the process of creating new blocks, frequently requesting data from the EVM to the consensus layer will cause inefficiency and create possibilities for MEV. Therefore, in EIP-4788, it is proposed to use a specialized Beacon Root Contract to store the latest Roots, which makes the Roots of the parent beacons exposed by EVM, and greatly improves the efficiency of calling for data.

Source: Kernel Ventures

  • EIP-5656: Copying data in memory is a very high-frequency basic operation on Ethereum, but performing this operation on the EVM incurs a lot of overhead. To solve this problem, the Ethereum community proposed the MCOPY opcode in EIP-5656, which allows efficient replication on EVMs. MCOPY uses a special data structure for short-term storage of the data in charge, including efficient slice access and in-memory object replication. Having a dedicated MCOPY instruction also provides forward-looking protection against changes in the gas cost of CALL instructions in future Ethereum upgrades.

Source: Kernel Ventures

  • EIP-6780: In Ethereum, SELFDESTRUCT can destroy a contract and clear out all the code and all the state associated with that contract. However, in the Verkle Tree structure, that will be used in the future of Ethereum, this poses a huge problem. In Ethereum that uses Verkle Tire to store state, the emptied storage will be marked as previously written but empty, which will not result in observable differences in EVM execution, but will result in different Verkle Commitments for created and deleted contracts compared to operations that did not take place, which will result in data validation issues for Ethereum in the Verkle Tree structure. data validation problems under the Verkle Tree structure. As a result, SELFDESTRUCT in EIP-6780 retains only the ability to return ETH from a contract to a specified address, leaving the code and storage state associated with that contract on the Ethereum.

3. Prospect of Different Verticals Post Cancun Upgrade

3.1 DA

3.1.1 Profit Model

For an introduction to the principles of DA and the various DA types, it can be learned from our organization's previous article Kernel Ventures: Exploring Data Availability — In Relation to Historical Data Layer Design. For DA projects, the revenue comes from the fees paid by users for storing data on them, and the expenses come from the fees paid to maintain the operation of the storage network and the persistence and security of the stored data. The remaining value of the network is the value accumulated by the network, and the main means for DA projects to realize the value increase is to improve the utilization of network storage space, so as to attract as many users as possible to use the network for storage. On the other hand, improvements in storage technology such as data compression or slice-and-dice storage can reduce network expenses, and on the other hand, realize higher value accumulation.

3.1.2 Detachment of DA

There are three main types of DA services today, DA for main chain, modularization DA, and Storage Chain DA, which are described and differentiated in Kernel Ventures: Exploring Data Availability — In Relation to Historical Data Layer Design.

3.1.3 Impact of Cancun Upgrade on DA

  • User requirements: After the Cancun upgrade, the historical transaction data of Ethereum will increase by tens of times. These historical data will also bring about greater storage needs. Since the Ethereum after the Cancun upgrade has not realized the improvement of storage performance, the DA layer of the main chain adopts a simple and regular cleaning of these histories, and this part of the data storage market will naturally fall on the heads of all kinds of DA projects, which will bring about greater user demand.

  • Direction of Development: The increase in the historical data of Ethereum after the Cancun upgrade will prompt major DA projects to improve the efficiency and interoperability of data interaction with Ethereum in order to better capture this part of the market. It is foreseeable that all kinds of cross-public chain storage bridge technologies will become the focus of the development of storage public chain DAs and modular DAs, while for the main chain DAs of Ethereum, it is also necessary to consider how to further enhance their compatibility with the main network and minimize the transmission costs and risks.

3.1.4 Cancun Upgrade and Various DA Verticals

The Cancun upgrade brought faster data growth to Ethereum while not changing the data storage method synchronized across the network, which made the main chain have to carry out regular cleaning of a large amount of historical data and delegate the function of long-term storage of transaction data. However, this part of the historical data is still in demand in the process of airdrops conducted by project parties and data analysis by on-chain analytics organizations. The value of the data behind it will attract competition from different DA projects, and the key to determining the market share lies in the data security and storage cost of DA projects.

  • DA for main chain: In the current stage of DA for main chain projects, such as EthStorage, its storage market mainly comes from some images, music and other large-memory data of the NFT project on Ethereum. Due to the high compatibility between the node clusters and Ethereum, the main chain DA can realize secure data interaction with the main network of Ethereum at a low cost. At the same time, it stores the storage index data on the smart contract of Ethereum and does not completely detach the DA layer from Ethereum, which has received strong support from the Ethereum Foundation. For the storage market brought by Ethereum, the main chain-specific DA has a natural advantage over other DAs.

  • Modularization DA and Storage Chain DA: These projects are difficult to achieve a competitive advantage in historical data storage performance in the Cancun upgrade compared to the DA for main chain. However, at this stage, DA for main chain is still in the testing stage and has not been fully implemented, while the Cancun upgrade is imminent, and if the dedicated DA projects fail to provide an implemented storage solution before the Cancun upgrade, this round of data value mining may still be dominated by modular DAs.

3.1.5 Opportunities for DA Post Cancun Upgrade

  • EthStorage: DA for main chain, like EthStorage, will be the biggest beneficiary of the Cancun upgrade, which deserves attention. In addition, after the recent news that the Cancun upgrade may take place in February this year, EthStorage's official X account has also been very active, releasing its latest official website and annual report, and the marketing seems to be very successful.

Let’s celebrate the reveal of our new website! Please visit http://EthStorage.io to see the brand new design!

Meet the Frontier of Scalability

Real-time Cost Comparison with Ethereum

How EthStorage Works

Core Features of EthStorage

Applications Enabled by EthStorage

However, comparing the content of the latest official website with that of the 2022 version, except for the cooler front-end effect and more detailed introduction, it has not realized too many innovations in service functions, and the main promotion is still storage and Web3Q domain name service. If interested, can click the following link to get the test token W3Q to experience EthStorage service on Galileo Chain network. To get the token, you need to have a W3Q domain name or an account with a balance of more than 0.1 ETH on the main network. Judging from the recent outpouring of water from the tap, there has not been very large participation at this stage, despite some publicity. However, combined with the fact that EthStorage just received a $7 million seed round of financing in July this year and did not see any obvious source of this funding, it is possible that the project is secretly brewing some infrastructure advancement, waiting for the Cancun upgrade to arrive in the pre-release to attract the greatest heat.

EthStorage's Faucet, Source: Web3q.io

  • Celestia: Celestia is currently the leading modular DA project. Compared to the DA for main chain projects still in development, Celestia have started to make its mark since the last bull market and received its first round of funding. After more than two years of precipitation, Celestia perfected its rollup model, token model, and finally, after a long period of testing, completed its main online launch and first airdrop on October 31st. The price of the coin has been rising since the market opened and recently exceeded US$20. According to the current circulation of 150 million TIA, the market capitalization of this project has already reached 3 billion US dollars. However, considering the limited service group of the blockchain historical storage track, the market capitalization of TIA has far exceeded that of Arweave, a traditional storage public chain with a richer profit model, and directly pushed the market capitalization of Filecoin, although there is still some room for growth compared to the bull market, and the market capitalization of TIA is somewhat overestimated at this stage. However, with the support of the Star project and the enthusiasm for airdrops that has not dissipated, if the Cancun upgrade can move forward in the first quarter of this year as expected, Celestia is still a play to watch. However, there is one risk worth noting: the Ethereum Foundation has repeatedly emphasized in discussions involving Celestia that any project that departs from the Ethereum's DA layer will not be Layer2, indicating a rejection for third party storage projects such as Celestia. The possible presentation of the Ethereum Foundation before and after the Cancun upgrade will also add uncertainty to Celestia's pricing.

Source: CoinmarketCap

3.2 Layer2

3.2.1 Profit Model

Due to the increasing number of users and the continuous development of projects on Ethereum, the low TPS of Ethereum has become a huge obstacle to the further development of its ecosystem, and the high transaction fees on Ethereum also make it difficult to promote some projects involving complex interactions on a large scale. However, many projects have already landed on Ethereum, and there are huge costs and risks in migrating, and at the same time, except for the Bitcoin public chain focused on payment, it is difficult to find a public chain with the same security as Ethereum. The emergence of Layer2 is an attempt to solve the above problems by placing all transaction processing and calculations on another public chain (Layer2), verifying the packaged data through the smart contracts bridged with Layer1, and changing the status on the main network. Layer2 focuses on transaction processing and validation, using Ethereum as the DA layer to store compressed transaction data, resulting in faster speeds and lower computational costs. Users who wish to use Layer2 to execute transactions must purchase Layer2 tokens and pay the network operator in advance. The Layer2 network operator has to pay for the security of the data stored on Ethereum, and the revenue of Layer2 is the amount paid by users for the security of the Layer2 data minus the amount paid by Layer2 for the security of the data on Layer1. So for Layer2 on Ethereum, the following two improvements can bring more revenue. From the perspective of open source, the more active the Ethereum ecosystem is, the more projects there are, the more users and projects will have the need to reduce gas and accelerate transactions, which will bring a larger user base to the Layer2 ecosystem, and under the premise that the profit from a single transaction remains unchanged, more transactions will bring more revenue to the Layer2 network operator. From the point of view of cost saving, if the storage cost of Ethereum decreases, the DA layer storage cost paid by the Layer2 project side decreases, and the number of transactions remains unchanged, the Layer2 operator can also get more revenue.

3.2.2 Detachment of Layer2

Around 2018, the Layer2 scheme of Ethereum presents a blossoming situation, and there are 4 kinds of schemes: Sidechain, Rollup, State Channel and Plasma. However, due to the risk of data unavailability during off-chain transmission and a large number of grief attacks, State Channel has been gradually marginalized from Layer2 schemes at this stage, and Plasma is relatively niche and cannot enter the top 10 in terms of TVL in Layer2, so it will not be discussed there. Finally, Layer2 solutions in the form of sidechains that do not use Ethereum as a DA layer at all have been gradually excluded from the definition of Layer2. In this paper, we will only discuss the mainstream Layer2 scheme Rollup and analyze it with its sub-tracks ZK Rollup and Op Rollup.

Optimistic Rollup

  • Implementation Principle: To begin with, Optimistic Rollup chain needs to deploy a bridge contract on the Ethereum main network, through which it can realize the interaction with the Ethereum main network.Op Layer2 will batch pack the user's transaction data and send it to the Ethereum, which includes the latest state root of the account on Layer2, the batch processed root and the compressed transaction data. data. At this stage, these data are stored in the form of Calldata in the Chain Bridge contract, although it has reduced a lot of gas compared to the permanent storage in MPT, but it is still a considerable data overhead, and also creates a lot of obstacles to the possible performance improvement of Op Layer2 (Optimistic Rollup Layer2) in the future.

Source: Kernel Ventures

  • Current status: These days, Op Layer2 is the top ecosystem of Layer2, with the top five Layer2 in TVL all from Optimistic Rollup ecosystem. Also, the combined TVL of Optimism and Arbitrium alone have exceeded 16 billion dollars.

Source: L2BEAT

  One of the main reasons why Op Rollup ecosystem can occupy the leading position now is its friendly development environment. It has completed the first round of Layer2 release and mainnet launch before ZK Rollup, which attracted a large number of DApp developers suffering from the limitations of Ethereum fees and low TPS, and shifted the position of DApp development from Layer1 to Layer2 migration. At the same time, Op Layer2 has a higher compatibility with EVM in the bottom layer, which clears the obstacles for the migration of projects on the main network of Ethereum, and realizes the deployment of various types of DApps on Ethereum such as Uniswap, Sushiswap, Cureve and so on to Layer2 in the fastest possible time, and even attracts projects such as Wordcoin and other projects to migrate from the main network of Polygon. At the present stage, Op Layer2 has not only Uniswap V3, a leading Ethereum DeFi, and GMX, a native DeFi project with a TVL of more than 100 million dollars, but also Friend.tech, a SocialFi project with a transaction fee of more than 20 million dollars, which not only completes the accumulation of the number of projects, but also promotes the qualitative breakthrough of the whole ecosystem by the high-quality projects in each track. But in the long run, ZK Lite will not be the best choice. However, in the long run, ZK Layer2 (ZK Rollup Layer2) has a higher TPS limit and lower gas consumption for a single transaction, and Op Layer2 will face a fierce competition with ZK Layer2 when ZK Rollup technology is gradually improved.

Source: Dune

ZK Rollup (Zero-knowledge Rollup)

  • Implementation Principle: The transaction data in ZK Layer2 has the similar processing method as Op Layer2, which is packaged and processed in Layer2 and then returned to the smart contract in Layer1 to be stored in Calldata. However, the transaction data in Layer2 has an extra step of generating ZKp, and it does not need to return the compressed transaction data to the network, but only needs to return the transaction root and batch root with ZKp used for verifying the legitimacy of the corresponding transaction. The data returned to Layer1 via ZK Rollup does not require any window period and can be updated in real time on the main network after validation.

Source: Kernel Ventures

  • Current status: ZK Layer2 has become the second largest Layer2 ecosystem, right after Op Layer2 with 4 of the top 10 Layer2 in TVL ranking are ZK Layer2. But the general phenomenon is that there are not any ZK Layer2 strong enough as Op Layer2. While we all think that ZK Layer2 have a good prospect, they just can't be developed. The first reason is that the early release of Op Layer2 has attracted many developers to implement projects on it, and if they can't get enough benefits from project migration, it is unlikely that they will migrate their projects that have already generated stable income on Op Layer2. Secondly, many ZK Layer2 projects are still struggling with the compatibility of the underlying layer with Ethereum. For example, Linea, a ZK star project, is currently incompatible with many EVM opcodes, which brings a lot of development obstacles for developers to adapt to EVM. And another star project, zkSync, is currently unable to realize compatibility with the underlying layer of EVM, and can only be compatible with some development tools of Ethereum.

Source: Kernel Ventures

  Compatibility with Ethereum also makes it difficult to migrate native projects to it. Since bytecode is not fully interoperable, projects need to make changes to the underlying contract to adapt to ZKEVM, a process that involves many difficulties and risks and thus slows down the migration process of Ethereum native projects. It can be seen that at this stage, most of the projects on ZK Layer2 are native projects, and they are mainly DeFi such as Zigzag and SyncSwap, which are relatively less difficult to develop, and the total number and diversity of projects on ZK Layer2 are waiting for further development. However, the advantage of ZK Layer2 lies in its technological advancement. If the compatibility between ZKEVM and EVM can be realized and the ZKp generation algorithm can be perfected, the performance of ZK Layer2 will have a better upper limit compared to Op Layer2. This is also the reason why ZK Layer2 projects continue to emerge in the Op Layer2-dominated market. As the Op Layer2 track has already been carved up, the most appropriate way for the latecomers to attract users to migrate from their original networks is to propose an expected better solution. However, even if ZK Layer2 is technically perfected one day, if Op Layer2 has formed a comprehensive ecosystem with enough projects on the ground, even if there is a Layer2 with better performance, whether users and developers are willing to take the huge risk of migrating will still be an unknown. In addition, Op Layer2 is also making improvements at this stage to stabilize its ecological position, including Optimism's open-source Op Stack to assist other Op Layer2 developers in rapid development, and improvements to the challenge method such as the dichotomous challenge method. While ZK Layer2 is in the process of improvement, Op Layer2 is not slowing down its development, so the important task of ZK Layer2 at this stage is to grasp the improvement of cryptographic algorithms and EVM compatibility in order to prevent users' dependence on the Op Layer2 ecosystem.

3.2.3 Impact of Cancun Upgrade on Layer2

  • Transaction speed: After Cancun's upgrade, a block can carry up to 20 times more data through a blob, while keeping the block's exit speed unchanged. Therefore, theoretically, Layer2, which uses Layer1 as the DA layer and settlement layer, can also get up to 20 times the TPS increase compared to the original. Even at a 10x increase, any one of the major Layer2 stars would exceed the highest transaction speed in the history of the mainnet.

Source: L2BEAT

  • Transaction fee: One of the most important factors limiting the decline of the Layer2 network is the cost of data security provided to Layer1, which is currently quoted at close to $3 for 1KB of Calldata data stored on an Ethereum smart contract. But through the Cancun upgrade, Layer2 packaged transaction data is only stored in the form of blobs in the consensus layer of Ethereum, and 1 GB of data storage costs only about $0.1 a month, which greatly reduces the operating costs of Layer2. This greatly reduces Layer2's operating costs. As for the revenue generated from this open source, Layer2 operators will surely give a portion of it to users in order to attract more users and thus reduce Layer2's transaction costs.

  • Scalability: The impact of the Cancun upgrade on Layer2 is mainly due to its temporary storage scheme and the new blob data type. Temporary storage periodically removes old state on the main network that is not useful for current validation, which reduces the storage pressure on nodes, thus speeding up network synchronization and node access between Layer1 and Layer2 at the same time. The blob, with its large external space and flexible adjustment mechanism based on the price of gas, can better adapt to changes in the network transaction volume, increasing the number of blobs carried by a block when the transaction volume is too large, and decreasing it when the transaction volume drops.

3.2.4 Cancun Upgrade and Various Layer2 Verticals

The Cancun upgrade will be positive for the entire Layer2 ecosystem. Since the core change in the Cancun upgrade is to reduce the cost of data storage and the size of individual blocks on Ethereum, Layer2, which uses Ethereum as its DA layer, will naturally see a corresponding increase in TPS and a reduction in the storage fees it pays to Layer1. However, due to the difference in the degree of use of the two Rollups for the Ethereum DA layer, there will be a difference in the degree of benefit for Op Layer2 and ZK Layer2.

  • Op Layer2: Since Op Layer2 needs to leave the compressed transaction data on the Ethereum for recording, it needs to pay more transaction fees to the Ethereum than ZK Layer2. Therefore, by reducing the gas consumption through EIP-4844, Op Layer2 can get a larger reduction in fees, thus narrowing the disadvantage of ZK Layer2 in terms of fee difference. At the same time, this round of Ethereum gas reduction is also bound to attract more participants and developers, compared with ZK Layer2, which has not issued any coins and its underlying layer is difficult to be compatible with EVMs, more projects and capitals will tend to flock to Op Layer2, especially Arbitrium, which has a strong performance in the recent period, which may lead to a new round of development of Layer2 ecosystem dominated by Op Layer2. This may lead to a new round of development in the Layer2 ecosystem led by Op Layer2, especially for SocialFi and GameFi projects, which are affected by high fees and have difficulties in providing quality user experience. Along with that, this phase of Layer2 is likely to see the emergence of many quality projects that can approach the Web2 user experience. If this round of development is taken by Op again, it will further widen the gap with the ZK Layer2 ecosystem, making it difficult enough for ZK Layer2 to catch up.

  • ZK Layer2: Compared to Op Layer2, the benefit of downward gas adjustments will be smaller because ZK Layer2 does not need to store transaction-specific information on the chain, and although ZK Layer2 is still in the process of development and does not have the large ecosystem of Op Layer2, the facilities of Op Layer2 have already been improved, and there is more intense competition for the development of Op Layer2, which is attracted by the Cancun upgrades. However, the facilities on Op Layer2 are already well established and there is more competition for development on it, and it may not be wise for the new entrants attracted by the Cancun upgrades to compete with the already mature Op Layer2 developers. If ZK Layer2 is able to improve the supporting facilities for developers at this stage and provide a better development environment for developers, considering the better expectation of ZK Layer2 and the fierce competition in the market, new developers may choose to flock to the ZK Layer2 track, and this process will speed up the process of catching up with ZK Layer2, and achieve the goal of catching up with Op Layer2 before Op Layer2 completely dominates the market. before Op Layer2 completely dominates the market.

3.2.5 Opportunities for Layer2 Post Cancun Upgrade

  • DYDX:Although DYDX is a DEX deployed on Ethereum, its functions and principles are very different from traditional DEX on Ethereum such as Uniswap. First of all, it chooses thin orders instead of the AMM trading model used by mainstream DEXs, which allows users to have a smoother trading experience and creates a good condition for leveraged trading on it. In addition, it utilizes Layer 2 solutions such as StarkEx to achieve scalability and process transactions, packaging transactions off-chain and transmitting them back on-chain. Through the underlying principles of Layer2, DYDX allows users to obtain a far lower transaction cost than traditional DEX, with each transaction costing only about $0.005. At a time when the Cancun upgrade and the volatility of Ethereum and related tokens is almost certain to see a surge in high-risk investments such as leveraged trading. Through the Cancun upgrade, the transaction fees on DYDX will surpass those of CEX even for small transactions, while providing higher fairness and security, thus providing an excellent trading environment for high-risk investments and leveraged trading enthusiasts. From the above perspective, the Cancun upgrade will bring a very good opportunity for DYDX.

  • Rollup Node:The data that was regularly purged in the Cancun upgrade is no longer relevant for the validation of new out-of-block, but that doesn't mean that there is no value in that purged data. For example, projects that are about to be airdropped conveniently need complete historical data to determine the security of the funds of each project that is about to receive airdrops, and there are also some on-chain analytics organizations that often need complete historical data to trace the flow of funds. At this time, one option is to query the historical data from the Rollup operator of Layer2, and in the process the Rollup operator can charge for data retrieval. Therefore, in the context of the Cancun upgrade, if we can effectively improve the data storage and retrieval mechanism on Rollup, and develop related projects in advance for layout, it will greatly increase the possibility of project survival and further development.

3.3 DApp

3.3.1 Profit Model

Similar to Web2 applications, DApps serves to provide a service to users on Ethereum. For example, Uniswap provides users with real-time exchange of different ERC20 tokens; Aave provides users with overcollateralized lending and flash lending services; and Mirror provides creators with decentralized content creation opportunities. However, the difference is that in Web2, the main way to profit is to attract more users to the platform through low-cost and high-quality services, and then use the traffic as a value to attract third-party advertisements and profit from the advertisements. However, DApp maintains zero infringement on users' attention in the whole process, and does not provide any recommendation to users, but collects the corresponding commission from a single service after providing a certain service to users. Thus, the value of a DApp comes mainly from the number of times users use the DApp's services and the depth of each interaction, and if a DApp wants to increase its value, it needs to provide services that are better than those of similar DApps, so that more developers will tend to use it rather than other DApps.

3.3.2 Detachment of DApps

At this stage, Ethereum DApps are dominated by DeFi, GameFi, and SocialFi. There were some Gamble projects in the early days, but due to the limitation of Ethereum's transaction speeds and the release of EOS, which is a more suitable public chain, the Gamble projects have gradually declined on Ethereum. These three types of DApps provide financial, gaming and social services respectively, and realize value capture from them.

DeFi

  • Implementation Principle: DeFi is essentially one or a series of smart contracts on Ethereum.In the release phase of DeFi, relevant contracts (such as coin contracts, exchange contracts, etc.) need to be deployed on the Ethereum main network, and the contracts will realize the interaction between DeFi function modules and Ethereum through the interfaces. When users interact with DeFi, they will call the contract interface to deposit, withdraw and exchange coins, etc. The DeFi smart contract will package the transaction data, interact with Ethereum through the script interface of the contract, and record the state changes on the Ethereum chain. In this process, the DeFi contract will charge a certain fee as a reward for upstream and downstream liquidity providers and for its own profit.

  • Current status: DeFi has an absolute dominance among DApps. Apart from cross-chain projects and Layer2 projects. DeFi occupies other places in the top 10 DApps in terms of contract assets on Ethereum. Until this time, the cumulative number of DeFi users on Ethereum has exceeded 40 million. Although the number of monthly active users has declined from the peak of nearly 8 million in November 2021 due to the impact of the bear market, with the recovery of the market, the number of monthly active users has also recovered to about half of the peak, and is waiting for the next round of the bull market to make another surge. Meanwhile, DeFi is becoming more diverse and versatile. From the early cryptocurrency trading and mortgage lending to the current leveraged trading, forward buying, NFT financing, flash loans, etc., financial methods that can be realized in Web2 have been gradually realized in DeFi, even somthing can't be realized in Web2, including flash loans, have also been realized in DeFi.

Source: DAppRadar

SocialFi

  • Implementation Principle: Similar to traditional design platforms, SocialFi supports individuals to create content and publish the created content through the platform to spread it and further attract followers for the accounts, while users can access the content they need and obtain the services they need through the platform. The difference is that the content published by users, the interaction records between the content publishers and their fans, and the information of the accounts themselves are all decentralized through blockchain smart contracts, which means that the ownership of the information is returned to each individual account. For the SocialFi platform, the more people are willing to create and share content through its platform, the more revenue it can generate by providing these services. The cost of user interaction on the SocialFi platform minus the cost of storing account and transaction data is the profit of the SocialFi project.

  • Current status: Although the UAW (User Active Wallet) of SocialFi seems to be comparable to DeFi's when it comes to the Head project, its volume often comes from the airdrop expectation of some projects, which is unsustainable. After the intial boom, Friend.tech had less than 1,000 UAWs these days. And when comparing with DeFi outside the top 5, it is more supportive of this conclusion. The root cause of this is that SocialFi's high service fees and inefficiencies have made it impossible for SocialFi to take on the social attributes it is supposed to have, and it has been reduced to a purely speculative platform.

Source: DAppRadar

GameFi

  • Implementation Principle: The application of GameFi is similar to that of SocialFi, except that the object of application has become a game. At this stage, the mainstream profit method of GameFi is to sell the props in the game for profit.

  • Current status: If the project owner wants to get more profits, more people to participate in the game is essentially needed. At this stage, there are only two things that can attract users to participate in the game, one is the fun of the game, which drives users to buy props in order to get the right to participate in the game or a better gaming experience. The other is the expectation of profitability, as users believe they can sell the props at a higher price in the future. The first model is similar to Steam, where the program gets real money and the users get to enjoy the game. In the other model, if the users and the project's profits come from the constant influx of new users, and once the new funds can not offset the project's props issued, the project will quickly fall into a vicious cycle of selling, market expectations decline, and continue to sell and difficult to sustainably realize the revenue, with the Ponzi attribute. Due to the limitations brought by blockchain fees and transaction speed, GameFi at this stage is basically unable to achieve the user experience required by the former mode, and is mostly based on the second mode.

3.3.3 Impact of Cancun Upgrade on DApps

  • Performance optimization: Cancun upgraded a block can carry more transaction data, corresponding to the DApp can realize more state changes. According to the average expansion of 8 blob capacity calculation, Cancun upgraded DApp processing speed can reach ten times the original.

  • Reduced Costs: Data storage costs are a fixed expense for DApps, and both Layer1 and Layer2 DApps directly or indirectly utilize Ethereum to record the status of accounts within the DApp. With the Cancun upgrade, every transaction in a DApp can be stored as a blob of data, significantly reducing the cost of running the DApp.

  • Functionality Expansions: Due to the high cost of storage on Ethereum, project owners are deliberately reducing the amount of data that can be uploaded during the development of DApps. This has made it impossible to migrate many Web2 experiences to DApps, such as SocialFi's inability to support video creation in Twitter, or even if they could, the data would not be as secure as Ethereum on the underlying chain, and GameFi's gameplay options are often low-level and uninteresting, as every state change needs to be recorded on the chain. With the Cancun upgrade, project owners will have more opportunities to experiment with these aspects.

3.3.4 Cancun Upgrade and Various DApp Verticals

  • DeFi: The impact of the Cancun upgrade on DeFi is relatively small because the only thing that needs to be recorded in DeFi is the current state of the user's assets in the contract, whether it is pledged, borrowed or other states, and the amount of data required to be stored is much smaller than that of the other two types of DApps. However, the increase of Ethereum's TPS brought by the Cancun upgrade can greatly facilitate the arbitrage business of DeFi, which has a high trading frequency, and the leverage business, which needs to complete the opening and closing of positions in a short period of time. At the same time, the reduction in storage costs, which is not evident in single-coin exchanges, can also add up to significant fee savings in leveraged and arbitrage transactions.

  • SocialFi: The Cancun upgrade has the most immediate impact on SocialFi's performance. The Cancun upgrade improves the ability of SocialFi's smart contracts to process and store large amounts of data to provide a superior user experience that is closer to that of Web2. At the same time, basic interactions such as user creation, commenting, liking, etc. on SocialFi can be done at a lower cost, thus attracting truly socially oriented long-term participants.

  • GameFi: For Asset on chain games in the last bull market, the effect is similar to DeFi, with a relatively small decrease in storage cost. But the increase in TPS can still benefit high frequency interactions, timeliness of interactions, and support for interactive features that can improve game playability. Fully On-chain games are more directly affected by the Cancun upgrade. Since all game logic, state, and data is stored on the chain, the Cancun upgrade will significantly reduce the cost of operation and user interaction for the Fully On-chain game. At the same time, the initial deployment cost of the game will also be greatly reduced, thus lowering the threshold for game development and encouraging the emergence of more fully chain games in the future.

3.3.5 Opportunities for DApps Post Cancun Upgrade

  • Dark Forest: Since the third quarter of 2023, perhaps because of the question that traditional asset-on-chain games are not decentralized enough, or simply because the traditional GameFi narrative seemed lukewarm, capital began to look for new growth points, Fully On-chain games began to explode and attracted a lot of attention. But for the fully on-chain game on Ethereum, the transaction speed of 15 TPS and the storage cost of 16 gas single bytes for the CALLDATA field severely limit the upper limit of its development. The landing of the Cancun upgrade can be a good improvement to both problems, combined with the continuous development of related projects in the second half of 2023, the Cancun upgrade can bring a relatively large positive for this track. Considering the head effect, Dark Forest is one of the few fully on-chain games from the last round of the bull market, with a relatively well-established community base, and has not yet issued its own tokens. It should have good prospects if the project side takes action around the time of Cancun's upgrade.

4. Conclusion

The landing of the Cancun upgrade will not only bring higher TPS and lower storage costs to Ethereum, but also a surge in storage pressure. DA and Layer2 are the ones that will be heavily impacted by the upgrade. In contrast, DA projects that do not use Ethereum in their underlying data storage are not supported by the Ethereum development community, and while there are opportunities, it need to be more cautious when dealing with specific projects. Since most of the ZK system Layer2 tokens have not yet been introduced, and Arbitrium has strengthened significantly in the recent period in anticipation of the Cancun upgrade, if the price of Arb's coins can stabilize through the pullback phase, Arb and its ecosystem of related projects should see a good rise along with the landing of Cancun. Due to the influx of speculators, the DYDX project may also have some opportunity at the Cancun upgrade node. Finally, Rollup has a natural advantage for storing Layer2-related transaction history data, when it comes to providing historical data access services, Rollup on Layer2 will also be a good choice.

If we take a longer-term perspective, the Cancun upgrade has created conditions for the development and performance of various types of DApps, and in the future, we will inevitably see Web3 projects gradually approaching Web2 in terms of interactive functions and real-time performance, which will bring Ethereum to the goal of a world computer, and it is worth making long-term investments for any pragmatic development projects. Ethereum has been in a weak position relative to Bitcoin in the recent market rally, and while Bitcoin has recovered to nearly 2/3 of its previous bull market high, Ethereum has not yet recovered 1/2 of its previous high.The arrival of the Cancun upgrade may change this trend and bring Ethereum a round of complementary gains, after all, as a rare public chain that can maintain profitability while in the midst of token deflation, there is indeed an undervalued value at this stage.

Kernel Ventures is a research & dev community driven crypto VC fund with more than 70 early stage investments, focusing on infrastructure, middleware, DApps, especially ZK, Rollup, DEX, Modular Blockchain, and verticals that will onboard the next billion of users in crypto such as Account Abstraction, Data Availability, Scalability and etc. For the past seven years, we have committed ourselves to supporting the growth of core dev communities and University Blockchain Associations across the world.

Reference

  1. eips.Ethereums-core: https://eips.Ethereum.org/core

  2. EthStorage 官网: https://eth-store.w3eth.io/#/

  3. EIP-1153: Transient storage opcodes: https://eips.Ethereum.org/EIPS/eip-1153

  4. EIP-4788: Beacon block root in the EVM: https://eips.Ethereum.org/EIPS/eip-4788

  5. EIP-5656: MCOPY - Memory copying instruction:https://eips.Ethereum.org/EIPS/eip-5656

  6. EIP-6780: SELFDESTRUCT only in same transaction:https://eips.Ethereum.org/EIPS/eip-6780

  7. 零知识卷叠如何运作:https://Ethereum.org/zh/developers/docs/scaling/ZK-rollups#how-do-ZK-rollups-work

  8. OPTIMISTIC ROLLUPS:https://Ethereum.org/developers/docs/scaling/optimistic-rollups

  9. ZK、ZKVM、ZKEVM 及其未来:https://foresightnews.pro/article/detail/11802

  10. 重建与突破，探讨全链游戏的现在与未来:https://foresightnews.pro/article/detail/39608

  11. 一文分析 Axie Infinity 背后的经济模式:https://www.tuoluo.cn/article/detail-10066131.html