Author: Jerry Luo, Kernel Ventures

Reviewed by: Mandy, Kernel Ventures, Joshua, Kernel Ventures

TLDR：

  1. Ethereum has completed the first three upgrade stages, solving the problems of development threshold, DoS attacks and POS transformation. The main upgrade goals at this stage are to reduce transaction fees and optimize user experience.

  2. The four proposals EIP-1553, EIP-4788, EIP-5656, and EIP-6780 respectively achieve the goal of reducing the interaction costs between contracts, improving the efficiency of beacon chain access, reducing data replication costs, and limiting the permissions of the SELFDESTRUCT bytecode.

  3. EIP-4844 can greatly improve Ethereum's TPS and reduce data storage costs by introducing blob data externally attached to blocks.

  4. The Cancun upgrade will have additional benefits for Ethereum-specific DAs in the DA track, and at this stage the Ethereum Foundation is averse to DA solutions that do not rely on Ethereum at all for data storage.

  5. Due to the more mature development environment of Op Layer2 and the greater demand for the Ethereum DA layer, the Cancun upgrade may bring relatively more benefits to it.

  6. The Cancun upgrade can improve the performance ceiling of DApp, making DApp have functions closer to Apps in Web2. Full-chain games that have not lost their popularity and require a large amount of storage space on Ethereum are worth paying attention to.

  7. The Ethereum ecosystem is currently underestimated, and the Cancun upgrade may be a signal that Ethereum is starting to strengthen.

1. Ethereum Upgrade Path

From the time Cointelegraph published fake news about the adoption of the Bitcoin ETF on October 16 last year to the final approval of the ETF on January 11 this year, the entire crypto market has experienced a period of continuous growth. Since the most direct benefit of ETF is Bitcoin, the trends of Ethereum and Bitcoin have diverged during this period. Bitcoin has reached a maximum of close to 49,000 US dollars, which has recovered 2/3 of the peak of the previous bull market, while Ethereum has reached a maximum of only $49,000. To around US$2,700, it was just over half of the peak of the last bull market. However, since the launch of the Bitcoin ETF, the ETH/BTC trend has rebounded significantly. In addition to the expectations of the upcoming Ethereum ETF, another important reason is that the repeatedly delayed Cancun upgrade was recently announced on the Goerli test network. The public test has released a signal that it is about to take place. As things stand, the Cancun upgrade will not occur earlier than the first quarter of 2024. The Cancun upgrade is dedicated to solving the current problems of low TPS and high transaction fees on Ethereum, and is part of the Serenity upgrade phase of Ethereum. Before Serenity, Ethereum had gone through three stages: Frontier, Homestead, and Metropolis. The first three stages respectively solved the problems of development threshold, DoS attack and POS transformation on Ethereum. It is clearly stated in the Ethereum Roadmap that the main goal at this stage is to achieve “Cheaper Transactions” and “Better User Experience”.

ETH/BTC exchange rate trend in the past year, image source: TradingView

2. Cancun upgrade core content

As a decentralized community, Ethereum's upgrade plan comes from proposals put forward by the developer community and ultimately approved by the majority of the Ethereum community. Among them, the ERC proposal was passed, and the EIP proposals that are still under discussion or about to be implemented on the main network are collectively referred to as EIP proposals. The Cancun upgrade is expected to pass 5 EIP proposals, namely EIP-1153, EIP-4788, EIP-5656, EIP-6780 and EIP-4844.

2.1 Main Task: EIP-4844

  • Blob: In EIP-4844, a new transaction type blob is introduced to Ethereum, a data packet of 125kb in size. Blob compresses and encodes transaction data and does not store it permanently on Ethereum in the form of CALLDATA bytecode, which greatly reduces gas consumption, but cannot be directly accessed in EVM. In Ethereum 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 the number of blobs carried by each block is 8. When this number is exceeded, although it can continue to be carried, it will face relatively increasing gas fees until the upper limit of 16 blobs is reached.

In addition, the other two core technologies used in EIP-4844 are KZG polynomial commitment and temporary storage, which are analyzed in detail in our previous article Kernel Ventures: An article exploring DA and historical data layer design. In summary, EIP-4844 has changed the size of a single block of Ethereum and the storage location of transaction data, which has greatly improved the TPS of the Ethereum mainnet while reducing the gas of the mainnet.

2.2 Side Quest: EIP-1153

  • EIP-1153: This proposal aims to reduce the storage cost during contract interaction. A transaction on Ethereum can be broken down into multiple frames created by the CALL instruction set. These frames may belong to different contracts and may involve information transmission between multiple contracts. There are two ways to transmit states between different contracts, one is in the form of input/output, and the other is to call the SSTORE/SLOAD bytecode to achieve permanent storage on the chain. In the former, data is stored and transmitted in the form of memory, which has a lower cost, but if the entire transmission process passes through any untrusted third-party contract, there will be huge security risks. However, if the latter is chosen, it will bring a considerable storage overhead and increase the burden of on-chain storage. The introduction of the transient storage opcodes TSTORE and TLOAD by EIP-1153 solves this problem. Variables stored by these two bytecodes have the same properties as variables stored by the SSTORE/SLOAD bytecode and cannot be modified during transmission. But the difference is that the data stored instantaneously will not remain on the chain after the transaction is completed, but will be destroyed like temporary variables. In this way, the security of the state transfer process and relatively low storage costs are achieved.

The difference between the three opcodes. Image source: Kernel Ventures

  • EIP-4788: In the beacon chain after the Ethereum POS upgrade, each new execution block contains the Root of the parent beacon block. Even if some of the roots that were generated earlier are lost, the roots stored by the consensus layer are reliable. Therefore, in the process of creating new blocks, we only need to keep the latest few roots. However, in the process of creating new blocks, frequent requests for data from the EVM to the consensus layer will cause low execution efficiency and create possibilities for MEV. Therefore, EIP-4788 proposes to use a dedicated Beacon Root Contract to store the latest Root, which makes the Root of the parent beacon block exposed by the EVM, greatly improving the efficiency of calling data.

How to call Beacon Root. Image 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 can efficiently copy on the EVM. MCOPY uses a special data structure to store the responsible data in the short term, including efficient shard access and memory object replication. Having a dedicated MCOPY instruction also provides forward-looking protection, which can better cope with changes in the gas cost of the CALL instruction in future Ethereum upgrades.

The changing process of Ethereum data copy gas consumption, source: Kernel Ventures

  • EIP-6780: In Ethereum, SELFDESTRUCT can be used to destroy a contract and clear all the code and all states related to the contract. However, in the Verkle Tree structure that Ethereum will use in the future, this will bring huge hidden dangers. In Ethereum, which uses Verkle Tire to store state, the cleared storage space will be marked as previously written but empty, which will not cause observable differences in EVM execution, but the created and deleted contracts will generate different Verkle Commitments compared to operations that did not occur, which will cause data verification problems in Ethereum under the Verkle Tree structure. Therefore, SELFDESTRUCT in EIP-6780 only retains the function of returning the ETH in the contract to the specified address, and will continue to save the code and storage state related to the contract on Ethereum.

3. Cancun’s upgraded racetracks

3.1 DA Track

3.1.1 Discussion on ecological value

For an introduction to the DA principle and various DA types, please refer to our previous article Kernel Ventures: An article discussing DA and historical data layer design. For DA projects, their revenue comes from the fees paid by users for data storage on them, while their expenses come from the fees paid for maintaining the operation of the storage network and the persistence and security of the stored data. Subtracting revenue from expenses, what remains is the value accumulated by the network. The most important means for DA projects to achieve value enhancement is to improve the utilization rate of network storage space and attract as many users as possible to use the network for storage. On the other hand, improvements in storage technology such as compressed data or sharded storage can reduce network expenses and achieve higher value accumulation from another perspective.

3.1.2 DA Track Segmentation

At present, projects that provide DA services are mainly divided into three types, namely main chain dedicated DA, modular DA and storage public chain DA. For a detailed introduction and differences between the three, see Kernel Ventures: An article discussing DA and historical data layer design.

3.1.3 Impact of Cancun Upgrade on DA Projects

  • User demand: After the Cancun upgrade, Ethereum's historical transaction data will grow dozens of times faster than before. These historical data will also bring greater storage requirements, but since Ethereum has not achieved an improvement in storage performance after the Cancun upgrade, the DA layer of the main chain has adopted a simple regular cleanup method for these historical data. The storage market for this part of the data naturally falls on various DA projects, which brings them greater user demand.

  • Development direction: The increase in Ethereum historical data after the Cancun upgrade will prompt major DA project parties to improve the efficiency and interoperability of data interaction with Ethereum to better seize this part of the market. It can be foreseen that various cross-public chain storage bridge technologies will become the development focus of storage public chain DA and modular DA, and for Ethereum's main chain dedicated DA, it also needs to consider how to further enhance its compatibility with the main network and minimize transmission costs and transmission risks.

3.1.4 Different DA tracks under the Cancun upgrade

While the Cancun upgrade brought faster data growth to Ethereum, it did not change the data storage method of the entire network synchronization, which forced the main chain to regularly clean up a large amount of historical data and delegate the function of long-term storage of transaction data. However, this part of historical data is still in demand during the airdrop of the project party and the data analysis of the on-chain analysis agency. The data value behind it will attract competition from different DA project parties, and the key to determining the market share trend lies in the data security and storage cost of the DA project.

  • Main chain dedicated DA: In the current main chain DA projects such as EthStorage, the storage market mainly comes from some large memory data such as pictures and music of NFT projects on Ethereum. Since the main chain DA has high compatibility with Ethereum on the node cluster, it can achieve secure data interaction with the Ethereum main network at low cost. At the same time, it stores the storage index data on the Ethereum main network smart contract, and does not completely separate the DA layer from Ethereum, thus receiving strong support from the Ethereum Foundation. For the storage market brought by Ethereum, the main chain dedicated DA has a natural advantage over other DAs.

  • Storage public chain DA and modular DA: It is difficult for such non-main chain DA projects to gain a competitive advantage in historical data storage performance in the Cancun upgrade compared to Ethereum’s dedicated DA. However, Ethereum’s dedicated DA is still in the testing phase and has not been fully implemented, while the Cancun upgrade is imminent. If the dedicated DA project cannot provide a realized storage solution before the Cancun upgrade, this round of data value mining may still be dominated by modular DA.

3.1.5 Opportunities for DA under the Cancun Upgrade

  • EthStorage: Main chain projects such as EthStorage will be the biggest beneficiaries of the Cancun upgrade, so you can focus on the EthStorage project before and after the Cancun upgrade. In addition, after the recent news that the Cancun upgrade may be carried out in February this year, EthStorage's official Twitter account has also been active, and it has released its latest official website and annual report, which seems to be very hard-working in publicity.

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, compared with the content of the latest official website and the 2022 version of the official website, in addition to cooler front-end effects and more detailed introductions, not much innovation in service functions has been achieved. The main push is still storage and Web3Q domain name services. If you are interested, you can click the link below (https://galileo.web3q.io/faucet.w3q/faucet.html) to receive the test token W3Q and experience the services of EthStorage on the Galileo Chain network. To participate in receiving tokens, you need to have a W3Q domain name or an account with a main network balance of more than 0.1 ETH. Judging from the recent water output of the faucet, despite some publicity, there is not a very large amount of participation at this stage. However, combined with the fact that EthStorage just received a seed round of financing of US$7 million in July this year and did not see the obvious source of this fund, it is also possible that the project party is secretly brewing the advancement of certain infrastructure, waiting for the early release of the Cancun upgrade to attract the maximum heat.

EthStorage’s tap water output, source: Web3q.io

  • Celestia: Celestia is the leading modular DA project at this stage. Compared with Ethereum-specific DA projects that are still under development, Celestia started to prosper and received its first round of financing as early as the last bull market. After more than two years of precipitation, Celestia has perfected its Rollup model and token model and has undergone a long test network test. Finally, on October 31, 2023, it completed its mainnet launch and the first batch of airdrops. It can be seen that its coin price has been rising since its opening. Recently, the coin price has once exceeded 20 US dollars. According to the current circulation of 150 million TIA, the market value of this project has reached about 3 billion US dollars. However, considering the limited service group of the blockchain historical storage track, the market value of TIA has far exceeded the traditional storage public chain Arweave with a richer profit model and is close to the market value of Filecoin. Although there is still some room for growth compared to the bull market, the market value of TIA is overestimated at this stage. However, with the support of star projects and the undissipated enthusiasm for airdrops, if the Cancun upgrade can be promoted as scheduled in the first quarter of this year, Celestia is still a very noteworthy project. But there is one risk that is also worth noting. The Ethereum Foundation has repeatedly emphasized in discussions involving Celestia that projects that are separated from the Ethereum DA layer will not be Layer2, showing an exclusionary attitude towards non-Ethereum native storage projects such as Celestia. The possible statements of the Ethereum Foundation before and after the Cancun upgrade will also bring uncertainty to the price trend of Celestia.

TIA token price trend, image source: CoinmarketCap

3.2 Layer2 Track

3.2.1 Discussion on ecological value

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 ecology. At the same time, the high transaction fees on Ethereum have also made it difficult for some projects involving complex interactions to be promoted on a large scale. However, many projects have already landed on Ethereum, and there are huge costs and risks in migrating. At the same time, except for the Bitcoin public chain that focuses 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. It puts all the processing and calculation of transactions on another public chain (Layer2). After the data is packaged, it is verified through a smart contract bridged with Layer1; and the status is changed on the main network. Layer2 focuses on the processing and verification of transactions, using Ethereum as the DA layer to store compressed transaction data, so it has faster speed and lower computing costs. If users want to use Layer2 to execute transactions, they need to purchase the corresponding Layer2 token in advance and pay it to the network operator. The network operator of Layer2 needs to pay the corresponding fees for the security of data stored in Ethereum. The fees paid by users for Layer2 data security minus the fees paid by Layer2 to Layer1 for data security is the network revenue of Layer2. Therefore, for Layer2 on Ethereum, the following two improvements can bring more benefits. From the perspective of open source, the more active the Ethereum ecosystem is and the more projects there are, the more users and project parties will have the demand to reduce gas and speed up transactions, thereby bringing a larger user base to the Layer2 ecosystem. Under the premise that the profit of a single transaction remains unchanged, more transactions will bring more benefits to the Layer2 network operator. From the perspective of cost-saving, if the storage cost of Ethereum itself decreases, the DA layer storage fee that the Layer2 project party needs to pay will decrease. Under the premise that the number of transactions remains unchanged, the Layer2 operator can also obtain more benefits.

3.2.2 Layer2 Track Segmentation

Around 2018, Ethereum's Layer2 solutions were flourishing, with a total of 4 solutions: sidechain, Rollup, state channel and Plasma. However, due to the risk of data unavailability during off-chain channel transmission and a large number of grief attacks, the state channel has been gradually marginalized from the Layer2 solution at this stage. The Plasma type is relatively niche, and the total TVL cannot enter the top 10 in Layer2, so it is not discussed much. Finally, for the Layer2 solution in the form of a sidechain, it does not use Ethereum as the DA layer at all, and is gradually excluded from the definition of Layer2. This article only discusses the current mainstream Layer2 solution Rollup, and analyzes it in combination with its subdivided tracks ZKRollup and OpRollup.

Optimistic Rollup

  • Implementation principle: During the initialization phase, the Optimistic Rollup chain needs to deploy a bridge contract on the Ethereum mainnet to interact with the Ethereum mainnet through this contract. Op Layer2 will batch the user's transaction data and send it to Ethereum, including the latest state root of the account on Layer2, the batched root and the compressed transaction data. At this stage, these data are stored in the bridge contract in the form of Calldata. Although a lot of gas has been reduced compared to permanent storage in MPT, it is still a considerable data overhead, and it also creates a lot of obstacles for the possible performance improvement of Op Layer2 (Optimistic Rollup Layer2) in the future.

Optimistic Rollup principle, image source: Kernel Ventures

  • Current situation: At this stage, Op Layer2 is the largest ecosystem of Layer2. The top five public chains in terms of TVL all come from the Optimistic Rollup ecosystem. The total TVL of the two public chains, Optimism and Arbitrium, alone exceeds 16 billion US dollars.

Ethereum Layer2 TVL total, image source: L2BEAT

One of the main reasons why the Op Rollup ecosystem can take the lead today is its friendly development environment. It completed the first round of Layer2 release and mainnet launch ahead of ZK Rollup, attracting a large number of DApp developers who are suffering from Ethereum's transaction fees and low TPS restrictions, and shifting the DApp development position from Layer1 to Layer2. At the same time, Op Layer2 has higher compatibility with EVM at the bottom layer, which clears the obstacles for the migration of Ethereum mainnet projects, and realizes the deployment of various DApps such as Uniswap, Sushiswap, Cureve on Ethereum on Layer2 in the fastest time, and even attracts projects such as Wordcoin to migrate from the Polygon mainnet. At this stage, Op Layer2 has Ethereum's leading DeFi such as Uniswap V3, native DeFi projects such as GMX with a TVL of more than 100 million US dollars, and SocialFi projects such as Friend.tech with transaction fees exceeding 20 million. Not only has the accumulation of the number of projects been completed, but the high-quality projects in various tracks have also led to a qualitative breakthrough in the entire ecosystem. However, in the long run, ZK Layer2 (ZK Rollup Layer2) has a higher TPS limit and lower gas consumption per transaction. When the subsequent ZK Rollup technology gradually improves, Op Layer2 will face fierce competition with ZK Layer2.

Friend.tech’s transaction fees and GMX V2’s TVL. Image source: Dune

ZK Rollup（Zeroknowledge Rollup）

  • Implementation principle: The transaction data in ZK Layer2 is processed in a similar way to Op Layer2. After being packaged and processed on Layer2, it is returned to the smart contract of Layer1 and stored as Calldata. However, the transaction data has an extra step of generating ZKp calculation process on Layer2. At the same time, it does not need to return compressed transaction data to the network, but only needs to return the transaction root and batch root with ZKp for verifying the legitimacy of the corresponding transaction. The data returned to Layer1 through ZK Rollup does not require any window period, and can be updated in real time on the main network after verification.

Zeroknowledge Rollup principle, image source: Kernel Ventures

  • Current situation: ZK Layer2 has developed into the second largest Layer2 ecosystem, following Op Layer2. Among the top 10 Layer2s in TVL, ZK also accounts for 4, but overall, there are many but not strong ones. Everyone thinks that ZK Layer2 has great development prospects, but it just can't develop. First of all, the early release of Op Layer2 has attracted many developers to land projects on it. If the project cannot gain enough advantages from the project migration, the project party is unlikely to migrate the project that has generated stable income on Op Layer2. Secondly, many ZK Layer2s are still working on the compatibility of the underlying layer with Ethereum. For example, Linea, a star project of ZK, is currently not compatible with many EVM opcodes, which brings many development obstacles to developers who have adapted to EVM. Another star project, zkSync, is currently almost unable to achieve compatibility with the underlying layer of EVM and can only be compatible with some development tools of Ethereum.

Compatibility of existing ZK Layer2 projects with Ethereum. Image source: Kernel Ventures

Compatibility with Ethereum also brings great difficulties to the migration of native projects on it. Since the bytecode is not fully interoperable, the project party needs to change the underlying contract to adapt to zkEVM. This process has many difficulties and risks, which greatly 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 with relatively low development difficulty such as Zigzag and SyncSwap. The total amount 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 of zkEVM and EVM can be achieved and the ZKp generation algorithm can be improved, it will have a better performance ceiling than Op Layer2. This is why even in the current market dominated by Op Layer2, there will continue to be ZK Layer2 projects. When the Op Layer2 track has been divided up, the most appropriate way for latecomers is to propose a better solution to attract users to migrate from the original network. However, even if ZK Layer2 achieves technical perfection one day, if a sufficiently comprehensive ecosystem has been formed on Op Layer2 and enough projects have been implemented, even if there is a Layer2 with better performance, whether users and developers are willing to take huge risks to migrate will be an unknown. In addition, Op Layer2 is also constantly improving at this stage to consolidate its ecological position, including Optimism open source Op Stack to assist other Op Layer2 developers in rapid development and improvements to challenge methods such as the binary challenge method. While ZK Layer2 is being improved, Op Layer2 has not slowed down its development, so the important task of ZK Layer2 at this stage is to speed up the improvement of cryptographic algorithms and EVM compatibility to prevent users from becoming dependent on the Op Layer2 ecosystem.


3.2.3 Impact of Cancun Upgrade on Layer2

  • Transaction speed: After the Cancun upgrade, a block can carry up to 20 times the original data through blobs, while keeping the block output speed unchanged. Therefore, in theory, Layer2, which uses Layer1 as the DA layer and settlement layer, can also get a TPS increase of up to 20 times compared to the original. Even if it is estimated at a 10-fold increase, the transaction speed of any of the major Layer2 star projects will exceed the highest transaction speed in the history of the Ethereum mainnet.

Current TPS of mainstream Layer2 projects, image source: L2BEAT

  • Transaction fees: One of the important reasons that restrict the Layer2 network from decreasing is the data security fees provided to Layer1. According to the current quotation, the storage price of 1KB Calldata on Ethereum smart contracts is close to 3 US dollars. However, through the Cancun upgrade, the transaction data packaged by Layer2 is only stored in the form of blobs on the consensus layer of Ethereum. It only costs about 0.1 US dollars to store 1 GB of data for a month, which greatly reduces the operating costs of Layer2. As for the income generated by this part of open source, Layer2 operators will definitely give part of the profit to users to attract more users and reduce the transaction costs of Layer2.

  • Scalability: The impact of the Cancun upgrade on Layer2 mainly comes from its temporary storage solution and the newly added blob data type. Temporary storage will regularly delete old states that are not very useful for current verification on the main network, reducing the storage pressure of nodes, thereby speeding up the network synchronization and node access speed of Layer1 and Layer2. Blob can better adapt to changes in network transaction volume through its huge external space and flexible adjustment mechanism based on gas prices. When the transaction volume is too large, the number of blobs carried by a block can be increased, and when the transaction volume decreases, it can also be reduced accordingly.

3.2.4 Different Layer2 Tracks under the Cancun Upgrade

The arrival of the Cancun upgrade will be beneficial to the entire Layer2 ecosystem. Because the core change in the Cancun upgrade is to reduce the cost of data storage on Ethereum and the size of a single block, the Layer2 with Ethereum as the DA layer can naturally get a corresponding increase in TPS and reduce the storage fees paid to Layer1. However, due to the different degrees of use of the Ethereum DA layer by the two Rollups, the benefits to Op Layer2 and ZK Layer2 will vary.

  • Op Layer2: Since Op Layer2 needs to leave the compressed complete transaction data on Ethereum for recording, it needs to pay more transaction fees to Ethereum than ZK Layer2. Therefore, after reducing gas consumption through EIP-4844, Op Layer2 can relatively obtain a larger reduction in handling fees, thereby relatively narrowing its disadvantage in handling fee spreads compared to ZK Layer2. At the same time, this round of Ethereum gas reduction will inevitably attract more participants and developers. Compared with ZK Layer2, which has not issued coins and is difficult to be compatible with EVM at the bottom layer, more projects and capital will tend to flow into Op Layer2, especially Arbitrium, which has performed strongly in recent periods. This may bring about a new round of development of the Layer2 ecosystem led by Op Layer2, especially SocialFi and GameFi projects, which are difficult to provide high-quality user experience due to high handling fees. Along with this, many high-quality projects that can approach the user experience of Web2 may emerge on Layer2 at this stage. If Op seizes the high ground of this round of development again, it will further widen the gap with the overall ZK Layer2 ecosystem, creating enough difficulties for ZK Layer2 to catch up in the future.

  • ZK Layer2: Compared with Op Layer2, since ZK Layer2 does not need to store specific transaction information on the chain, the benefits of gas reduction will be smaller than Op Layer2. Although ZK Layer2 is in the process of development as a whole and does not have the huge ecosystem of Op Layer2, the facilities on Op Layer2 have been improved, and there is more intense competition for development on it. For new developers attracted by the Cancun upgrade, it may not be a wise choice to compete with the already mature Op Layer2 developers. If ZK Layer2 can improve the supporting facilities for developers at this stage and provide developers with a better development environment, considering the better expectations of ZK Layer2 and the fierce market competition, perhaps new developers will choose to flock to the ZK Layer2 track. This process will accelerate the catching-up process of ZK Layer2 and achieve surpassing before Op Layer2 completely forms a dominant advantage.

3.2.5 Opportunities for Layer2 under the 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 uses the order book instead of the AMM trading model used by mainstream DEX, which allows users to have a smoother trading experience, which also creates a good condition for leveraged trading on it. In addition, it uses layer 2 solutions such as StarkEx to achieve scalability and process transactions, and packages transactions off-chain and transmits them back to the chain. Through the underlying principle of Layer2, DYDX allows users to obtain transaction costs far lower than traditional DEX, with the fee for each transaction being only around US$0.005. At a time when Ethereum and related tokens are fluctuating violently during the Cancun upgrade, it is almost certain that there will be a surge in the amount of funds for high-risk investments such as leveraged transactions. Through the Cancun upgrade, the transaction fees on DYDX will surpass CEX even for small transactions, while also having higher fairness and security, thus providing an excellent trading environment for high-risk investments and leverage enthusiasts. Considering the above perspectives, the Cancun upgrade will bring a very good opportunity to DYDX.

  • Rollup Node: For the verification of new blocks, the data that is regularly cleaned up in the Cancun upgrade is no longer meaningful, but it does not mean that the cleaned data has no value. For example, projects that are about to airdrop need complete historical data to determine the security of the funds of each project that is about to receive the airdrop. Some on-chain analysis institutions also often need complete historical data to trace the flow of funds. At this time, one option is to query the Layer2 Rollup operator for historical data. In this process, the Rollup operator can charge for data retrieval. Therefore, in the context of the Cancun upgrade, if the data storage and retrieval mechanism on Rollup can be effectively improved, and related projects can be developed in advance for layout, it will greatly increase the possibility of project survival and further development.

3.3 DApp Track

3.3.1 Discussion on ecological value

Similar to Web2 applications, the role of DApp is to provide a service to users on Ethereum. For example, Uniswap can provide users with real-time exchanges of different ERC20 tokens; Aave provides users with over-collateralized lending and flash loan services; Mirror provides creators with decentralized content creation opportunities. But the difference is that in Web2, the main way for applications to make profits is to attract more users to its platform through low-cost and high-quality services, and then use traffic as value to attract third parties to place advertisements and profit from advertisements. However, DApp maintains zero infringement on user attention throughout the process, does not provide any recommendations to users, but charges corresponding handling fees from a single service after providing a certain service to users. Therefore, the value of DApp mainly comes from the number of times users use DApp services and the depth of interaction during each interaction process. If DApp wants to increase its own value, it needs to provide services that are better than similar DApps, so that more developers tend to use it instead of other DApps for operation.

3.3.2 DApp Track Segmentation

At present, Ethereum DApps are mainly DeFi, GameFi, and SocialFi. There were some Gamble projects in the early days, but due to the limitation of Ethereum transaction speed and the release of more suitable public chains such as EOS, Gamble projects are now gradually declining on Ethereum. These three types of DApps provide financial, gaming, and social services respectively, and realize value capture from them.

DeFi

  • Implementation principle: In essence, DeFi is one or a series of smart contracts on Ethereum. In the release phase of DeFi, relevant contracts (such as currency contracts, exchange contracts, etc.) need to be deployed on the Ethereum mainnet. The contracts implement the interaction between the DeFi functional module and Ethereum through interfaces. When users interact, they will call the contract interface to deposit, withdraw, exchange and other operations. The DeFi smart contract will package the transaction data, interact with Ethereum through the contract's script interface, and record the status 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 situation: At this stage, DeFi has an absolute advantage in DApp on Ethereum. In addition to cross-chain projects and Layer2 projects, DeFi occupies other seats in the top 10 DApps in contract assets on Ethereum. As of now, the cumulative number of DeFi users on Ethereum has exceeded 40 million. Although affected by the bear market, the number of monthly active users has experienced a decline from the peak of nearly 8 million in November 2021, but with the recovery of the market, the current monthly user volume has also rebounded to about half of the peak, and is waiting for the next round of bull market to rise again. At the same time, the types of DeFi are becoming more and more diverse, and the functions are becoming more and more comprehensive. From the earliest currency trading, mortgage lending to the current leveraged trading, regular purchases, NFT finance, flash loans, etc. The financial methods that can be realized in Web2 have gradually been realized in DeFi, and the functions that cannot be realized in Web2, including flash loans, have also been realized in DeFi.

Top 10 DApps by Ethereum contract assets, image source: DAppRadar

SocialFi

  • Implementation principle: Similar to traditional design platforms, SocialFi also supports individuals to create content and publish the created content through the platform for dissemination and further attract fans for the account. Users can check 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 content publishers and fans, and the information of the account itself 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 obtain by providing these services. The cost of users using the SocialFi platform to interact minus the storage cost of account and transaction data is the profit of the SocialFi project.

  • Current situation: Although the UAW (User Active Wallet) of the top SocialFi seems to be comparable to DeFi, this is often due to the airdrop expectations of some projects and is not very sustainable. For example, the UAW of friend.tech some time ago was less than 1,000 after the craze. This can also be clearly seen from the comparison between DeFi and SocialFi, which are not ranked 5. The fundamental reason is that SocialFi's high service fees and low efficiency make it unable to bear the social attributes it should have and simply become a speculative platform.

Comparison of UAW between top SocialFi and DeFi projects on Layer1 and Layer2, Image source: DAppRadar

GameFi

  • Implementation principle: GameFi is similar to SocialFi, except that the application object has become a game. At present, the mainstream profit method of the GameFi project is to make a profit by selling props in the game.

  • Current situation: If the project wants to gain more profits, it must attract more people to participate in the game. At this stage, there are only two points 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 obtain the right to participate in the game or a better gaming experience. The other is the expectation of profit. Users believe that they can sell these props at a higher price in the future. The first model is similar to Steam, where the project party gets real money and users get the enjoyment of the game. In the other model, if the profits of users and project parties come from the continuous influx of new users, and once the new funds cannot offset the project party's additional issuance of props, the project will quickly fall into a vicious cycle of selling, falling market expectations, and continuous selling, making it difficult to achieve sustainable profits, with Ponzi properties. Due to the limitations of blockchain fees and transaction speeds, GameFi at this stage basically cannot achieve the user experience required by the former model and is mostly in the second model.

3.3.3 Impact of Cancun Upgrade on DApp

  • Performance optimization: After the Cancun upgrade, more transaction data can be carried in one block, which means that more state changes can be achieved in DApp. According to the average expansion of 8 blobs, the processing speed of DApp after the Cancun upgrade can reach ten times the original speed.

  • Cost reduction: Data storage costs are a fixed expense for DApp projects. Whether it is Layer1 or Layer2, DApps will directly or indirectly use Ethereum to record the status of accounts within the DApp. After the Cancun upgrade, each transaction in the DApp can be stored in the form of Blob data, which greatly reduces the operating costs of the DApp.

  • Functional expansion: Limited by the high storage cost on Ethereum, project parties are deliberately reducing the data on the chain during the development of DApp. This results in many experiences that users in Web2 can't be migrated to DApp. For example, SocialFi cannot support the needs of video creation in Twitter, or even if it can, the data can't enjoy the same security as Ethereum at the bottom. The interactive options of the games in GameFi are often low-level and boring, because every state change needs to be recorded on the chain. Through the Cancun upgrade, the project party has more opportunities to try the above aspects.

3.3.4 Different DApp tracks under the Cancun upgrade

  • DeFi: The impact of the reduction in storage costs in the Cancun upgrade on DeFi is relatively small, because DeFi only needs to record the current status 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 less than the other two types of DApps. However, the increase in Ethereum TPS brought about by the Cancun upgrade can greatly promote arbitrage businesses with high transaction frequency in DeFi and leverage businesses that need to open and close positions in a short period of time. At the same time, the improvement in storage costs that cannot be clearly reflected in a single currency exchange can also save a lot of fees when accumulated in leverage and arbitrage transactions.

  • SocialFi: The Cancun upgrade has the most direct impact on the performance of SocialFi. Through the Cancun upgrade, the SocialFi smart contract can be improved to process and store large amounts of data, thereby providing a high-quality user experience that is closer to Web2. At the same time, basic operations such as user creation, commenting, and liking on SocialFi can also have lower costs, thereby attracting truly social-oriented long-term participants.

  • GameFi: For asset-on-chain games in the last bull market, the impact is similar to DeFi. The storage cost has dropped relatively little, but the increase in TPS provides conditions for high-frequency interaction in games, which can improve the real-time interaction of games and support complex interactive functions that improve the playability of games. Full-chain games are more directly affected by the Cancun upgrade. Since all the logic, status, and data of the game are stored on the chain, the Cancun upgrade will greatly reduce the cost of game operation and user interaction. At the same time, the cost of the initial deployment of the game will also be greatly reduced, thereby lowering the threshold for game development and prompting the emergence of more full-chain games in the future.

3.3.5 Opportunities for DApps under the Cancun Upgrade

  • Dark Forest: Since the third quarter of 2023, perhaps because of doubts about the lack of decentralization of traditional asset-on-chain games, or simply because the traditional GameFi narrative has become weak, full-chain games have begun to become popular. But for full-chain games on Ethereum, the transaction speed of 15 TPS and the storage cost of 16 gas per byte in the CALLDATA field greatly limit its development ceiling. The implementation of the Cancun upgrade can greatly improve these two problems. Combined with the continuous development of related projects in the second half of 2023, the Cancun upgrade may bring relatively large benefits to this track. Considering the head effect, Dark Forest is one of the few Fully On-Chain Games that has come out of the minor bull market. It has a relatively complete community foundation and has not yet issued its own tokens. If the project party has this idea before and after the Cancun upgrade, it should be able to have a good trend.

4. Conclusion

The implementation of the Cancun upgrade will bring higher TPS and lower storage fees to Ethereum, but it will also bring a surge in storage pressure. The tracks of DA and Layer2 will be greatly affected. For the DA track, the surge in storage pressure will bring great benefits to Ethereum-specific DA. Related projects such as EthStorage are worth paying attention to. In contrast, DA projects that do not use Ethereum at all in data underlying storage have not received support from the Ethereum development community. Although there are opportunities, we need to be more cautious when dealing with specific projects. Since most ZK-based Layer2s have not yet introduced tokens, and Arbitrium has shown a significant strengthening in the recent Cancun upgrade expectations, if Arbitrium does not experience a major explosion next, Arb and its ecosystem-related projects will have more advantages than other Layer2s in the Cancun upgrade. Due to the influx of a large number of speculators, the DYDX project may also have certain opportunities in the nodes upgraded in Cancun. Finally, Rollup has a natural advantage in storing Layer2-related transaction history data. If it comes to providing historical data access services, Rollup on Layer2 will also be a good choice.

If we consider it from a longer-term perspective, the Cancun upgrade has created conditions for the development and performance of various DApps. In the future, we will inevitably see Web3 projects gradually approaching Web2 in terms of interactive functions and real-time performance, making Ethereum closer to the goal of the world computer. Any pragmatic development project is worth investing in for the long term. In the recent rise of the market, Ethereum has been in a weak position relative to Bitcoin. While Bitcoin has recovered to nearly 2/3 of the high point of the last bull market, Ethereum has not yet recovered 1/2 of the high point of the last round. The arrival of the Cancun upgrade may change this trend and bring a round of compensatory gains to Ethereum. After all, as a rare public chain that can maintain profitability and is in token deflation, it is indeed underestimated at this stage.

Kernel Ventures is a crypto venture capital fund driven by the research and development community, with more than 70 early-stage investments, focusing on infrastructure, middleware, DApps, especially ZK, Rollup, DEX, modular blockchains, and verticals that will carry billions of future crypto users, such as account abstraction, data availability, scalability, etc. Over the past seven years, we have been committed to supporting the development of core development communities and university blockchain associations around the world.

reference

  1. eips.ethereums-core：https://eips.ethereum.org/core

  2. EthStorage official website: 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. How zero-knowledge rollups work: https://ethereum.org/en/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 and its future: https://foresightnews.pro/article/detail/11802

  10. Reconstruction and breakthrough, explore the present and future of full-chain games: https://foresightnews.pro/article/detail/39608

  11. An article analyzing the economic model behind Axie Infinity: https://www.tuoluo.cn/article/detail-10066131.html