Ethereum: Cancun Upgrade Brings Potential Investment Opportunities

Key Takeaways

Shanghai Upgrade

What is the Shanghai Upgrade?

Goal: The main purpose of the Shanghai Upgrade is to release the mortgaged ETH as soon as possible. If it is not opened soon, it will gradually reduce the enthusiasm for staking behavior, which will have a certain impact on the entry of new users in the future.

Proposal:

• Mainly around Ethereum staking withdrawal mentioned in EIP-4895, with supporting optimizations that affect incentive transaction types (EIP-3651);
• By introducing push0, about one-tenth of the execution instructions can save about 200 gas, and also slightly increase the existing TPS of Ethereum (EIP-3855);
• Double the size limit of deployable smart contracts to alleviate the problem that some complex contracts must be split into multiple contracts to be deployed to the main network due to the contract bytecode length limit, allowing developers to deploy richer contracts (EIP-3860);
• And optimize gas fees to improve the user experience of developers (EIP-6049);

Ethereum Staking Benefits the Overall Ecology and Liquidity Staking Track:

• Staking rate analysis: Ethereum’s current staking rate is 14.83%, which is much lower than the common staking rates of other public chains (such as Polkadot 48.45%, Solana 71.41%, and Avalanche 52.84%). Ethereum’s current market value is about 188m, and the staking market value is about 28m. If the staking rate reaches 50%, there will be an increase of 66m, and the future development potential is high;
• Unlocking selling pressure analysis: The selling pressure that may exist in this ETH withdrawal will be alleviated through linear unlocking and dynamic adjustment of the staking rate. According to Blue Fox analysis, the theoretical upper limit of withdrawals per day is about 55,000 ETH. Ethereum can activate about 7.55 validators (total number of validators/65,536) per epoch, and there are 225 epochs per day. That is, currently, about 55,000 ETH can be unlocked at most per day. Because users who wanted to withdraw before can also swap through the Lido market without waiting for the official withdrawal, and the official will adjust the APR to make it dynamically balanced whether the number of withdrawals is too large or too small, so there is no need to worry about selling pressure.
• Price expectation: Some user withdrawals may cause short-term fluctuations (the daily upper limit is 55,000 ETH). In the long run, POS staking becomes the underlying asset and security guarantee of the ecology, and expands the appeal of Ethereum’s ecology. Moreover, after EIP-1559, ETH is in a deflationary state, and 84,885 ETH will be destroyed in February 2022. Since early August 2021, 2.95 million ETH has been destroyed, equivalent to approximately 9.02 billion U.S. dollars. Therefore, the development of the ecology and deflation can offset the short-term fluctuations caused by opening staking in the long term.
• LSD Staking Asset Participates in DeFi Arbitrage: Projects such as Lido and Rocket Pool are biased towards guaranteed income, and major DeFi protocols innovate around LP tokens such as stETH, allowing stETH to be used as collateral in the lending market. Typical cases are Aave and Compound, which can leverage stETH staking with additional leverage, or Yearn, which relies on the machine gun pool to obtain the highest return rate from protocols such as Aave and Compound. Aura Finance allows users to stake LP tokens after providing liquidity to Balancer and receive additional AURA rewards and mining rewards.
• Restaking Infrastructure Innovation: Restaking has enriched the forms of income, such as Eigenlayer, which allows users to stake ETH, lsdETH, and LP Tokens in other public chains, oracles, middleware, etc., so that the liquidity of LSD can also be profitable on other cross-chain bridges and oracles, forming a value flywheel of Eigenlayer-Ethereum consensus layer-dapp. At the same time, Eigenlayer’s first product is EigenDA, as Ethereum’s data availability service, it can increase Ethereum’s 80KB data bandwidth to 15MB, an increase of nearly 200 times. Although EigenLayer currently monopolizes the restaking narrative, there may be middleware innovations based directly on assets such as stETH in the future;

Cancun Upgrade

What is the Cancun Upgrade?

• EIP-4844 and EOF have been removed from the Shanghai Upgrade. The specific details of the Cancun Upgrade are not yet determined. Deneb and KZG ceremonies should be the content of the next Cancun Upgrade, and it is uncertain whether EOF will be included in the Cancun Upgrade.
• EIP-4844: expanding L2 while reducing transmission costs

-Deneb introduced Blob, an external data packet (currently 128 KB in size), which can allow Ethereum to carry more data, improve Ethereum’s TPS, and reduce costs. Since Blob is a temporary data packet, it is cleared once every fixed number of days (currently 30 days), so nodes only need to download the amount of data for a fixed month.

-EIP-4844 will open up Danksharding-the preface to Ethereum’s sharding expansion plan. Danksharding will further expand the amount of data that Blob can carry from 1–2MB per block to 16MB-32MB, which will greatly benefit Ethereum’s expansion.

-Danksharding (Ethereum’s sharding expansion solution) may have problems such as excessive node burden (above 16MB) and insufficient data availability (30-day validity period) in the future. Solutions include data availability sampling (used to reduce node burden), proposer-packer separation (solve the problem of node workload distribution, let high-performance nodes download all data for encoding and distribution, let low-performance nodes be responsible for spot-check verification), anti-censorship list and dual-slot PBS (used to solve MEV problems).

• KZG Ceremony-KZG commitment preparation

-KZG commitment is a technology to help Danksharding implement data availability sampling (DAS). KZG commitment and erasure code technology can jointly reduce the node burden when Blob’s carrying capacity expands to 16MB-32MB.

-The KZG ceremony is similar to a new type of multi-party secure computation. Because the feature of KZG commitment is that whoever controls the initial password seed can control the result, the KZG ceremony is a process of letting participants take turns to superimpose the initial encryption. For details, see Todd’s tweet.

• EOF is an upgrade to EVM, introducing new contract standards and some new opcodes. The EOF proposal includes EIP-3540, EIP-3670, EIP-4200, EIP-4750, and EIP-5450.

-After EOF, security can be improved and EVM overhead can be reduced because the content verified by EVM at runtime is moved to deployment, and this avoids incorrect content being deployed on Ethereum;

-Secondly, EVM versioning makes it easier to introduce and remove features. When iterating, it is no longer limited by compatibility requirements, and the upgrade difficulty is lower. This may lead to more frequent upgrades of Ethereum EVM in the future;

-However, frequent EVM iterations may require higher requirements for EVM-compatible virtual machines, such as zkEVM. To keep up with the version, other EVM-compatible VMs may need to have the ability to automatically convert EOF updates to their own VM.

Cancun Upgrade Benefits L2 Track, DA Track, and Customized Raas Track

Diversification of L2 Tracks

• The scalability and low fees provided by EIP-4844 will benefit various L2 ecosystems. The op ecosystem will become more diverse, and the zk ecosystem will be more available due to enhanced data availability. More independent layer 2 solutions that are difficult to operate due to high costs will rapidly grow;
• According to Jordi Baylina’s tweet, the scalability of zkRollup is determined by data availability, and the cost of data availability accounts for a large proportion of all costs. Danksharding, which will be promoted in the future, will implement Data Availability Sampling (DAS), allowing the additional data amount of Blob to expand to 16MB~32MB, greatly enhancing data throughput and bringing significant benefits to the zk ecosystem. Once data availability is solved, the next bottleneck will be maintaining chain synchronization. At this point, parallel ecosystems of multiple rollups will be the next development direction;
• Currently, the leading Optimistic Rollup projects are Arbitrum and Optimism (TVL is $1–2b). EIP-4844 may provide more opportunities for smaller optimistic rollups, such as Metis and Boba;
• Projects such as Aztec, zkswap, zkspace, starknet, and Polygon Hermez may have a more enriched ecosystem and an increased number of users due to the reduction in on-chain fees.

Major Benefits of DA Tracks

• Due to the short-term storage of Blob data, there are issues with accessing historical data. Decentralized storage protocols will have a new development channel, and Layer2 expansion solutions will require a data availability layer;
• Eth storage, a network dedicated to solving Ethereum’s dynamic storage problems, will benefit from EIP4844. Based on Ethereum’s data availability, it will provide a second-layer solution for programmable storage at lower storage costs. EthStorage will significantly reduce the storage costs of a large amount of data on Ethereum and save 100 to 1000 times the cost.

Raas Track: Customizable Raas may be the biggest winner

• Overview

-Rollup as a service (RaaS) aims to innovate the deployment of Rollup by providing easy-to-use tools and services, abstracting complex technical details, and making them available to everyone. After EIP4844, various rollup services will expand to a certain market.

-From the perspective of value creation, RaaS can currently provide certain functions that are difficult to achieve, such as customizing ZK circuits, or implementing inefficient designs in general-purpose scaling. For example, RaaS can customize privacy functions on the basis of rollup or even rollup of rollup.

-Currently, the value of RaaS is: customization > cost and efficiency. Therefore, customizable RaaS is likely to become a hot spot in the future.

• In RaaS, there will be sufficient competition between ZK-based multilayer networks and OP ecosystems.
• Currently, the advantage of OP-based RaaS is the quick construction of the ecosystem, leading the development of the zk ecosystem. Especially with the bedrock upgrade of the op stack and the launch of EIP4844, the small improvement in cost and efficiency does not attract enough attention before EIP4844.
• ZK-based multilayer network design can combine the advantages of low cost and customization. In the long run, it will have greater competitiveness. Gaming projects may have more demand to go to L3, while defi projects may stay on L2. Social projects may have daily behavior on L3 or off-chain, and the core data and relationships will be placed on L2.
• Currently, RaaS is highly homogeneous, but eventually, several leading RaaS may dominate the entire market.

-The rise of RaaS is very dependent on ecological construction, and mature RaaS must have the ability to meet the customized rollup needs of all projects. Therefore, multiple RaaS may eventually dominate the market.

• RaaS brings modular blockchain underlying innovation paradigm.

-RaaS will reduce the threshold for developers to build a Rollup from 0 to 1, and the reduction of entry barriers will bring stimulated competition, which will further drive Rollup’s innovation.

• The Rollup track has not yet fully erupted, and the RaaS track is still in its early stages.

-Currently, ORUs represented by Arbitrum and Optimism occupy over 80% of the market share of this track, while related zk projects are still in a state of accumulation. Although zkSync and StarkNet have already launched on the mainnet, they have not yet experienced a large explosion of on-chain ecosystems. Therefore, it is still too early to say that the Rollup track has been fully determined, and there is still great potential for development.

• Projects:
• Eigenlayer has started a new narrative of re-pledging, and its team has a strong technical background, a rich variety of products and application scenarios, and has developed an EigenDA solution that meets data availability requirements. Its future prospects are very promising;
• Celestia, as a leader in modular blockchain, has relatively mature products, and its ecology includes Fuel, Cevmos, dYmension, and Eclipse. Among them, Fuel and dYmension products have already taken shape, and they are worth paying attention to continuously;
• The RaaS track is in the early stage, and most of them are still in the incubation stage, with little product information. However, it is recommended to pay attention to OP Stack and AltLayer. OP Stack is backed by the Optimism team and has already launched Ethereum Layer 2 network Base in February. Its development roadmap is clear. AltLayer is a representative no-code Rollup solution, with good progress in product security and innovation.

The full report can be found here.

Author: Kiwi,OKX ventures Researcher,@KiwiCryptoBig