Lower Transaction Fees for L2s with Ethereum Dencun Upgrade

A week after the launch of Ethereum’s latest update, Dencun, it is meeting and surpassing expectations. Dencun was launched on March 13 with the aim of enabling faster and cheaper transactions on the Ethereum network. Historically, Ethereum has struggled to increase the speed of its base layer to meet the growing demand, so Dencun focuses on scaling with the help of layer 2 solutions.

According to Brian Gallagher, co-founder of Partisia blockchain, the timing of the Dencun update is crucial as competition from rival blockchains, such as Solana, threatens to erode Ethereum’s market dominance. Solana has been gaining market share in areas like new token launches, decentralized exchanges, and non-fungible tokens, where retail traders are active. Gallagher explains that on-chain transactions on Ethereum have become too expensive, leading users to explore alternatives like Solana.

One of the major issues with Ethereum has been high transaction fees. Typical fees on Ethereum range from $1 to $20, while on Solana, fees are only a fraction of a cent. In March 2023, fees on Ethereum even soared above $30. Ethereum’s scaling problems have been persistent, with transaction fees rising from under $1 to $5 in September 2020, then to over $20 at the end of 2021. The average fee reached an all-time high of $197 in April 2022. Previous upgrades like the Merge have attempted to address these issues but have not been able to sustainably reduce fees.

Dencun takes a different approach by focusing on improving interactions with layer 2 solutions such as Arbitrum and Optimism, making transactions cheaper on these layers. The goal is to incentivize users to shift their traffic from Ethereum’s layer 1 to layer 2 solutions, distributing the network’s load across multiple networks. Early feedback on Dencun is encouraging, as it has successfully reduced fees on layer 2 solutions by a factor of 10 or more. Transaction costs on Optimism and Arbitrum are now below $0.01.

The Ethereum community is excited about Dencun’s success. Nick Johnson, founder of the Ethereum Name Service (ENS), sees Dencun as a game-changer for the network’s economic sustainability. Layer 2 developers are also pleased with the upgrade, with Arbitrum and Optimism praising Dencun as a significant development for scaling Ethereum.

While Dencun has achieved its initial goals, its success will ultimately depend on whether it can attract users away from Ethereum’s base layer. Early signs are positive, with transaction volumes on layer 2 solutions like Arbitrum and Optimism increasing significantly in the past week. The real test will be in the longer term, particularly in decentralized finance (DeFi), where speed and cost are crucial factors for users. If Dencun doesn’t significantly lower costs, other faster and more affordable chains may continue to gain market share.

Dencun is off to a good start, but it still needs to prove itself against market challenges. Ethereum’s latest upgrade is promising, but caution is warranted, as the crypto market can be unpredictable. Dencun is a step in the right direction for Ethereum’s scalability and cost-efficiency.