Understanding the Cancun Upgrade and Analysis of Favorable Projects in One Article

01/25/2024·11months ago

Why Pay Attention to the Cancun Upgrade?

On January 12th, the U.S. SEC announced the approval of the Bitcoin spot ETF, an event seen as a milestone of great significance. However, the crypto market's reaction was lukewarm, and even after the announcement, Bitcoin's price began to decline. In nearly half a month, it fell from a high of $46,000 to below $40,000, a drop of -13%. The previously amplified effect of the ETF event's bubble was burst, and a large amount of capital flowed into other public chains and project protocols with new narratives.

The Bitcoin ETF game has temporarily come to an end, and the market's attention has immediately turned to the Ethereum spot ETF, with current market analysis estimating a 50% chance of approval in May this year. Having experienced the strong price surge during the Bitcoin ETF hype, it is not to be missed to position oneself in Ethereum ahead of the next major rise of mainstream tokens.

In addition, Ethereum's next upgrade – the Cancun Upgrade – is coming soon, with the upgrade expected to be completed as early as the end of February. The main purpose of this upgrade is to expand the Ethereum mainnet, enhancing the scalability, security, and usability of the Ethereum network, improving the mainnet's TPS and reducing Gas fees. This is extremely favorable for the Ethereum L2 ecosystem and will drive the vigorous development of the L2 ecosystem.

Combining the above two reasons, this issue will explain the Cancun Upgrade and analyze favorable projects.

What is the Cancun Upgrade?

The Cancun Upgrade is another upgrade to the Ethereum mainnet following the Ethereum Shanghai Upgrade. The name Cancun comes from the fact that Cancun is a seaside city in Mexico and a world-famous vacation destination, one of the cities where the Ethereum Developers Conference (EthCC) is held.

The Cancun Upgrade aims to solve the core issue of Ethereum's blockchain network: the cost of transactions. In December 2023, Vitalik Buterin stated in his article "Make Ethereum Cypherpunk Again" that one of the core reasons limiting blockchain to asset speculation is the rise in transaction fees. The high network transaction fees have turned people from users of the blockchain network into speculators. To realize the application value of blockchain, the transaction fees of the network must be reduced by an order of magnitude. Even though the emergence of L2 has reduced network fees compared to the Ethereum mainnet, it is still not enough.

The Cancun Upgrade is expected to provide several enhancements to the Ethereum network:

Scalability improvements: The introduction of Proto-Danksharding is expected to increase transaction processing speed and volume, especially beneficial for L2 solutions built on the Ethereum main blockchain.
Gas fee reduction: By integrating data Blob and activating EIP-4844, transactions become more cost-effective.
Security advancements: The implementation of EIP-6780 in this upgrade aims to improve network security measures, providing stronger protection for user data and investments.
Optimized data storage: The implementation of EIP-1153 in this upgrade will bring more efficient blockchain data storage, improve operations, and reduce costs, benefiting second-layer solutions that rely on simplified data management.
Cross-chain enhancement features: EIP-4788 in this upgrade aims to improve the usability and security of cross-blockchain interactions, supporting enhanced interoperability with second-layer solutions.

The core content of the Cancun Upgrade is the EIP-4844 protocol – the introduction of Proto-Danksharding, a precursor version of Danksharding, which could reduce L2 transaction fees by 10 to 100 times.

Danksharding is a solution that describes: the solution can design a separate data type Blob (specifically for storing L2 to L1 transaction data) and separate it from Layer1's Calldata. This way, Blob data only needs to be accessible and verifiable by those who need it within a certain time, without the need for Layer1's execution layer to execute it all, thus greatly reducing the burden on Layer1.

The introduction of Proto-Danksharding in the Cancun Upgrade is the first step in Ethereum's full expansion. This phase introduces Blobs of 128 KB each, with each Ethereum block planned to contain 3-6 Blobs (0.375 MB -0.75MB), and will gradually expand to 64 in the future. By comparison, the current Ethereum block can accommodate less than 200KB of data. With the introduction of Blob, the amount of data that Ethereum blocks can accommodate will significantly increase. Therefore, Proto-Danksharding will lay the foundation for further implementation of full Danksharing, the separation of block proposers and builders, and the realization of data availability sampling.

Specific content of the Cancun Upgrade (completed technical improvements):

Introduction of Blob transactions: Blob stands for Binary Large Object. Blob transactions are a new type of transaction that will be used in future sharding.
Introduction of all execution layer logic required for future full sharding.
Introduction of all execution layer and consensus layer cross-validation logic required for future full sharding.
Implementation of beacon block verification (i.e., Ethereum layer 2 data) and layered Blob data availability sampling.
Introduction of most of the logic required for future full sharding in beacon blocks.

Sharing of Projects Benefiting from the Cancun Upgrade

For this upgrade, it is actually directly favorable for the entire L2 ecosystem. According to data statistics from I2fees.info on 2023/12/11, the introduction of Blob has significantly reduced L2 transaction fees and increased throughput to some extent. It has also further promoted the development of Restake track and DA track projects.

1. Arbitrum

As the leader of Ethereum L2, Arbitrum currently has the richest variety of protocols in all L2s. We believe that Arbitrum can benefit greatly from this upgrade mainly for the following reasons:

Numerous protocols: According to incomplete data from DeFiLlama, there are about 520 protocols on Arbitrum, far exceeding the 216 on the second-ranked Optimism.
Large TVL volume: According to L2beat data, Arbitrum's TVL is about 10B, accounting for 49.26% of Ethereum Rollup's TVL.
Large transaction volume: According to L2beat data, the past 30-day network transaction volume ranking shows that Arbitrum has about 28M in transaction volume, ranking only behind zkSync, which has not yet issued tokens and still has a large amount of wool-pulling activities, and leads the Optimism network by nearly 3 times the transaction volume gap.

Considering the above three points, Arbitrum, which is firmly at the top in terms of volume, will obviously enjoy more benefits from the reduction in transaction fees, and the optimization of TPS is also beneficial to the prosperity of protocols with higher performance requirements such as GMX and GNS on Arbitrum. From the perspective of network fundamentals, Arbitrum is undoubtedly one of the biggest beneficiaries of the Cancun Upgrade.

2. Optimism

Different from Arbitrum, Optimism's competitive focus is more on the Optimism Super Chain network built based on OPStack. The value of Optimism depends more on the network value of the Optimism Super Chain. Since the release of OP Stack, a large number of projects such as Base, Lyra, opBNB, and Debank have been built based on OP Stack. The upgrade of the OP Stack Bedrock version has further optimized transaction costs, transaction processing within blocks, and node performance, making it more attractive to build L2 based on OP Stack.

If the Cancun Upgrade can benefit all L2s at the same time, then the upgrade premium that Optimism enjoys is the combined network value brought by all Optimism ecosystem chains. If the Cancun Upgrade can give birth to more new L2s, then the upgrade premium that Optimism enjoys is that more L2 chains may use OP Stack to build, and Optimism will also get closer to the final vision of the Optimism SuperChain super ecosystem.

3. EthStorage

EthStorage is a second-layer solution focused on solving Ethereum's dynamic storage problem. Based on Ethereum's Data Availability, it can provide programmable storage at a much lower storage cost.

Since Blob data can only be saved for a short period, there is a problem with calling historical data. Therefore, decentralized storage protocols will have a new development channel, and L2 expansion solutions will also need to use a data availability layer. EthStorage will greatly reduce the storage costs of a large amount of data on Ethereum, saving costs by 100 to 1000 times.

4. THORChain

THORChain is a decentralized cross-chain AMM trading protocol. The protocol aims to decentralize cryptocurrency liquidity through a network of public nodes and ecosystem products, allowing any individual, product, or institution to access its native and cross-chain liquidity.

As a cross-chain bridge project, it mainly benefits from the EIP-4788 and EIP-4844 upgrades in this Cancun Upgrade, with gas fees and confirmation times improving beyond expectations. Considering the large amount of capital that has flowed into the BTC chain in the past six months, and the recent Bitcoin ETF craze, these funds may flow back into the Ethereum chain, so this sector may gain Alpha returns.

5. Metis

Metis is an Ethereum L2 Optimistic rollup platform that has evolved from Optimism. By introducing powerful L2 technology, Metis provides a scalable and high-performance solution for Ethereum, offering users and developers a fast, efficient, and low-cost transaction experience.

With the Cancun Upgrade bringing more L2 bursts, the problems of centralized sequencers such as single points of failure, malicious arbitrage, capturing MEV value, and censoring user transactions may become increasingly serious. It can be foreseen that the competition for decentralized sequencers may become the core theme of L2 competition after the Cancun Upgrade.

Metis may become the first Ethereum L2 to run a decentralized PoS sequencer. It has already broken the centralized sequencer pattern, supporting nodes that stake at least 20,000 METIS tokens to enter the sequencer pool as sequencer operators. Sequencers in the pool are responsible for determining the order of transaction packaging, and at least 2/3 of the sequencers' signatures are required to package the data and upload it to the L1 mainnet. In addition, to further prevent sequencers from acting maliciously, Metis has also introduced the role of verifiers to conduct sample investigations of blocks to ensure the correct order of transactions by sequencers.

6. EigenLayer

The amount of Ethereum staked continues to increase, and the demand for re-staking is becoming more prominent. EigenLayer allows users to re-stake ETH, lsdETH (liquidity staked ETH), and LP Tokens on other side chains, oracles, middleware, etc., as nodes and receive verification rewards. This allows third-party projects to enjoy the security of the ETH mainnet, and ETH stakers can also earn more returns.

In addition, EigenLayer announced the provision of re-staking services for Cosmos, which on one hand gives Cosmos the security of Ethereum, and on the other hand opens up a new world of incremental returns for Ethereum stakers.

7. Kelp DAO

Kelp DAO is a Restaking project by Stader Lab, a multi-chain LSD project, belonging to the Liquid-LSD Restaking type mentioned above. It currently accepts deposits of Lido's stETH and Stader's ETHx, two LST tokens. However, since the EigenLayer LST quota is full, deposits are currently suspended.

Although Stader Lab has already issued tokens, Kelp DAO has launched a points system. As its sub-project, Kelp DAO is likely to issue its own tokens. The synergy between SD (Stader Lab's token) and Kelp DAO can also be anticipated.

8. ether.fi

ether.fi belongs to the Liquid Native Restaking type of product and has received a $5.3 million seed round investment led by BitMEX founder Arthur Hayes. Unlike Lido, ether.fi adopts a decentralized, non-custodial approach to ETH staking and has announced the provision of re-staking services. Since it is native ETH re-staking, it is not affected by the EigenLayer LST quota and can still accept deposits. Its staking certificate token eETH (wrapped token weETH) is also one of the few LRT staking certificate tokens with liquidity.

9. Celestia

Celestia adopts a modular architecture, deconstructing blockchain into data, consensus, and execution. Currently, most blockchains still bundle consensus and execution functions on one layer, building smart contracts on that layer. Users being tied to this execution environment greatly limits the potential for optimization and specialization for specific use cases.

Celestia's modular architecture has the execution layer exist on its own blockchain, allowing for optimization and specialization for specific use cases. Any developer building decentralized applications based on this architecture will enjoy more complete security and scalability on the original blockchain execution layer. And in Celestia's modular blockchain, data availability sampling is achievable, allowing nodes to verify a block with a small sample, and also allowing nodes to be operated on devices with lower hardware configurations, such as home computers and mobile phones.

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