Ethereum Dencun upgrade lowers transaction fees for L2s

The Dencun upgrade marks a change in tactics for Ethereum, encouraging growth through improved layer-2 support.

A week on from the launch of Dencun, Ethereum’s latest update appears to be meeting expectations and, in some instances, surpassing them.

Dencun launched on March 13 with the promise of ushering in a new era of faster and cheaper transactions. Ethereum has historically struggled to ratchet up the speed of its base layer in line with demand, so Dencun shifts focus by scaling with the aid of layer 2s.

According to Brian Gallagher, co-founder of Partisia blockchain, the update is not a minute too soon as competition from rival blockchains threatens to erode Ethereum’s market dominance.

“The timing for Ethereum to launch its Dencun update [couldn’t] wait any longer,” Gallagher told Cointelegraph. “It’s undeniable that Solana is growing its market share away from Ethereum, particularly in the new token launch, on-chain DEX [decentralized exchange] swaps and NFT [nonfungible token] arenas, where retail traders tend to hang out.”

Gallagher added, “It is simply far too expensive to make on-chain transactions still on Ethereum, so alternatives like Solana are rising up to the occasion.”

As Gallagher points out, the comparison of fees is not currently flattering for Ethereum. Typical fees on Ethereum are anything from $1–20. This starkly contrasts Solana, where fees are a fraction of a cent. As recently as March 5, fees on Ethereum soared above $30.

Ethereum fees are a longstanding problem

Ethereum’s scaling issues are nothing new. The matter first grew acute when transaction fees rose from under $1 to the $5 mark in September 2020, then above $20 at the end of 2021 and through into 2022. On April 30, 2022, the average fee soared to an all-time high of $197.

Previous upgrades to the Ethereum network have attempted to improve the speed and scalability of Ethereum’s base layer. The most significant of these was the Merge, which occurred on Sept. 15, 2022, and completed Ethereum’s transition from proof-of-work to proof-of-stake.

The Merge may have made Ethereum more energy efficient, but if there were any small reductions to transaction fees, they weren’t to last. By March 2023, fees were beginning to creep upward once more.

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Dencun is different. Instead of attempting to make Ethereum’s base layer more scalable, Dencun focuses on improving interactions with layer 2s, such as Arbitrum and Optimism, making them cheaper. In theory, Dencun’s improvements should incentivize and encourage users to shift traffic from Ethereum’s layer 1, spreading the traffic to other networks.

While Dencun is still in its infancy, the early feedback is encouraging. Dencun promised to drop fees on layer 2s by a factor of 10. Data from Dune Analytics shows it has succeeded in that aim and, in some cases, even surpassed it. According to L2 Fees, transaction costs on Optimism and Arbitrum are now below $0.01.

Reasons to celebrate Dencun

With Dencun delivering right out of the gate, there is a palpable sense of excitement among many within the Ethereum community.

Nick Johnson, the founder and lead developer of the Ethereum Name Service (ENS), is among those lauding the development.

Johnson told Cointelegraph: “The Dencun upgrade ushers in a new era for Ethereum, in terms of economic sustainability. For so long, layer 2 developers have incurred costly transaction fees that have hindered accessibility to the network. The ENS developer team is looking forward to improved accessibility for Ethereum.”

As for those layer 2s Johson referenced, the buzz from their camps has been noticeable.

Arbitrum took to X to declare Dencun, “One of the biggest upgrades to support layer 2s in scaling Ethereum,” while Optimism said, “Today is going to be a good day.”

Given that Dencun has already lowered transaction costs by more than 90%, the general mood of positivity appears justified.

More to do

Dencun may have succeeded in its initial goals, but the market will determine what happens next. For Dencun to truly succeed, Arbitrum, Optimism, zkSync Era, Loopring, Polygon and others will need to pry users away from the Ethereum base layer.

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The early signs are encouraging here, too. Data from GrowThePie shows that transaction volume on Arbitrum has increased by 145% in the last seven days, while Optimism has increased by 144%. On-base transaction volume has increased by 203% over the same period.

Gallagher says that with Dencun up and running, the focal point over the longer term “will be on DeFi [decentralized finance] and how this upgrade potentially increases speed and lowers cost. If it fails to lower costs significantly, then I believe market share will continue to grow on other chains that are faster and more affordable.”

Given that Dencun is yet to be tested against everything the crypto market can throw at it, Gallagher’s note of caution is a reminder against complacency. But for the moment, Ethereum’s latest upgrade looks like a job well done.