Posted March 8, 2024 at 12:31 pm EST.
In less than a week’s time, fees on Ethereum layer 2 networks are set to be reduced dramatically, thanks to Ethereum’s Dencun upgrade.
Scheduled for March 13, Dencun is the next major upgrade on Ethereum’s ambitious multi-year roadmap to reduce transaction fees, increase security, and future proof the network. At the heart of Ethereum’s scaling plan are layer 2 solutions, which help reduce the load on the network.
The Dencun upgrade includes a highly-anticipated improvement protocol EIP-4844, also known as “proto-danksharding,” that benefits layer 2 rollups that bundle together transactions and post them as a single piece of data to Ethereum.
After the upgrade, instead of rollups needing to use calldata to post transactions to Ethereum, which is costly and makes up around 90% of the gas fees required to post bundled transactions, layer 2s will now be able to use a highly optimized and much cheaper transaction type called “blobs.”
On X last Saturday, Ethereum founder Vitalik Buterin noted that 125kb of calldata costs around 0.06 ether ($231.27), while users on prediction market Polymarket expect the gas price of an equivalent-sized blob to be 0.001 ether ($3.93), which is a cost saving of around 60 times.
Polymarket is predicting that blobs (~125 kB) will cost ~0.001 ETH.
Today, 125 kB calldata costs ~30 gwei per gas * 16 gas per byte * 125000 gas ~= 0.06 ETH
And if you think polymarket’s guess that blobs will be 60x cheaper is over-optimistic, you can use the market to hedge! pic.twitter.com/vUwJInNhCP
— vitalik.eth (@VitalikButerin) March 3, 2024
All Bets Are Off
Around 36% of users betting on the topic on Polymarket believe a blob will cost less than 0.0001 ether ($0.39), while 33% think it will be between 0.0001 ether ($0.39) and 0.001 ether ($3.93).
“There’s a pretty wide range of views, even on the prediction markets, as to how big the reduction will be,” said Ed Felten, co-founder and chief scientist at Offchain Labs, the research and development firm behind Ethereum scaling solution Arbitrum.
The lack of historical pricing for blob gas, which is the gas consumed by transactions that make use of blobs, makes it difficult to predict with certainty how much an average transaction will cost, said Luke Nolan, Ethereum research associate at digital asset investment manager CoinShares. He points out that even the layer 2 rollup Optimism uses Polymarket’s predictions as a midpoint estimate within its saving calculator.
Predicting the price can be a dangerous exercise, said Nicolas Liochon, founder of Linea, an Ethereum layer 2 blockchain bootstrapped by Consensys. The real price will vary based on demand, he said. At the price levels predicted by users on the Polymarket, many external actors may want to use this blob space and, more broadly, activity on rollups is increasing dramatically, he added, which are both factors that could influence the fee reduction.
Conservative Estimates
Coinshares’ Nolan agrees that transaction fees are unlikely to be sustained at a level of 60 times cheaper than in the current system if demand is high for blobs. As a conservative estimate, it’s more likely transaction fees will be reduced by 15 to 20 times, he added.
“There’s a good likelihood it will be a 10 times or more reduction, but I wouldn’t bet my life on that,” Felten said. “It could easily be less.”
Several layer 2s are predicting a reduction factor in fees closer to six to 10 times, which was stated at various ETHDenver panels, said Toni Mateos, co-founder and chief technology officer at LAOS network, which is a layer 1 blockchain deployed as a parachain within Polkadot.
Read More: Top Takeaways From ETHDenver
Average layer 2 gas fees have ranged from $0.15 to $0.60 this year, according to a blog post from Lucas Outumuro, head of research at crypto market intelligence platform IntoTheBlock. He also estimates that costs will be cut by at least 10 times, thanks to the introduction of blobs.
On Base, the new Ethereum layer 2 from crypto exchange Coinbase, transaction fees are expected to decline from double-digit to single-digit cents, said Roberto Bayardo, a core developer at Base.
“Fee reductions will vary depending on how aggressively the layer 2 chains take advantage of blob data,” Bayardo said. “We expect Optimistic rollups, like Base, to benefit the most, since they can aggressively compress transaction data stored in blobs, and otherwise have minimal layer 1 gas costs.”
For Morph, an Ethereum scaling solution that looks to combine the strengths of Optimistic rollups and zero-knowledge technology, its aim is to have as many layer 2 transactions as possible in a blob to share this cost. Test results show a range of 50% to 90% improvement in costs under different transactions-per-seconds and optimization methods, said Ender Lu, chief technology officer at Morph.
“The cost of one blob remains fixed, regardless of whether it is fully utilized,” Lu said. “For example, whether you put 100 or 1,000 transactions into one blob, the gas cost remains the same.”
Layer 2s with high activity levels will have an advantage, said Linea’s Liochon. Chains which can delay posting to maximally fill blobs to capacity will see the greatest cost reductions, while lower traffic chains may not have this flexibility, Bayardo said.
Ethereum Layer 2s that don’t use Ethereum for data availability, such as side chains or Plasma chains, won’t derive significant benefits from this upgrade, Lu said.
A Waiting Game
There’s also a whole series of unknowns that will only be fully understood once the upgrade is rolled out and people’s behaviors adapt, Offchain Labs’ Felten said.
Different layer 2s will have different policies around how they will pass any cost savings from fee reductions to users, LAOS Network’s Mateos said.
“Layer 2 fees don’t necessarily correlate directly with submission costs to the layer 1,” Mateos said. “This fact varies by layer 2, some of which subsidize part of their costs to gain traction.”
It’s also unclear whether block builders, which are validators that construct blocks on the network, will require tips to include blobs and whether those costs will get passed back to the users, Felten said. And there’s also uncertainty around how much traffic will come to rollups as a result of the fee reductions and to what extent increased traffic pushes prices back up, he added.
“After the upgrade, it’s important to not think after 12 or 24 hours that we know what the future will be,” Felten said. “It’ll take longer than that to really learn the full impact of it.”
Still one thing remains certain, and that is that blobs are going to be much cheaper than calldata, Coinshares’ Nolan said.
“Even a big uptick in this blob gas price means that it will always be cheaper to use blobs as opposed to calldata, no matter how much pent up demand there is,” he said.
