TL;DR:

• Ethereum's current throughput is relatively modest, standing at just 50 transactions per second, a far cry from the rapid processing speeds seen with platforms like Solana. 

• While the Dencun Upgrade holds promise for enhancing Ethereum's throughput in the future, this improvement won't be immediately evident on the network. 

• A sudden surge in speed could disrupt Ethereum's economic model, which relies on a small amount of ETH being burned with each transaction. 

• The Dencun Upgrade aims to lower the costs for Layer 2 networks to aggregate transactions onto the Ethereum main chain.

• For investors, Decun enhances Ethereum’s usability, accessibility and its position as a leading blockchain platform for innovation, improving the investment case for ETH.

 

The activation of the Dencun upgrade marks a significant milestone in Ethereum's most recent evolution (which started with the Merge), particularly for investors eyeing its long-term potential. At the heart of this upgrade lies a new feature (with a rather intimidating name) called Proto-Danksharding, a proposal set to revolutionize Ethereum's second layer scaling solutions called rollups. This update is essential to solidify the notion that the leading platform for smart contracts in crypto is ushering into a phase akin to the broadband era witnessed by the internet in the 2000s, establishing the requisite technological framework to accommodate millions of new users and applications.

 

How will Dencun improve Ethereum?

To draw a parallel with the dial-up internet era preceding the broadband phase, let's elucidate what is perhaps the primary limitation of the current Ethereum network: 

• Presently, Ethereum updates its ledger approximately every 12 seconds¹, processing around 600 transactions within that time frame, resulting in a throughput of approximately 50 transactions per second. 

• However, until the completion of each 12-second cycle, transactions remain pending. 

• This delay poses challenges for users seeking to conduct frequent transactions; scaling solutions like Polygon are designed to expedite transaction processing, achieving a turnaround time of just 3 seconds. 

• However, the trade-off is a compromise in security compared to Ethereum: to bridge this gap, sidechains² and rollups³ summarize transactions and periodically submit them to Ethereum as a single transaction. 

• Currently, this process incurs substantial fees for scaling solutions, which are ultimately passed on to end-users.

 

By leveraging so-called data blobs, Dencun empowers these scaling solutions to access and register data in the blockchain's base-layer more efficiently, without engaging in costly competition with other applications like NFT marketplaces or decentralized exchanges such as Uniswap. This reduction in costs promises to drive down transaction fees for users of Ethereum's scaling solutions⁴, amplifying the network's utility and attractiveness for investors.

 

Why it matters to investors

Investing in native tokens of smart contract platforms, like ether (ETH), is driven by the anticipation of a future where these networks host a plethora of highly popular applications and users. The applications and users will demand network access, which will require the ownership of aforementioned native tokens. But in order to achieve this, the Ethereum network must display low enough costs and possess much higher throughput to register data in its database. Only then—and akin to the internet's evolution—can we expect the utilization of its block space to become a routine aspect of daily life for hundreds of millions of users.

Furthermore, updates like Dencun introduce a crucial advancement in Ethereum's scalability roadmap, making the combination of the network and its scaling solutions a high-throughput platform capable of supporting a vast array of decentralized applications and use cases. While the upgrade may initially dampen demand for ETH due to lower gas costs for major block space consumers, it's reasonable to expect that more rollups will be able to operate on Ethereum, potentially consuming gas at a pace equal to or greater than the current levels. For investors, it signals not only enhanced usability and accessibility but also reinforces Ethereum's position as a leading blockchain platform for innovation and the long-term investment thesis for ETH.

 

 

_{¹Source: https://usa.visa.com/solutions/crypto/the-merge-ethereum.html} 

_{²A sidechain is a separate, independent blockchain linked to the main blockchain (mainchain) using a two-way bridge. It can be used to run blockchain applications like decentralized apps (dApps), taking some computational load off the mainchain and helping to scale the blockchain.}

_{³A rollup scaling solution for blockchains which involves ‘rolling up’ or compiling a bunch of transactions on a layer 2 blockchain and turning them into a single piece of data to broadcast on a layer 1 blockchain. To explain, they take the transactions out of the mainnet and process them off-chain. Then convert them into one single piece of data, and submit them back on a parent chain.}

_{⁴Estimates suggesting a reduction by a factor of 10 to 20}

 

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