Dencun Hard Fork Set to Influence Ethereum Emission Dynamics

The upcoming Dencun (Cancun-Deneb) upgrade may impact the emission dynamics of the second-largest cryptocurrency by market capitalization, suggested CoinShares researcher Luke Nolan, as reported by The Block. 

The upgrade introduces several changes to the system, including EIP-4844. It incorporates the Proto-Danksharding option, aimed at scaling the network by creating a new type of transaction for large binary data arrays (BLOB). This is expected to reduce the size of fees for L2 solutions based on Rollups technology.

Post-Dencun, transaction data from second-layer networks will be sent to Ethereum via BLOB space—an alternative to the calldata mechanism. This could lead to reduced gas consumption and, consequently, a decrease in the volume of ether burned. 

The London hard fork activation in August 2021 implemented EIP-1559, which involves the destruction of all base fees (miners only receive the priority fee).

“Transaction calldata accounts for 90% of the costs that L2 incurs as gas fees. However, after the Dencun upgrade, instead of publishing their data through calldata, second-layer solutions will be able to use the new large array mechanism, significantly reducing expenses,” Nolan noted in a conversation with the publication.

According to him, shortly after the hard fork, gas prices will stabilize at lower levels. The potential reduction in the volume of coins burned as base fees could affect the supply dynamics of Ethereum.

“Demand for gas in the Ethereum network triggers a deflationary mechanism through gas burning. It can reduce the market supply of coins,” the expert explained.

The aforementioned impact of the upcoming upgrade with the implementation of the BLOB mechanism could be mitigated by other factors—such as the growing demand for L1 transactions, Nolan suggested. The latter could become the main driver of deflation.

“Even if we see a reduction in gas prices due to L2 levels using large binary data arrays, there is no strong reason to fear that Ethereum will become significantly inflationary. The goal of the Dencun upgrade is to reduce gas fees for those conducting transactions via rollups and to bring users back to the network through lower fees. Therefore, increased overall activity means greater gas consumption,” Nolan shared his thoughts.

He added that the ultimate goal of Dencun is to increase Ethereum’s market share. Thus, “secondary effects” are offset in the long term, regardless of “short-term gas price fluctuations.”

Nolan expects the hard fork activation on the mainnet in March. 

Earlier in January, Ethereum developers activated Dencun on the Goerli testnet.

According to the previously presented schedule, Dencun deployment is set for January 30 on the Sepolia testnet, and February 7 on Holesky.