Experts examined the impact of Dencun on Ethereum monetary policy

The new architecture for L2 solutions and changes to the staking pool as a result of the successful activation of Dencun will affect Ethereum's monetary policy. The changes were analyzed in Glassnode.

The Dencun upgrade has activated successfully, introducing a new architecture for Layer-2 solutions to anchor into the mainchain. It also introduces modifications to the staking pool. Both could impact Ethereum's monetary policy. pic.twitter.com/mJt4EdCliq

— glassnode (@glassnode) March 19, 2024

One of the main components of the Dencun update was EIP-4844. It includes a Proto-Danksharding option designed to scale the network by creating a new type of transaction for large binary data sets (BLOBs).

BLOBs are temporarily stored at the consensus layer rather than at the execution layer. The solution is designed to reduce fees for L2 protocols, especially those based on Rollups technology.

The table below shows the dynamics of fees. Optimism and StarkNet indicators dropped below $0.01.

Data: Glassnode. Specialists normalized fees in Mainnet and L2 solutions in value terms. Thus, in Arbitrum and Optimism the indicator varied in the range of $0.1–0.3, and in the main network – $2–7.

During periods of significant on-chain activity, the metric in Ethereum could exceed $30, which provoked a reaction in L2 networks, where it jumped to $2.5.

Data: Glassnode. Analysts noted that such interdependence at times leads to higher costs and a more complex user experience. L2 solutions have added a new source of demand for block space in Ethereum. According to the Fidelity report, their share is ~10% of the total.

Data: Glassnode. Experts noted that the community has hope for the transition of some users to L2 solutions from the main network due to lower fees, which will be reflected in an increase in Ethereum throughput without compromising the decentralization and security of the mainnet.

Experts recorded a jump in TPS in L2 networks to 105, including in Rollups - up to 46.

Glassnode saw this as a sign of the roadmap's success. Compared to its largest competitor, Solana, which averages around 2,600 TPS, there remains a significant difference, largely dependent on the design architecture. Ethereum is modular, Solana is monolithic.

Data: Glassnode.Dencun also influenced Ethereum stakers. In particular:

1. Permanent signed outputs improve the user experience for liquid staking participants. Before the update, the signature key required to authorize the withdrawal of a user's ETH from the pool was held by the validator operator. This scheme assumes that the service client relies on the goodwill of the validator operator when he wants to withdraw ETH. Following Dencun, validator operators can pre-sign voluntary exits, allowing clients to unilaterally stop using the service.
2. Increasing the confirmation window stretches the time required for validators to vote for the correctness of a block by half - from 6.4 minutes to 12.8 minutes. This allows for more confirmations to be collected, which can speed up the block confirmation process. The daily number of certifications now stands at approximately 759,000.

Data: Glassnode. The update also set a fixed limit for new validators (eight for each 6.4 minute epoch) in order to slow down the rate at which they grow

Before Dencun, the number of entries/exits of validators from the staking pool was regulated by the outflow limit. The innovation was another step towards specifying the rate of increase in the total number of active validators. This will reduce the side effect of worsening slowdown of interaction between nodes.

Data: Glassnode. The slowdown in the growth of the number of validators and, as a consequence, the effective balance of ETH in staking has a secondary impact on the monetary policy of Ethereum. Since the current supply is based on the number of active validators, the restrictions introduced will reduce the rate of expansion of the supply of coins.

According to analysts’ calculations, after the Shanghai update, as the number of validators increased, the daily emission increased from 1183 ETH to 2554 ETH per day. After Dencun, the indicator showed negative dynamics for the third time in history.

Data: Glassnode. Potentially, a slowdown in emission could be reflected in a decrease in the supply of Ethereum if the number of coins burned in conditions of high on-chain activity exceeds the number of coins issued. According to Glassnode, the total supply of ETH available has dropped by 410,000 since The Merge.

Data: Glassnode Dencun's impact on the Ethereum supply remains to be assessed due to two mutually impacting changes:

1. L2 decision binding transactions have been moved to a BLOB data structure, which has eliminated ~10% of the commission load. This may result in a slight decrease in the amount of ETH burned.
2. Lower L2 fees could encourage increased use of both mainnet and scaling solutions, which could create upward pressure on fees.

According to analysts, the growth rate of emission will decrease due to a decrease in the growth rate of new validators.

Ethereum has undergone six major upgrades throughout its history, not all of which were directly aimed at changing the supply of ETH. The last four led to a slowdown in the metric. After The Merge, generally negative dynamics were recorded.

Data: Glassnode. Let us recall that, according to Grayscale experts, the launch of Dencun will help Ethereum “grow up” by increasing scalability.

Previously, Polygon developers also expressed hope for a reduction in commissions as a result of Dencun, but admitted that the main beneficiaries would be Rollups networks.