Ethereum’s Dencun Upgrade Could Mean Near-Zero Fees for Layer-2 Blockchains: Fidelity Digital Assets

• The Dencun upgrade is scheduled for March 13.

• It is expected to result in lower fees for users of layer-2 networks.

• It allows Ethereum to act as a proper database for other blockchains.

The Ethereum blockchain’s Dencun upgrade, scheduled for March 13, is the first step toward enabling its rollup–centric roadmap and will allow the network to function as a proper database for layer-2 blockchains to store data more efficiently and cheaply, Fidelity Digital Assets said in a research report on Wednesday.

“Ethereum’s improvement as a database unveils the opportunity for near-zero transaction fees for users of layer 2’s,” and this could attract more users, wrote analyst Max Wadington.

The upgrade will provide the scaling needed to support millions of users on layer-2 blockchains, making it a more “fitting distributed database for other blockchains,” the report said. The improvements are expected to bring substantially more users into the Ethereum ecosystem and should expand the network’s total addressable market (TAM).

The upgrade will lower costs for layer 2 blockchains to store data on the main blockchain, and this reduction will probably be passed along to users in the form of lower fees.

Rollups are Ethereum protocols that process transactions separately from the main network to help increase speed and lower costs. Layer 2s are separate blockchains built on top of layer 1s, or the base layer, that reduce bottlenecks with scaling and data.

Still, the upgrade will not have many direct positive effects for Ethereum users because the fee reductions promised to layer 2 users will not affect those transacting on the base Ethereum blockchain, the note said.

“In the short term, users who wish to benefit from this fee change must sacrifice some decentralization and security by transacting on layer 2’s instead of Ethereum,” Wadington wrote. “This will certainly spur more users to bridge assets elsewhere.”

“However, we strongly believe that transacting on Ethereum for application-specific purposes will still be considered the best option in the medium term as layer-2 platforms continue to mature,” the report added.