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Ethereum is scheduled to undergo a network update called the Deneb-Cancun, or Dencun, on Wednesday, aimed at improving user experience and lowering transaction fees for some users on the the network's Layer 2 blockchains.

Ether (ETH), the native coin of the Ethereum blockchain, soared past $4,000 early Wednesday, but gave up some of those gains to trade a shade under that threshold at 10:30 a.m. Eastern.

The Dencun update prioritizes scalability, efficiency, and security through the implementation of various Ethereum Improvement Proposals (EIPs).

According to the Ethereum Foundation, the most notable change is EIP-4844 for proto-danksharding, which seeks to optimize gas fees for Layer 2 network (L2) data and enhance the network's ability to handle greater transaction volumes via those secondary layers.

Exchanges may face delays in processing Ethereum transactions on Wednesday as the update rolls out. Coinbase (COIN) said Monday that it expects disruption due to the update to last for at least an hour on or around 9:45 a.m. Eastern time, although that could change. Kraken, meanwhile, is budgeting for about 15 mins of delay for maintenance around 4:00 a.m. Eastern time and recommends users "not to place or cancel orders during this timeframe."

Layer 2 networks, such as rollups, are secondary blockchains built on top of the base Ethereum network. In a bid to scale transaction volumes, rollups compress transactions by bundling them. The initial verification for those transactions happens off the chain, but the transactions are settled on the main Ethereum blockchain.

However, even with the compression, nodes processing transactions hold on to Layer 2 data forever, expanding their hardware requirements, which are then passed on to users via higher transaction or gas fees. More than 90% of the fees paid by users on rollups are because of this data storage.

The Dencun upgrade will alter that, allowing information related to Layer 2 networks to be added to the base Ethereum blockchain via temporary, more efficiently stored "blobs" rather than as permanent data. As of this writing, blob data will be available for 18 days. This is intended to lower costs.

"Each byte of data that L2s store on Ethereum costs roughly 16 gas. The introduction of blobs and a new fee market designed for blob data drops the gas cost down to 1 per byte of data stored," noted Fidelity Digital Assets in a report about the upgrade. "This is a maximum gas cost reduction of 94%!"

However, it is important to note that Ethereum users on the main blockchain or Layer 1 users won't stand to benefit much from the lower fees found on Layer 2 networks after the upgrade.

"Currently, Ethereums performance is hindered by its slow transaction speed, low throughput, and high costs for users. With average transaction fees of $2.3 as of February 22nd, Ethereum is significantly more expensive versus alternatives like Solana. This threatens to drive away end users to other chains," said crypto asset manager Grayscale in a report.

The Dencun upgrade "could help Ethereum compete in terms of scalability with faster chains," the Grayscale report said.

Fidelity also points out that in addition to differentiating it from competitors, the latest changes to the Ethereum network could help transition from being a general-purpose blockchain to a global database for Layer 2 networks. The best way to gauge the success of the Dencun upgrade will be to track the number of Layer 2 users via a metric such as active addresses," Fidelity said.

(UpdateMarch 13, 2024: This story has been updated with more recent ETH price information.)

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What You Need To Know Ahead of Ethereum's Dencun Update Wednesday - Investopedia