When the demand for blobs in the Ethereum Optimistic Rollup (OB) exceeds the target rate (currently 3 blobs per block), the protocol automatically increases the forced base cost of blobs. EIP 7762 increases the minimum base cost of blobs so that the blob fee market can be more sensitive to fluctuations in blob demand and achieve price discovery for blobs faster.
EIP 7623 introduces an increase in the cost of calling data – in addition to blobs, transactions can also use the call data field to publish arbitrary data to the Ethereum network. However, using the call data field for aggregators is usually more expensive. EIP 7623 aims to further increase the cost of calling data to reduce the maximum block size of Ethereum. As Ethereum developers increase the block size by increasing the blob capacity, they hope to prevent edge cases where validators with a large amount of call data and the maximum number of blobs propagate abnormally large blocks.
Increasing the blob throughput in Pectra is a controversial topic among developers as it may reduce the number of independent stakers running on the network, which could have a negative impact on Ethereum’s decentralization. Independent stakers refer to users who stake their own ETH and run their own staking operations at home or through cloud providers, rather than relying on staking pools or other intermediaries. Independent stakers are users who operate validators on the most resource-constrained devices compared to other types of stakers.
Increasing blob throughput may increase the computational requirements for operating validators, leading to some independent stakers shutting down their machines. In ACDE #197, developers shared anecdotal evidence indicating that some independent stakers have been struggling to operate validators after the DenCun upgrade. Developers have agreed to conduct data-driven research on the health of independent staking operations before deciding on increasing Pectra’s blob capacity.
Expected Impact:
In the short term, Ethereum’s DA improvements are expected to reduce protocol revenue from Layer-2 rollups (L2), increase the profitability of L2 sequencers, and lower transaction fees for L2 end users. These impacts are expected to be similar to the effects observed after the activation of EIP 4844 in the DenCun upgrade.
Affected stakeholders: Layer-2 aggregators, L2 end users, ETH holders
Expected impact on ETH: Negative
Pectra Timeline Analysis:
Developers have discussed two alternative code changes to include in Pectra in case the changes to the blob fee market are ultimately not included in the upgrade. Due to the potential increase in blob capacity in Pectra, these two code changes are unlikely to be included in Pectra. They are EIP 7782 and EIP 7783.
EIP 7782, proposed by Nethermind developer Ben Adams, reduces Ethereum slot time from 12 seconds to 8 seconds. This change in slot time would effectively increase Ethereum’s transaction throughput by 50% and decrease transaction confirmation speed by 33%. Concerns raised by developers in ACDE #198 and ACDC #144 about this proposal are that it may accelerate state growth, making the transition to Verkle more difficult. Additionally, Francesco D’Amato, a researcher at the Ethereum Foundation, suggests that changes to slot time could have negative effects on positive research initiatives such as the Separating ePBS and Inclusion List.
EIP 7783, proposed by Erigon developer Giulio Rebuffo, is a relatively easier-to-implement code change for developers as it does not require a hard fork. EIP 7783 creates a mechanism for client teams to gradually increase the Gas target over time. Increasing the Gas target would increase the maximum number of transactions that can be included in a block. Rebuffo’s proposal does not specify a specific Gas target, but suggests a mechanism for developers to choose a target and gradually and safely increase it to that threshold. The potential implementation of EIP 7783 shortly after the Pectra upgrade was discussed in a recent conference call in October 2024.
The addition of any new EIPs in Pectra could delay the activation of the mainnet upgrade. Additionally, the longer developers delay deciding on the final scope of Pectra, the longer it will take to upgrade the public Ethereum testnets for developers. As of October 2024, developers do not seem to be close to finalizing the scope of Pectra. Therefore, it is unlikely that the public testnet upgrade of Pectra will be launched by the end of this year.
Assuming that the scope of Pectra is finalized in January or early February next year, developers will need to test any additions to Pectra on a private test network (also known as a development network) before proceeding with the upgrade of the public Ethereum testnet. It is recommended that at least one month be reserved for testing additional code changes to Pectra, and developers may consider starting the upgrade of the public testnet in March, temporarily activating the mainnet upgrade sometime in April or May.
These timeline estimates may change based on the time developers take to finalize the scope of Pectra in the coming months and the complexity of the code changes they decide to include in the upgrade.
Other Catalysts for ETH Value:
So far, Pectra is a mixed bag of code changes, some of which are expected to enhance the user and smart contract developer experience. With the simplified scope of Pectra, this upgrade is not expected to have a significant impact on the value of ETH. In addition to Pectra, Ethereum has more upcoming updates that could directly affect the value of ETH, such as reducing issuance and implementing PeerDAS. However, as mentioned earlier in this report, it is difficult to predict when these changes can be activated on the mainnet.
It is worth noting that as Ethereum further pursues DA scalability improvements according to the “rollup-centric roadmap,” the impact of protocol upgrades on the value of ETH should become increasingly smaller over time. In the long run, as applications and users migrate to L2, Ethereum’s revenue may be primarily driven by user activity on L2. Upgrades happening on L2 can improve user experience, interoperability, decentralization, and security on these networks, which are more important for the value of Ethereum than optimizations and improvements at the base layer. While upgrades like Pectra further enhance the decentralization and usability of the protocol, they are unlikely to attract a new wave of users and drive adoption of decentralized applications, as Rollups can scale to meet this demand, while Ethereum cannot. Therefore, when evaluating factors driving ETH value, applications built on Rollup and protocol upgrades based on Rollup (further enhancing the functionality of applications built on Rollup) are key to the analysis.
A common concern with the rollup-centric roadmap is the fear that Ethereum could become too cheap due to the DA layer or that the income from Rollups would be insufficient to support the value of ETH. These arguments underestimate the overall potential market for decentralized applications. Currently, use cases for cryptocurrencies are disrupting every industry in the world, as public blockchains have the potential to fundamentally change human coordination activities, just as artificial intelligence (AI) has the potential to disrupt all industries by fundamentally changing how digital content is generated.
While scalability improvements like EIP 4844 or PeerDAS may reduce protocol revenue in the short term, they are laying the foundation for Ethereum to support more on-chain activity than Ethereum L1. Gaming, fundraising, decentralized finance, and social media are just a few examples of application types that historically have led to increased transaction volume and fees on Ethereum. These applications leverage the network effects, decentralization, censorship resistance, and composability of Ethereum. Theoretically, application on Rollups will be able to leverage all these advantages of Ethereum in addition to significantly lower costs and enhanced capabilities such as different types of virtual machines, programming languages, and account management.
However, in practice, Rollups do not inherit the decentralization, censorship resistance, or composability properties of Ethereum in a meaningful way. While they can effectively reduce transaction costs, they come at the expense of decentralization and security. In other words, apart from lowering transaction costs, Rollups do not meaningfully scale Ethereum. Users have to weigh too many considerations when migrating their activities and applications from L1 to L2. Rollups as a technology, along with infrastructure projects like re-staking solutions and ZKVM, are still under development. The maturity of Rollup as a technology and its ability to meaningfully inherit Ethereum’s security and scale to millions of new users is critically important before pure DA improvements can drive new adoption of Ethereum or Rollup built on it.
Conclusion:
Despite the uncertainty in the scope and timeline of Pectra, Ethereum remains a leader as we enter the Web 3 era, where human coordination is primarily done through decentralized blockchain technology rather than centralized internet protocols. To achieve this vision, Ethereum must continue to scale as a decentralized technology while countering centralized forces such as maximum extractable value (MEV) and transaction censorship. Although Ethereum certainly has competitors in achieving this vision, dominating the Web 3 blockchain space is still Ethereum’s game to lose.
Ethereum maintains the highest network effects among all general-purpose blockchains. It remains the most battle-tested blockchain for smart contract developers and the most researched and developed blockchain for researchers and developers working on challenges related to scalability, MEV, censorship, user experience, and more. However, as Ethereum developers pursue the rollup-centric roadmap, the importance of Ethereum as a technology and Ethereum upgrades should diminish as solutions to the biggest problems faced by Web 3 will be inherited by Rollups.
Pectra will introduce user experience-focused code changes that are expected to attract new users and smart contract developers to the Web 3 space. However, this may be one of the last remaining upgrades where code changes directly impact users and ETH holders on the protocol. As users migrate to Rollups, where protocol revenue is increasingly driven by Rollup activity, the most important code changes for Ethereum stakeholders will be those happening on Rollups. It is therefore crucial to analyze the maturity of Rollup as a technology and its ability to meaningfully inherit Ethereum’s security and scale to millions of new users.
