Reduced Costs, Increased Activity: ETH's L2s Post-Dencun
Executive Summary
- Market trading color: BTC rebounds post-FOMC, $1.2B liquidations, $742.2M ETF outflows, Dencun upgrade boosts Ethereum L2s, $BTC potential outperformance
- Theme of the week – The effects of the Dencun upgrade on L2s
- Sector commentary: Bitcoin, Ethereum, Solana, DeFi growth, NFT trends, mining updates, and evolving regulatory landscape in crypto markets
Market Trading Color (Nolan Aibel)
There certainly have not been any dull days to start the week. After sinking 8% below $61,000 on Tuesday, $BTC’s highest daily percentage fall since the FTX collapse in Nov ’22, the digital commodity has rallied back above $67,000 following a dovish FOMC yesterday. This significant volatility has caused over $1.2B in perp liquidations to start the week, $823M of these from long positions, $398M from shorts. This three-day total ranks amongst the highest amount of liquidations seen over a three day period since last March.
Perhaps the most notable news this week has been spot the $BTF ETF data. The 10 ETFs combined experienced their third outflow day in a row. There has been over $742.2M in outflows to start the week. The “newborn 9” did their best to offset the $1.4B in outflows from $GBTC. In efforts to reduce these withdrawals, Grayscale’s CEO, Michael Sonnenshein, affirmed the company’s commitment to reduce fees stating, “I’ll happily confirm, that, over time, as this market matures, the fees on $GBTC will come down.” Regardless, since inception spot ETFs have seen an impressive $11.4B of net inflows and have assets totaling $54B.
Looking at a liquidation level heatmap, there are smaller yet visible areas building around the $70,000 and $60,000 areas. If $BTC is able to break the upper range of $70,000, the next target would be new all-time highs. With this technical view, a decreased likelihood of an $ETH ETF being approved in May, increased activity on native L2s, and $SOL continuing to steal market share from $ETH, we could see $BTC to continue to outperform $ETH. The ETH/BTC ratio at .057 continues to decline and is (3.91%) over the past week.
As mentioned above, with the success of the Dencun upgrade, user experience on Ethereum based L2s has been significantly heightened. Look for Arbitrum, Optimism, and Base to continue to see increased volume and fees generates. We detail that more in the research below.
Source: Dune Analytics @shogun
In the world of options, implied vols have softened off early week highs. $BTC and $ETH have both consolidated around 70. Look for this gap to widen with $ETH potentially experiencing more volatility in the short term.
Source: TheTie
The Rollout of the Dencun Upgrade
On March 13th, 2024, Ethereum activated the Dencun upgrade, introducing EIP-4844 with 'blobs' for off-chain data storage. This significantly reduced transaction fees on L2 solutions, benefiting Ethereum enthusiasts. The upgrade also improves EVM access to beacon block roots, enhancing data efficiency. Future upgrades will expand blob space and implement data availability sampling, aiming for near-zero transaction costs.
The fractionalized liquidity across Ethereum L2s has been a contributing factor to why ETH has underperformed Solana and other L1 blockchains, especially in meme trading activities. Unlike Ethereum, which has faced challenges with high gas fees and congestion on its mainnet, Solana and other L1s offer faster and cheaper transactions, making them more attractive for traders looking to engage in quick and cost-effective meme trading. However, with the recent Denon upgrade and the introduction of blob space, Ethereum L2 transaction fees have significantly decreased. This reduction in fees is expected to boost trading activity across Ethereum L2s, making them more competitive and attractive for meme trading and other DeFi activities.
Source: oklink.com
After the upgrade, Layer 2 transaction fees notably dropped on platforms like Optimism, Base, Arbitrum, zkSync, and Zora. This graph highlights the immediate impact, showcasing Ethereum's dedication to affordability. Ethereum's L2 gas fees now average fractions of a penny thanks to blob space integration.
Source: Dune Analytics @Marcov
Financial Implications of EIP-4844
The introduction of blobs has not only decreased transaction costs but also enabled an array of use cases by dramatically lowering the costs of essential operations such as:
- Minting ERC-721 NFTs, where costs have been reduced from $0.9819 to $0.0116
- Deploying ERC-721 contracts now costs $0.0186, down from $1.4235
- Airdropping ERC-721 NFTs costs have been slashed to $0.0034 from $0.1736
While the Dencun upgrade has certainly made transaction on L2s more attractive, Ethereum’s mainnet gas fees remain high. According to Etherscan, an average swap costs around $45.87 in gas fees, and an NFT sale averages about $77.52. Despite this, the reductions in L2 fees could see a shift in user behavior, with many opting for L2 transactions due to their newfound affordability that still rollup to Ethereum.
Source: Etherscan.io
Base Network's Transaction Surge
A testament to the upgrade's success is the Base network, an Ethereum Layer 2 by Coinbase. Following the Dencun upgrade, Base experienced a dramatic increase in daily transaction volume and user adoption, with the daily transaction count soaring to over 1.05 million — outpacing other optimistic rollups like Arbitrum, which reported 960,000 transactions, and Optimism, with 519,000.
Source: The Block
The reduction in median gas fees on Base was paralleled by an uptick in new users, with weekly new user counts spiking to 800,000, a 600% increase from the preceding week. This surge in user activity is mirrored in the broader Layer 2 ecosystem, where platforms like Arbitrum are also poised for significant fee reductions. Arbitrum's gas fees are expected to decrease by another 90% due to optimizations in the ArbOS 20 Atlas upgrade. This combination of reduced fees and increased user engagement highlights the growing interest and adoption of Layer 2 networks, highlight that the cost to transact on a network is a key factor in user acquisition and adoption from other chains.
Source: Ethereum Foundation, L2Beat, CoinMetrics
Sector Commentary
- Layer One / Altcoins
- Bitcoin ($BTC): Bitcoin Drops Under $63K, Leads to Marketwide Correction (link)
- Bitcoin ($BTC): Bitcoin Flash Crashed to $8.9K on BitMEX (link)
- Bitcoin ($BTC): Standard Chartered Raises Year-End BTC Forecast to $150K, Sees 2025 High of $250K (link)
- Bitcoin ($BTC): Bernstein analysts see bitcoin ‘dip buying opportunity’ ahead of the halving (link)
- Bitcoin ($BTC): World's Largest Pension Fund Seeks Information on Bitcoin Under Portfolio Diversification Plan (link)
- Bitcoin ($BTC); Ethereum ($ETH): Bitcoin and ether perpetual futures funding rates still elevated despite downturn in spot prices (link)
- Ethereum ($ETH): Ethereum Could Top $14,000 Next Year Alongside Bitcoin Boom: Standard Chartered (link)
- Solana ($SOL): Solana activity flips Ethereum amid memecoin craze, even as txs fail (link)
- Solana ($SOL): Solana Meme Coin Slerf Clocks Higher Trading Volume Than All of Ethereum (link)
- Altcoins: Bitcoin maxis are about to kick off the altseason as BTC turns institutional (link)
- DeFi
- AI / NFTs / Web3
- RWA / Tokenization / Metaverse / Gaming
- MANTRA Chain Raises $11M for RWA Tokenization with Middle East Tint (link)
- Sygnum issues $50 million of Matter Labs' reserves as Fidelity ILF security tokens on zkSync (link)
- Brevan Howard-Backed Tokenization Firm Libre Goes Live (link)
- Hong Kong gaming firm to double down on $100 million crypto investment (link)
- Square Enix Brings Ethereum NFT Game Symbiogenesis to HyperPlay Amid Investment (link)
- Digital Infrastructure: Capital Markets / Exchanges / DAOs / Mining
- Hot New Bitcoin Funds Are Still Waiting for Buy-In from Financial Advisers (link)
- History of Crypto: A timeline of events that shaped the future of money (link)
- Michael Saylor's MicroStrategy Acquired Another 9,245 BTC for $623M (link)
- BlackRock Managing Director says spot bitcoin ETFs are satisfying 'pent-up demand' (link)
- Bitcoin Correction May Continue if ETF Inflows Disappoint in Next Few Days: 10x Research (link)
- Grayscale CEO Believes Bitcoin ETF Fees Will Drop Over Time: CNBC (link)
- Genesis to Pay SEC $21M Penalty to Settle Charges Over Gemini Earn Product (link)
- Coinbase's Allies Join Crypto Firm's Case Against SEC (link)
- Luxor Looks to Help Bitcoin Miners Hedge Halving Risk With New Hashrate Futures (link)
- Goldman Sachs has been eyeing crypto bankruptcy claims (link)
- Galaxy Digital to Introduce Exchange-Traded Products in Europe in 'Matter of Weeks' (link)
- Citi and Brazilian Development Bank Join Hyperledger Foundation (link)
- Bakkt threatened with delisting by sister exchange NYSE (link)
- EU Lawmakers Vote for Three Major Texts in Anti-Money Laundering Package That Also Targets Crypto (link)
- FTX victims describe ‘irreparable harm’ ahead of Sam Bankman-Fried’s sentencing (link)
