GM DOers!
The next big upgrade for Ethereum has officially been scheduled for March 13th.
EIP-4844, aka Proto-Danksharding, aims to lower gas fees for Ethereum L2s by a whopping 10x, enabling L2s such as Base, Arbitrum, or Optimism to settle transactions for pennies.
Now, if you’ve been on X, you would’ve heard a lot of different opinions about this upgrade, most of which are either wrong or out of context.
In today’s piece, I wanted to set the record straight by covering:
What exactly is EIP-4844?
How much lower will the gas fees actually become?
What will EIP-4844 do for Ethereum & L2s?
This one’s going to be fun, as we’re going to make some calculations to find out the approximate gas fees that’ll be paid when using Ethereum L2s.
Let’s get into it. ⏬
EIP-4844 introduces a cost-saving way for Ethereum to handle transactions with "blobs" of data.
Blobs, blobs, blobs… WTF are blobs? 😂
Think of blobs as big chunks of data that are cheaper to use.
This is great for Layer 2 networks, which need to send lots of data to Ethereum's main network but want to keep costs low.
These blobs make it cheaper for Rollups (i.e. Base, Arbitrum, Optimism etc…) to work.
Rollups take many transactions, pack them together, and then send them to the main Ethereum network to keep things secure and efficient.
With blobs, it costs less to send this packed data, which should help reduce fees for everyone using these services.
EIP-4844 is part of Ethereum’s bigger upgrade called danksharding which aims to enable Ethereum to handle over 100k transactions per second, by segmenting the network and utilizing blobs.
The full upgrade requires several protocol upgrades, like the EIP-4844, so it’s still a few years away.
We might do a piece fully dedicated to danksharding later on. Reply to this email with a yes if you’d like to read that!
Before we make the calculations, you’ll need some context…
When you transact on Ethereum, you pay a fee (gas), for processing and recording your transaction on the Ethereum network.
When you pay gas fees on Ethereum, you're covering two main things: calldata and non-calldata.
Calldata is the information needed for a transaction, like sending tokens.
Non-calldata includes everything else that makes the transaction secure and recorded on the blockchain, like validating and storing the transaction.
Right now, about 77% of gas fees go towards covering the calldata.
What EIP-4844 will do is make the calldata approximately 10 times cheaper.
This means that 77% of the total gas fees paid will be reduced by 10x.
What does this mean for Ethereum and its users? Let’s look at numbers from January to assess.
In January, L2 users paid a total of 8,157 $ETH in gas fees.
6,280 $ETH (77%) was spent on gas for calldata. With EIP-4844 active in January, calldata gas costs could have dropped by about 90% (10x), to just 628 $ETH.
In total (including non-calldata), the total gas fees paid by L2 users for January would’ve been 2,505 $ETH.
So in reality, the gas fees would’ve been lowered by 70%, meaning that for the user, the gas fees would have ranged between 1-5 cents per transaction.
Important: These rough estimates hint at what L2 fees could have been last month with EIP-4844 – they're not guaranteed figures.
Now, also keep in mind that EIP-4844 is just the first step for Ethereum to achieve scalability. It’s likely that in the next 2 years, L2s will reach under $0.01 gas fees.
So for the end user, this is great, but how does this impact Ethereum as a whole?
Since its merge, Ethereum has become one of the only profitable blockchains in crypto, i.e. it has more revenue (gas fees) than expenses (paying validators).
What does Ethereum do with its revenues?
It pays its validators for securing the network
It burns the rest
If we look at Ethereum’s revenue from January, we can see that 85% (67,944 $ETH) of the total revenue was burned, while the rest 15% (11,867 $ETH) went to validators.
This mechanism makes $ETH a deflationary asset. Since its merge, the Ethereum network has burned 1.4 million $ETH, causing a -0.2% supply change.
This is what makes $ETH such a strong asset. Learn more about its tokenomic design in our PRO report here.
How will EIP-4844 impact this? Will $ETH become inflationary? Let’s explore.
Remember that EIP-4844 will only reduce gas fees for L2 networks.
In the past 30 days, Ethereum burned 86,000 $ETH – only ~11% of that (9,572 $ETH) came from L2 transactions.
So, this means that just 11% of $ETH burned will be cut by 70%.
If EIP-4844 was already live, only 2,871 $ETH would’ve been burned from L2 transactions, instead of 9,572 in the past 30 days.
This means that the $ETH burned would’ve decreased by 6,699 $ETH.
Would that mean that Ethereum would cease to be deflationary?
Nope! In the past 30 days, 14,000 $ETH was burned.
If we exclude the 6,699 $ETH that would’ve been ‘lost’ because of EIP-4844, Ethereum would have still decreased its circulating supply by ~7,300 $ETH in the past 30 days.
Summary: EIP-4844 will reduce Ethereum’s revenues and the amount of $ETH getting burned.
Not great, but as shown above, $ETH would still remain a deflationary asset.
However, in the long-run, this is extremely bullish. Why?
After this upgrade, it’ll cost pennies or less to transact on Ethereum L2s, which will probably increase network activity by making Ethereum transactions more affordable, which in turn could lead to a higher volume of transactions.
More importantly, since it’ll cost pennies to transact on L2s, developers will be able to abstract away the clunky web3 tech from the user.
The biggest hurdle for web3 apps right now is that they force users to sign transactions – therefore, they’ll never be able to reach mainstream adoption.
Since transactions will cost pennies, it’ll be cheap for developers to cover the gas fees for users, enabling them to create apps that look and feel just like web2 apps, but that have all the benefits that web3 offers.
That’s the great unlock of EIP-4844 and it shouldn’t be underestimated! Bullish. 🐂
Thanks for reading. And remember, you're strong, you’re powerful, you’re alpha! ❤️
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Disclaimer: This article is for informational purposes only and not financial advice. Conduct your own research and consult a financial advisor before making investment decisions or taking any action based on the content.
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