Original author: YBB Capital Researcher Ac-Core
1. Background of Pectra Hard Fork
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The Ethereum Pectra upgrade went live on March 5. This upgrade combines the Prague and Electra updates to optimize Ethereums execution and consensus layers. The Pectra fork is a major upgrade of the Ethereum network, which aims to improve the ETH staking experience, enhance the second layer (L2) scalability, and expand network capacity, introducing 11 Ethereum Improvement Proposals. The upgrade process was first implemented on the Holesky testnet on February 24, 2024, and Pectra is ultimately planned to be deployed to the mainnet on April 8, 2024, provided that both the Holesky and Sepolia testnets have successfully completed the upgrade.
Pectra follows the Dencun upgrade implemented in March 2024. According to ethereum.org (see Reference 1), the Ethereum Pectra upgrade is expected to integrate a number of important Ethereum improvement proposals that will work together to address challenges in scalability, security, and user experience. Pectras upgrade will be implemented in two phases:
Phase 1: Mid-March 2025
Doubling Tier 2 Blob Capacity: Increasing the capacity of blobs in each block from 3 to 6, reducing congestion and lowering fees;
Account abstraction: Allows the use of stablecoins such as USDC and DAI to pay gas fees, providing more payment flexibility;
Increase validator staking limit: Increase the staking limit from 32 ETH to 2,048 ETH, allowing large-scale staking operations;
Phase 2: Late 2025 or early 2026
Verkle tree implementation: replace Merkle-Patricia with a more efficient data structure to improve data storage and synchronization;
Peer Data Availability Sampling (PeerDAS): Improves scalability by allowing nodes to verify transaction data without storing all the data.
2. Specific contents of the 11 improvement proposals for Pectra upgrade
Image source: datawallet
Ethereums Pectra upgrade includes 11 EIPs (Ethereum Improvement Proposals), which aim to improve the networks scalability, security, account abstraction, and validator staking mechanisms. The following will describe the key proposals of the improvement proposals (different researchers have different judgments on the key proposals, and the following are only the opinions of the proposals that I personally think are important) and my personal views on the impact of the proposals on the development of Ethereum.
1. EIP-7702: Account Abstraction
Content: This proposal allows externally owned accounts (EOA) to execute some smart contract functions, making account operations more flexible, such as batch transactions and sponsoring gas fees. This greatly enhances the wallet function and supports more operation modes.
Viewpoint: This proposal will undoubtedly make account abstraction wallets more powerful. Not only can they perform regular transfer operations, but they can also perform some advanced functions like smart contracts, such as batch transactions or letting others pay for your gas fees. (The related EIP-7840 provides a wider range of account function extensions, which may allow users to customize more complex account behaviors)
2. EIP-7251: Increased validator stake
Content: The maximum staked balance of a validator is increased from 32 ETH to 2048 ETH. This can simplify validator management and allow for larger validator nodes, thereby reducing management complexity.
Viewpoint: The huge increase in the number of pledges has undoubtedly increased the centralization of Ethereum. The more concentrated the nodes are, the easier it is to do evil. It also increases the difficulty of making profits in the Ethereum market. The cost of node and MEV arbitrage will increase significantly. Overall, it is no longer suitable for ordinary people but more suitable for institutions.
3. EIP-7002: Withdrawal Improvements
Content: Allowing execution layer addresses to trigger withdrawal operations, reducing trust assumptions between the consensus layer and the execution layer, simplifying the withdrawal process and improving the flexibility of the network.
Viewpoint: It is mainly to make the withdrawal operation simpler without complicated steps. Validators can withdraw funds from the pledge more directly, reducing the number of intermediate links.
4. EIP-6110: Validator activation delay optimization
Content: The activation delay of validator deposits has been reduced from about 9 hours to about 13 minutes, greatly improving the efficiency and flexibility of validator participation.
Viewpoint: The speed at which new validators join the network has been greatly accelerated, which will reduce costs from the perspective of storage management and contract storage costs, from the previous 9 hours to only 13 minutes. To a certain extent, it can be regarded as improving the utilization rate of Ethereum resources.
5. EIP-7691: Block Extension
Content: Increase block size by 50%, which means the network can handle more transactions, improving overall scalability and transaction throughput.
Viewpoint: Ethereums block size has increased by 50%, which means that the network can handle more transactions, especially during peak hours, the network is not so easily blocked, and the transaction speed is faster. (Related EIP-7742 can dynamically adjust the capacity of Blobs, dynamically adjust the maximum and target number of Blobs per block, especially for L2)
6. EIP-7516: Improving MEV transparency
Content: Provide more information and transparency about the maximum extractable value of MEV, helping users and developers better understand and monitor MEV activity in the blockchain.
Viewpoint: It increases the transparency of MEV and, like EIP-7251 above, increases the difficulty of arbitrage, but ensures the fairness of transactions at a great cost.
7. EIP-7549: Gas fee adjustment
Content: By adjusting the Gas fee structure, the networks fee mechanism will be further optimized to reduce the network burden during peak hours and make transaction fees more reasonable.
Viewpoint: Adjusting the Gas fee structure means that transaction fees will be more stable even when the network is busy, reducing the situation where users pay high fees during peak hours. (EIP-6046 also involves adjustments to the Gas fee structure, but EIP-7549 proposes a more dynamic and flexible fee adjustment plan)
8. EIP-7685: Governance Mechanism Optimization
Content: Optimize network governance, enhance decentralized governance mechanisms, and make governance processes more transparent and efficient.
Viewpoint: Ethereum’s governance may become more transparent and efficient, especially the review and approval process of proposals, which will improve governance efficiency and make community decision-making more flexible.
9. EIP-7021: Optimization of the validator penalty mechanism
Content: Adjust the penalty mechanism for validators to ensure that validators’ behavior is more in line with the interests of the network and reduce the impact of bad behavior.
Viewpoint: The improved penalty mechanism will better constrain the behavior of validators, and can be regarded as a supplementary mechanism to increase the maximum staked balance from 32 ETH to 2048 ETH, so as to balance the relationship between network security and validator incentives and ensure the stability of the consensus layer.
10. EIP-7683: Smart Contract Performance Optimization
Content: Optimize the execution efficiency of smart contracts, especially in terms of Gas consumption, reduce execution costs, and improve the operating efficiency of smart contracts on the network.
Viewpoint: Smart contracts run more efficiently and consume less gas fees, which may essentially improve the relevant mechanisms of Uniswap, reduce transaction costs, and increase transaction speed. The biggest direct beneficiary is DeFi applications.
11. EIP-6123: Cross-chain compatibility improvements
Content: Enhance the cross-chain compatibility of the Ethereum network with other blockchains, ensure that more cross-chain operations can be supported in the future, and promote interoperability between different blockchains.
Viewpoint: The enhanced compatibility between Ethereum and other blockchains has also optimized the account abstraction mechanism to a certain extent. In the future, it will be easier to transfer assets and perform operations between different blockchains, and custom functions will be strengthened.
3. Pectra Double-layer Upgrade
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Pectra adopts a dual-layer upgrade method that merges the execution layer (Prague) and the consensus layer (Electra) to solve the synchronization problems that may arise from separate upgrades in the past. Ethereums execution layer and consensus layer often have different functions, so historically these two layers are usually upgraded separately.
Execution layer (Prague): Responsible for processing user transactions, executing smart contracts and managing state changes. This is the part where users interact directly with Ethereum and is also the core layer that runs all decentralized applications (DApps) and smart contracts.
Consensus layer (Electra): Manage validators through the PoS (Proof of Stake) mechanism to ensure block generation and chain security. This layer is the basis for ensuring network consistency and security. Validators stake to ensure that their actions are in line with the interests of the network.
The following additional explanations are required:
EIP-6110, EIP-7002 EIP-7251, EIP-7549, EIP-7685 and EIP-7691 require changes to Ethereum’s consensus layer.
EIP-2537, EIP-2935, EIP-6110, EIP-7002, EIP-7623, EIP-7685, EIP-7702 and EIP-7840 require changes to Ethereums execution layer 7623 .
EIP-7623: Improved cross-chain message mechanism
Improve the processing mechanism of cross-chain messages and improve the efficiency and security of cross-chain communication. The Pectra upgrade focuses on improvements to the execution layer and consensus layer within Ethereum, while EIP-7623 focuses on interactions with external blockchains, especially the optimization of cross-chain asset and information transmission.
EIP-2537: BLS 12-381 curve operation
Introducing support for the BLS 12-381 curve in Ethereum for encryption and zero-knowledge proofs. EIP-2537 is a proposal to introduce specific cryptographic curves to support cryptography, mainly serving verification and privacy-related functions. In contrast, the proposals in the Pectra upgrade are more broadly related to transactions, gas fee optimization, and validator mechanisms.
EIP-2935: Validator recovery mechanism
Provide a more flexible mechanism for nodes that have lost their validator status to restore their qualifications. EIP-2935 focuses on the recovery mechanism of the validator, ensuring that the validator can continue to participate in the consensus under certain circumstances, while EIP-7251 and EIP-7021 in Pectra are more focused on the improvement of the staking limit and penalty mechanism.
4. Pectra’s Impact on Ethereum and the Crypto Market
Image source: voiceofcrypto
DApps
The Pectra hard fork brings smart contract functionality to regular wallets, which can simplify the development process and expand the range of possible applications. Features such as social recovery and transaction batching make it easier to create user-friendly DApps, whether it is DeFi, GameFi or other applications, users can expect to experience more reliable and efficient DApps on the Ethereum network.
But then, the main dilemma facing Ethereum itself is that the parasitic effect of L2 is too obvious. The L2 chain has attracted a large number of DeFi activities, resulting in a decrease in transaction fees on the Ethereum mainnet and an increase in ETHs inflation rate. Although the L2 chain is part of the Ethereum ecosystem, its centralized sorter and independent economic model have raised questions about the value of the Ethereum mainnet.
The long-term value of Ethereum
Many Ethereum holders are dissatisfied with the price performance of ETH in this cycle. Many people see the Pectra upgrade as a hope to change the rules of the game for ETH, mainly improving real staking and L2 scalability. Overall, the Pectra upgrade has brought a lot of changes to Ethereum. It makes wallet operations more flexible, can process transactions in batches or sponsor gas fees, increases the staking limit of validators, speeds up withdrawals and joining the network, and makes operations more convenient. The relatively increased block capacity of the network allows faster transaction processing, and more stable gas fees, which will not suddenly become expensive during peak periods.
Substantially raising the pledge threshold also improves the overall MEV transparency, increases the MEV cost, and makes network governance more transparent and efficient. In terms of smart contracts, execution will be more cost-effective and cross-chain compatibility has also been improved. However, regarding the expansion of Ethereums fragmentation, should the development route take the high throughput of a single network instead of relying on the aggregation of multiple chains to solve it? These challenges will also become shackles on the future development of Ethereum itself.
Solanas price surge is mainly attributed to high throughput, low transaction costs and backing by US capital. The liquidity of a single chain is complete and unified. Ethereum has solved the scalability problem through L2, but it has also made innovation fragmented and replicated, and the single network is superior to the L2 aggregation path. From a market perspective, Ethereums biggest advantage at present is that it has the most complete and decentralized decentralized financial network. DeFi is the greatest value of Ethereum.
Compromise on decentralization
The biggest advantage of this upgrade is that it enhances the overall security and scalability of Ethereum, but the double-edged sword of EIP-7251 is that on the positive side it will potentially reduce the operational load on the network by consolidating the number of validators and reducing the burden on large storage. On the negative side, it will undoubtedly deepen the centralization of Ethereum and turn Ethereum into a home ground for large investors and institutions.
However, whether it can rely on the huge 2048 ETH pledges to cut off the threshold for retail investors to attract large capital investment, turn to Solana and Sui to embrace American capital, and thus push up the price of ETH remains to be considered. The current Ethereum seems to be facing new challenges. The narrative ability, centralized pull, and decentralized PoS pledge have become the new impossible triangle problem.
Where is the North Star of the New Narrative?
Ethereum seems to be losing direction, fragmented ETH is now inflating year by year, DeFi activities have migrated to the second layer chain, and the fee capture of the first layer has been greatly reduced. The second layer chain is actually an independent blockchain, and the centralized sorter can be understood as a completely different blockchain network. A large amount of revenue earned by Base goes to Coinbase, and Arbitrums profits go to Arbitrum DAO, and profits flow completely out of Ethereums first layer.
Bitcoin has a clear North Star, digital gold, while Solanas North Star is Nasdaq on the chain. Blockchain embraces AI, and Solana relies on the rapid popularity of DeFAI and AI Agent-related narratives. The SOL/ETH exchange rate ratio also makes the dream of Solana, the biggest Ethereum killer, come true. Metis ReGenesis plan will transform into an AI public chain, and it is also fighting against DeFAI with intention as the center.
So what is Ethereums North Star? Why have ETFs been frustrated repeatedly? The biggest root cause is the lack of staking income and centralized value attribution. The current form of Ethereum ETF does not allow investors to participate in staking and hold Ethereum through ETFs. In addition to missing out on about 3.5% yield, they also need to pay additional management fees and cannot obtain DeFi income.
In terms of value attribution, Ethereums strong decentralized nature makes it difficult for it to be attributed to any capital force, and Wall Street Capital has not really stolen the fruits of decentralization. Most of them only support DApps through stablecoins and DeFi, but Pectras upgrade increases the maximum pledge balance from 32 ETH to 2048 ETH. It seems that it is using pledge as exposure to support large institutional participants to introduce real assets into Ethereum and develop a more Ethereum-friendly version of RWA. Therefore, the North Star of Ethereum in the short term may be ETF pledge, which will raise the price expectation of Ethereum to the same level as the landing of Bitcoin strategic reserves.
References:
(1) https://eips.ethereum.org/EIPS/eip-7600
(2) https://ethroadmap.com/?ref=bankless.ghost.io#pectra%20sticky
(3) https://eips.ethereum.org/EIPS/eip-7742
(4) https://eips.ethereum.org/EIPS/eip-7702
(5) https://eips.ethereum.org/EIPS/eip-7685
(6) https://eips.ethereum.org/EIPS/eip-7251
(7) https://eips.ethereum.org/EIPS/eip-7002
(8) https://eips.ethereum.org/EIPS/eip-6110
(9) https://eips.ethereum.org/EIPS/eip-2935
(10) https://eips.ethereum.org/EIPS/eip-2537
(11)https://www.galaxy.com/insights/research/ethereum-all-core-developers-execution-call-187/
