Can the Pectra upgrade reshape the Ethereum ecosystem?

The Ethereum Pectra upgrade will go live on March 5, combining the Prague and Electra updates to optimize Ethereum's execution layer and consensus layer. This upgrade aims to enhance the ETH staking experience, improve Layer 2 (L2) scalability, and expand network capacity, introducing 11 Ethereum Improvement Proposals. The upgrade process will be implemented on the Holesky testnet prior to February 24, 2024, with the final plan to deploy Pectra on the mainnet on April 8, 2024, provided that both Holesky and Sepolia testnets successfully complete the upgrade.

Pectra follows the Dencun upgrade implemented in March 2024, which is expected to integrate several important Ethereum Improvement Proposals that will collaboratively address challenges related to scalability, security, and user experience. The Pectra upgrade will be implemented in two overall phases:

Phase 1: Mid-March 2025

• Double the Blob capacity on layer 2: Increase the Blob capacity in each block from 3 to 6, reducing congestion and lowering fees.
• Account Abstraction: Allows payment of Gas fees using stablecoins, providing more payment flexibility.
• Increase validator staking limit: Raise the staking cap from 32 Ether to 2,048 Ether, allowing for large-scale staking operations.

Phase 2: End of 2025 or early 2026

• Implementation of Verkle tree: 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.

Details of 11 Improvement Proposals for Pectra Upgrade

The Ethereum Pectra upgrade includes 11 EIPs (Ethereum Improvement Proposals), which aim to enhance various aspects of the network such as scalability, security, account abstraction, and validator staking mechanisms. The following will outline the key proposals of the improvement proposals and my personal views on the impact of these proposals on the development of Ethereum.

1. EIP-7702: Account Abstraction

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 wallet functionality, enabling support for more operation modes.

This proposal will undoubtedly make account abstraction wallets more powerful, capable not only of performing regular transfer operations but also executing advanced functions like smart contracts, such as batch transactions or allowing others to pay your Gas fees.

2. EIP-7251: Validator Staking Increase

The maximum staking balance for validators has been increased from 32 Ether to 2048 Ether. This can simplify validator management, allowing for larger-scale validator nodes, thereby reducing management complexity.

The massive increase in the amount of staking has undoubtedly increased the centralization of Ethereum. The more concentrated the nodes are, the easier it is to commit malicious acts. At the same time, it has also increased the difficulty of making profits in the Ethereum market. The costs for nodes and MEV arbitrage will rise significantly, making it no longer suitable for "ordinary people" but more suitable for institutions.

3. EIP-7002: Withdrawal Improvement

Allow execution layer addresses to trigger withdrawal operations, reducing trust assumptions between the consensus layer and the execution layer, simplifying the withdrawal process and enhancing the flexibility of the network.

The main goal is to make the withdrawal process simpler, without the need for complicated steps. Validators can withdraw directly from staking, reducing intermediaries.

4. EIP-6110: Validator Activation Delay Optimization

The activation delay time for validator deposits has been reduced from about 9 hours to about 13 minutes, greatly improving the participation efficiency and flexibility of validators.

The speed at which new validators join the network has significantly accelerated, reducing costs from a previous 9 hours to only 13 minutes in terms of storage management and contract storage costs. This also somewhat improves the resource utilization of Ethereum.

5. EIP-7691: Data Block Expansion

Increase block capacity by 50%, which means the network can handle more transactions, enhancing overall scalability and transaction throughput.

The block size of Ethereum has increased by 50%, meaning that the network can handle more transactions, especially during peak times, and the network will not be so easily congested, resulting in faster transaction speeds.

6. EIP-7516: Increase MEV Transparency

Provide more information and transparency about MEV (Maximally Extractable Value) to help users and developers better understand and monitor MEV activities in the blockchain.

Increased transparency for MEV, and like EIP-7251, it has increased the difficulty of arbitrage, but at a great cost, it ensures the fairness of transactions.

7. EIP-7549: Gas Fee Adjustment

By adjusting the Gas fee structure, further optimizing the network's fee mechanism, alleviating the network burden during peak periods, and making transaction fees more reasonable.

Adjusting the Gas fee structure means that even when the network is busy, transaction fees will be more stable, reducing the occurrence of users paying high fees during peak times.

8. EIP-7685: Governance Mechanism Optimization

Optimize network governance, enhance decentralized governance mechanisms, and make governance processes more transparent and efficient.

The governance of Ethereum may become more transparent and efficient, especially in the proposal review and approval process, enhancing governance efficiency and making community decision-making more flexible.

9. EIP-7021: Validator Penalty Mechanism Optimization

Adjust the penalty mechanism for validators to ensure that their behavior aligns more closely with the interests of the network and reduces the impact of misconduct.

The improved penalty mechanism will better constrain the behavior of validators, serving as a supplementary mechanism to increase the maximum staking balance from 32 Ether to 2048 Ether, thus balancing the relationship between network security and validator incentives to ensure the stability of the consensus layer.

10. EIP-7683: Smart Contract Performance Optimization

Optimize the execution efficiency of smart contracts, especially in terms of Gas consumption, reduce execution costs, and improve the operational efficiency of smart contracts on the network.

Smart contracts run more efficiently, consuming less Gas fees. This may essentially improve the mechanisms related to certain DEXs, reducing transaction costs and enhancing transaction speeds, with DeFi applications being the direct biggest beneficiaries.

11. EIP-6123: Cross-chain Compatibility Improvement

Enhance the cross-chain compatibility of the Ethereum network with other blockchains, ensuring future support for more cross-chain operations and promoting interoperability between different blockchains.

The compatibility of Ethereum and other blockchains has been enhanced, which has also optimized the mechanism of account abstraction to a certain extent. In the future, transferring assets and performing operations across different blockchains will be simpler, and customization features will be strengthened.

Pectra Double Layer Upgrade

Pectra adopts a merged dual-layer upgrade approach with the execution layer (Prague) and the consensus layer (Electra) to address the synchronization issues that may arise from separate upgrades. The execution layer and consensus layer of Ethereum often serve different functions, and historically, these two aspects have usually been upgraded separately.

• Execution Layer (Prague): Responsible for handling user transactions, executing smart contracts, and managing state changes. This is the part where users interact directly with Ethereum, and it is the core layer running all decentralized applications (DApp) and smart contracts.

• Consensus Layer (Electra): Manages validators through the PoS (Proof of Stake) mechanism to ensure block generation and the security of the chain. This layer is the foundation for ensuring network consistency and security, where validators stake to ensure their actions align with the interests of the network.

It should be noted additionally that:

EIP-6110, EIP-7002, EIP-7251, EIP-7549, EIP-7685, and EIP-7691 require changes to the Ethereum consensus layer.

EIP-2537, EIP-2935, EIP-6110, EIP-7002, EIP-7623, EIP-7685, EIP-7702, and EIP-7840 require changes to the execution layer of Ethereum 7623.

EIP-7623: Cross-chain Message Mechanism Improvement

Improve the processing mechanism of cross-chain messages to enhance the efficiency and security of cross-chain communication. The Pectra upgrade primarily focuses on improvements to the execution layer and consensus layer within Ethereum, while EIP-7623 is centered on interactions with external blockchains, particularly the optimization of cross-chain asset and information transfer.

EIP-2537: BLS12-381 curve operations

Introducing support for the BLS12-381 curve in Ethereum for cryptography and zero-knowledge proofs. EIP-2537 is a proposal introduced to support specific cryptographic curves, primarily serving verification and privacy-related functions. In contrast, the proposals in the Pectra upgrade more broadly involve transactions, Gas fee optimization, and validator mechanisms.

EIP-2935: Validator Recovery Mechanism

Provide a more flexible mechanism that allows nodes that have lost their validator identity to restore their eligibility. EIP-2935 focuses on the recovery mechanism for validators, ensuring that validators can continue to participate in consensus under certain specific circumstances, while EIP-7251 and EIP-7021 in Pectra are more focused on improving staking limits and penalty mechanisms.

The Impact of Pectra on Ethereum and the Cryptocurrency Market

DApps

The Pectra hard fork introduces smart contract functionality to regular wallets, simplifying the development process and expanding the potential range of applications. Features such as social recovery and transaction batching make it easier to create user-friendly DApps, whether in DeFi, GameFi, or other applications, users can expect to experience more reliable and efficient DApps on the Ethereum network.

However, the main dilemma faced by Ethereum itself is the overly obvious "parasitic" effect of L2, where L2 chains attract a large amount of DeFi activity, leading to a decrease in transaction fees on the Ethereum mainnet and an increase in the inflation rate of ETH. Although L2 chains are part of the Ethereum ecosystem, their centralized sequencers and independent economic models have raised doubts about the value of the Ethereum mainnet.

The long-term value of Ethereum

In this cycle, many Ethereum holders are dissatisfied with the price performance of ETH during this period. Many see the Pectra upgrade as a hope to change the game rules for ETH, mainly enhancing real staking and L2 scalability. Overall, the Pectra upgrade has brought significant changes to Ethereum, making wallet operations more flexible, allowing for batch processing of transactions or sponsoring Gas fees. The staking limits for validators have been raised, and the speed of withdrawals and joining the network has also increased, making operations more convenient. The network's block capacity has increased relatively, allowing for faster transaction processing, and Gas fees have become more stable, without sudden spikes during peak times.

The significant increase in staking thresholds has also improved the overall transparency of MEV, raising the costs of MEV, and making network governance more transparent and efficient. In terms of smart contracts, execution will be "more cost-effective," and cross-chain compatibility has also been enhanced. However, regarding the issue of fragmentation in Ethereum's scalability, should the development path focus on a single network with high throughput rather than relying on the aggregation of multiple chains to address the issue? These challenges may also become constraints on Ethereum's future development.

The price surge of a certain high-throughput public chain is mainly attributed to three factors: high throughput, low transaction costs, and backing from American capital. The liquidity of a single chain is complete and unified. Ethereum has solved the scalability issue through L2, but has also made innovation "fragmented" and "replicated". A single network demonstrates higher quality than L2 aggregation paths. From a market perspective, Ethereum's greatest advantage currently lies in having the most comprehensive and decentralized decentralized financial network; DeFi is where Ethereum's greatest value resides.

Compromises on Decentralization

The biggest advantage of this upgrade is undoubtedly the enhanced overall security and scalability of Ethereum, but the duality of EIP-7251.