Which sectors will experience a surge after the Ethereum Shanghai upgrade?

Author: Asher Zhang, BitpushNews

On January 5, the Ethereum core developer meeting was held, and the final scope of the Shanghai upgrade was determined. So, what are the main contents involved in the Shanghai upgrade? Which sectors will gain new opportunities after the Shanghai upgrade? After the Shanghai upgrade, what problems will the Cancun upgrade mainly address, and which sectors will benefit from it? After Ethereum transitioned to PoS, miners disappeared, and the MEV sector developed rapidly. What projects are worth paying attention to?

Ethereum's Shanghai Upgrade May Trigger a Surge in Staking Sector

The Ethereum Foundation held its first All Core Developers (ACD) meeting of 2023 on the 5th of this month, where developers agreed to remove code changes related to the implementation of EOF from the Shanghai upgrade to ensure that the timeline for staking ETH withdrawals would not be delayed, with the Shanghai upgrade mainnet tentatively scheduled to launch sometime in March 2023. In addition, Ethereum core developers reached a consensus on the final scope of the Shanghai upgrade, which primarily aims to introduce beacon chain withdrawals for stakers. Below is a brief overview of the contents of the Ethereum Shanghai upgrade:

The execution layer specifications of the Shanghai upgrade list all the included EIPs, which can be divided into three different parts: minor improvements, EVM Object Format, and withdrawals:

1. Minor Improvements

• EIP-3651: Warm COINBASE (reducing gas costs for accessing COINBASE addresses)

• EIP-3855: PUSH 0 instruction (new opcode PUSH 0)

• EIP-3860: Limit and meter initcode (setting limits on initcode size and introducing gas metering)

1. EVM Object Format (EOF)

Most of the EIPs included in the Shanghai upgrade are part of this single feature: EVM Object Format (EOF). This work is broken down into five different EIPs to help client developers understand each individual modification, but to provide a higher-level overview, the developers released a consolidated specification.

• EIP-3540: EVM Object Format (EOF) v1

• EIP-3670: EOF - Code Validation

• EIP-4200: EOF - Static relative jumps

• EIP-4750: EOF - Functions

• EIP-5450: EOF - Stack Validation

1. Beacon Chain Withdrawals

The main component of "Shapella" (a combination of Shanghai and Capella) is the beacon chain withdrawals. This change is detailed in the consensus layer specifications and EIP-4895. Notable details include: 1). There is no difference in priority/order between "full withdrawal" and "partial withdrawal" when processing withdrawals; 2). To process withdrawals, validators must use a 0x01 credential, which represents the ETH address; 3). The scanning of validators is done on a per-block basis.

Why will the Shanghai upgrade promote a surge in the staking sector? Compared to the staking ratios of many other major public chains, Ethereum's staking rate is relatively low. Many public chains have staking ratios mostly distributed around 60%-80%, while Ethereum has significant room for improvement in its staking rate. However, it is important to note that many major public chains have high staking rates primarily by attracting users with high annualized returns, which can lead to a depreciation of the staked tokens' value; whereas Ethereum has effectively entered a deflationary phase since the merge, and as the Ethereum ecosystem continues to thrive, the economic incentives for Ethereum staking are highly sustainable and attractive, continuously drawing in more institutional participants. Leading projects worth paying attention to in the Ethereum staking sector include Lido, Rocket Pool, StakeWise, SSV, and FXS.

Cancun Upgrade: Layer 2 May Experience a Real Surge

As the content of the Shanghai upgrade has been finalized, many EIPs considered for the upgrade (CFI) did not make it into the Shanghai upgrade. Although some minor improvements may help promote Layer 2 development, the real surge may have to wait until the Cancun upgrade (the next important upgrade after the Shanghai upgrade, with the name of the consensus layer yet to be determined). In terms of the consensus layer, EIP-4844 has already become the first EIP written into the specifications after the Capella upgrade. The execution layer does not yet have a specification that can implement this layout, but the execution layer team has agreed to follow a similar path and center the next upgrade around EIP-4844. So why is it said that the Cancun upgrade will bring a surge to Layer 2?

The largest cost in Layer 2 transaction unit costs is "Call Data." Call Data is crucial for the security mechanism of L2. Essentially, in the event of malicious validator activity on L2s, the entire L2 chain can be reconstructed using Call Data published on L1s. However, the cost of publishing Call Data on L1 is high, currently accounting for over 80% of L2 transaction fees. Fundamentally, more space needs to be created for data on L1 to reduce L2 transaction fees. Data sharding (DankSharding) will help establish a massive data space on Ethereum L1. This is why Ethereum core developers and Rollup teams have begun proposing different suggestions to create an instant data space on L1, making Rollups immediately price competitive in the L1 market. EIP-4844 is the result of these efforts, and it is expected to reduce Rollup fees by several orders of magnitude. EIP-4844, also known as proto-danksharding, essentially implements most of the logic of the data sharding specification, preparing for Danksharding.

With the implementation of EIP-4844, Layer 2 will be more competitive compared to other L1s, and the future development prospects are relatively large. In addition to significantly reducing L2 transaction fees, EIP-4844 also provides a good foundation for the future application of Danksharding, facilitating the easy implementation of data sharding in the future. A specific example is that EIP-4844 can be compatible with future changes in the consensus layer, helping L2 developers avoid the hassle of needing upgrades. It also introduces a multi-dimensional fee market to Ethereum L1, distinguishing the use and charging of different resource types, such as EVM applications, block data, witness data, and state size.

Currently, the most anticipated Layer 2 projects include Optimism, Arbitrum, zkSync, and StarkNet. Among these four projects, only Optimism has released its project token so far. Additionally, Polygon is developing rapidly and has established Web3 partnerships with brands such as Starbucks, Disney, Adidas, and PRADA.

After Miners, the MEV Sector May Become the New Hotspot in the Next Bull Market

After Ethereum transitioned to proof of stake through the merge, the role of miners was taken over by validators, leading to significant changes in the MEV (Maximal Extractable Value) market. With Ethereum's shift to PoS consensus, the participants sharing on-chain MEV have changed from a single group of miners to various Layer 2s, CEXs, Lido, validator node custodians, and others. The involvement of multiple parties has made the MEV issue in ETH 2.0 more complex. The MEV sector has also become an important battleground for multiple parties, likely to become a significant hotspot in the next bull market.

Maximal Extractable Value (MEV) refers to the maximum value that validators can extract from block production beyond standard block rewards and gas fees by adding, deleting, and changing the order of transactions in a block. However, the problem is that there is no built-in mechanism in the protocol to help validators capture MEV. If left unchecked, this structure will allow professional companies and larger entities to better capture MEV by setting up multiple validators and constructing optimal blocks, making it difficult for other validators to compete effectively. Therefore, Flashbots created an alternative called MEV-Boost after the merge.

MEV-Boost allows validators to auction their block space to the public market and maximize their staking rewards. In this framework, searchers will continue to seek profit opportunities from MEV. When it is the validators' turn to propose a block, they will query the MEV-Boost relay for the highest-paying valid payload and include it in their proposed block. One of the resulting impacts is that MEV rewards will vary. For example, high volatility periods tend to bring higher MEV fees, and validators proposing during these periods may receive higher MEV rewards.

Although many solutions have emerged for MEV, there are still many issues that MEV faces. While the PBS (Proposer-Builder Separation) of Danksharding can theoretically solve the MEV problem, MEV still needs a transitional solution in the years leading up to Danksharding. Given the abundance of articles related to the staking sector and Layer 2 sector, this article focuses on introducing some MEV sector projects:

MEV-Boost

Considering Ethereum's merge to proof of stake, Flashbots' auction has shifted to MEV-Boost, which is the implementation of Proposer-Builder Separation (PBS) for PoS Ethereum proposers and builders. MEV-Boost allows validators to outsource block construction to a competitive block builder market and accept the most profitable block construction through services called relays, thereby minimizing the negative impact of MEV. MEV-Boost enhances Ethereum's security and decentralization, enabling validators of all sizes to receive MEV rewards supporting PBS, making MEV not just a game for a few.

Manifold Finance

Like Flashbots, Manifold Finance has built its own technical infrastructure to minimize the negative impact of MEV. The foundation of Manifold Finance is their Secure RPC system, which allows users to submit secure and private transactions. By sending orders to Manifold's SecureRPC or RPC endpoints like Flashbots, users' transactions are sent through an intermediary, protecting them from the influence of searchers and arbitrageurs in the public pool.

BloxRoute

After Flashbots, BloxRoute is becoming the second-largest relay provider. They currently operate three different relays: BloXroute Max Profit, BloXroute Ethical, and BloXroute Regulated.

Eden Network

Eden Network is the fourth offensive on-chain solution for MEV. Similar to the above three, Eden has three related but distinct MEV protection products: RPC, relays, and bundles. Eden RPC is an RPC endpoint that users can add to their wallets to send their transactions to Eden builders. Eden RPC supports Eden relays, which connect validators to the block builder network to maximize validator efficiency. Finally, through Eden's RPC, searchers can send "bundles" to Eden's block builder network.