Coin Metrics: Pectra - the next major upgrade for Ethereum

Author: Tanay Ved Source: Coin Metrics Translation: Shannon OuBa, Golden Finance

Key Takeaways

Pectra, the next important upgrade to Ethereum, introduces changes to the execution layer (Prague) and the consensus layer (Electra). It is expected to go live on the testnet in February and March, with mainnet activation expected in April.

The upgrade introduces key improvements to staking, Layer-2 scalability, and user experience (UX), laying the groundwork for future changes.

Key changes include higher validator staking limits, flexible staking withdrawals, enhanced account abstractions, and increased blob throughput that help improve the efficiency and security of the network.

Introduction

29 months after 'The Merge', 22 months after 'Shapella', and 11 months after 'Dencun', we are ushering in the next major upgrade for Ethereum - the Pectra hard fork. As the world's largest proof-of-stake (PoS) blockchain, Ethereum currently secures around $900 billion in staked ETH, over $135 billion in stablecoins, and approximately $40 billion in tokenized assets, and continues to evolve through progressive upgrades.

Pectra will be the largest hard fork in the history of Ethereum, with plans to include up to 20 Ethereum Improvement Proposals (EIPs). Building on last year's Dencun upgrade, Pectra introduces improvements to user experience (UX), validator operations, and further support for Layer-2 scaling, signaling its profound impact on various Ethereum stakeholders. In this issue of Coin Metrics' 'Network Status Report,' we will interpret the key changes of Pectra and their significance for users, stakeholders, and investors, looking forward to its progress before the mainnet activation in April.

What is Pectra and why is it important? **

Like previous Ethereum upgrades, Pectra has made changes to both the Execution Layer (EL) and the Consensus Layer (CL). The name reflects this dual focus: 'Prague', named after the city where Devcon 4 was held, represents an upgrade of the executive layer; And 'Electra', a star in the constellation Lyra, represents the upgrade of the consensus layer.

Pectra started as an ambitious upgrade plan with up to 20 Ethereum Improvement Proposals (EIPs) originally planned. However, as the development process progressed, Pectra was divided into two phases to better refine and manage its complexity. Now, Pectra is nearing its final phase, with plans to go live on the Ethereum testnet in February and March, followed by a mainnet activation in early April.

Before we delve into the various EIPs, it is crucial to understand the overall areas that Pectra aims to address, mainly covering staking and validator dynamics, user experience (UX), and L2 scaling.

Improvements to Validators and Staking

There are three main EIPs aimed at improving the experience related to validator operations in the Ethereum Proof of Stake (PoS) system:

EIP-7251: Increase the Maximum Effective Balance

Currently, Ethereum's staking design limits validators' effective balance to 32 ETH, which means that independent stakers must stake in fixed increments of 32 ETH, while a single validator can only stake up to 32 ETH. Any rewards that exceed this limit will not have an impact on their active staking. EIP-7251 increases this maximum effective balance (MaxEB) to 2,048 ETH, which means that a single validator can now stake any amount between 32 and 2,048 ETH. This is expected to bring the following benefits:

• Improve staking flexibility: Stakers can now reinvest rewards into the entire balance instead of being limited to multiples of 32 ETH. For example, a validator staking 33 ETH will include the full 33 ETH in rewards, thereby improving capital efficiency and staking flexibility.

• Reducing the number of validators: Ethereum currently has 1.05 million active validators on the consensus layer. The EIP will allow large operators to consolidate their validators, which is expected to reduce the number of validators and reduce the burden on the network from a large set of validators.

• Reduce network load: While a large number of validators helps to strengthen decentralization, it also increases bandwidth and computational requirements. Increasing MaxEB can achieve a more efficient set of validators, thereby reducing the overhead of peer-to-peer communication.

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EIP-7002::Execution Layer Triggers Withdrawal

This EIP expands the capabilities of validators and complements the aforementioned EIP. EIP-7002 enables validators to initiate exits and partial withdrawals directly through their execution layer (0x01) using withdrawal credentials. Validators have two keys: one for the active key used in validator duties, and one for the withdrawal key used to access and manage staked funds. Previously, only the first key could trigger an exit, but now withdrawal credential addresses can also initiate exits, allowing for larger withdrawals and reducing reliance on node operators. This change enhances the control of funds by validators, making fully trustless staking pools possible, thereby improving security and decentralization.

EIP-6110: On-chain supply verifier deposit

EIP-6110 simplifies the onboarding process for validators by improving the way deposits are handled between Ethereum's execution layer (EL) and consensus layer (CL). Currently, when a new validator makes a deposit at the execution layer, they have to wait for the consensus layer to confirm and process it before activation, which causes delays. EIP-6110 allows the execution layer to pass validator deposits directly to the consensus layer, eliminating the need for an additional validation process, thereby reducing the activation delay from about 9 hours to about 13 minutes.

Extending Blobs and Layer-2

EIP-7691: Increase Blob Throughput

In addition to validator improvements, Pectra has made critical changes to the data availability and scalability of Ethereum. Last year's Dencun upgrade introduced Blob as an efficient data storage method, especially suitable for Layer-2 Rollups. Blob is now widely used in Ethereum's Layer-2, with an average of about 21,000 Blobs released daily. However, the use of Blob has consistently reached capacity limits, leading to increased costs and limiting throughput.

Currently, the network's goal is to process an average of 3 Blobs per block, with a maximum of 6. EIP-7691 raises this target to 6 and the maximum to 9, thereby increasing the capacity for storing data, improving throughput, and scalability. Data storage costs will decrease, meaning that Ethereum's Layer-2 will reduce Blob fees, thereby reducing transaction costs for end users.

EIP-7623: Increase calldata cost, this is another supplemental EIP adopted by Blob. Before the introduction of Blob, Layer-2 used calldata to store data on Ethereum, although it is still used at times as it may be more cost-effective compared to Blob. By increasing the cost of calldata, this change will encourage Layer-2 to focus more on using Blob space, making Rollup transactions more efficient.

User Experience (UX) Enhancements

EIP-7702: Set EOA Account Code

EIP-7702 is a highly anticipated change, as it will bring Ethereum closer to account abstraction. It is expected to greatly improve user experience (UX) and wallet functionality by allowing Externally Owned Accounts (EOAs), i.e., user wallets, to temporarily act as smart contract wallets. This enables EOA to execute smart contract-like logic, providing users with greater flexibility and greater programmability for wallets and applications.

After the Pectra upgrade, users and developers can use EIP-7702 to:

• Bundle Transactions: Merge multiple transactions or user actions into a single transaction (e.g., approve and swap tokens in one transaction).

• No Gas Transactions: Allows Account X to pay transaction fees on behalf of Account Y, or a "payer contract" to pay gas fees for users.

• Conditional or Sponsored Trading: Achieve expenditure control, automated operations, or sponsored transactions based on set conditions.

While we discussed the most impactful changes in Pectra, there are several EIPs that also contribute to network improvements, including EIP-2513, EIP-2935, EIP-7549, EIP-7865, and EIP-7840, all of which focus on optimizing efficiency and reducing network resource consumption.

Conclusion

Ethereum is gearing up for another significant upgrade - this time with a record number of EIPs. Pectra aims to address several key priorities for Ethereum, including transitioning to account abstraction, improving validator operations, enhancing network efficiency, and gradually expanding the use of Layer-2 Blob. At the same time, as Vitalik Buterin emphasized in a recent blog post, while Ethereum's roadmap focuses on Rollup, Ethereum is still scaling Layer-1. With the recent Gas limit increase to 36 million, future scalability is expected to further enhance censorship resistance, throughput, and scalability.

While the changes in Pectra are mostly technical, many may wonder how they affect the valuation of ETH. Historically, ETH has seen measurable price fluctuations in previous upgrades, but market sentiment – both within the crypto market and broader financial markets – tends to play a bigger role than direct changes when it comes to influencing the Ethereum economy. Nonetheless, Pectra is poised to advance Ethereum adoption, and as we move beyond this upgrade, we will be revisiting its impact on key network metrics, ecosystem stakeholders, and ETH as an asset.