Sebastian Sinclair

Liquid staking tokens (LSTs) have begun to pick up momentum this month as the second half of the year edges closer toward a highly anticipated Ethereum upgrade.



Dubbed <a href="https://blockworks.co/news/ethereum-cancun-upgrade-blobs">Cancun-Deneb</a> (or “Dencun” for short), the upgrade — expected sometime in the fourth quarter of this year — will see the introduction of a mechanism known as “blob-carrying transactions.”



Liquid staking providers, especially Lido, have gained significant traction, underlining users&#8217; preference for greater liquidity and flexibility in their staking activities, blockchain analytics firm Glassnode wrote in a <a href="https://insights.glassnode.com/the-week-onchain-week-27-2023/" target="_blank" rel="noreferrer noopener">research note</a> on Monday.



As such, protocols and assets linked with staked ETH are delivering outsized gains when compared to other major digital assets in the market on the week.



As of 5 am ET, the governance token for liquid staking solution Lido DAO (LDO), has jumped about 11% and 24% on 1-week and 2-week timeframes respectively.



Frax Share (FXS) — the governance token of the Frax ecosystem responsible for frxETH — and the staking pool known as Rocket Pool (RPL) have also risen by 11% and 2.4% over the past week.



To date, LST platforms and protocols have so far accrued $20 billion in total value locked, representing some 10.3 million ETH, data from <a href="https://defillama.com/lsd" target="_blank" rel="noreferrer noopener">DeFiLlama</a> shows.



Lido has garnered a significant portion of the market, boasting roughly 7.5 million ETH staked on its platform, as per data from <a href="https://query.nansen.ai/public/dashboards/Hk93n66vsO0uvycfui8ypF2xcpNhpraxfwX5AWZJ?org_slug=default&amp;utm_campaign=shanghai_12Apr23&amp;utm_medium=PR%20Team&amp;utm_source=Media" target="_blank" rel="noreferrer noopener">Nansen</a>. That figure accounts for approximately 77% of the total market, data shows.



Bitcoin (BTC) and ether (ETH), on the other hand, were up approximately 1.9% and 3.9% over seven days — even as renewed investor interest comes via Blackrock’s spot ETF application last month. The pair of major blue-chip digital assets retain roughly 51% and 20% of the total market share, respectively.



<h2 class="wp-block-heading">Cancun upgrade could fuel further growth</h2>



The next update to Ethereum focuses on EIP-4844 (also known as proto-dank sharding), which would effectively allow for larger “blobs” of data to be transmitted to Ethereum nodes for a limited duration, as opposed to hosting that data permanently on the layer-1 chain.&nbsp;



The data is stored long enough for nodes to demonstrate that provers from layer-2 rollups, which make sure the transactions from the L2 chain are correct, have done their job.



“With the upcoming Cancun upgrade, L2 sequencers can anticipate considerably higher profit margins as L1 data costs are set to decrease substantially,” Delphi analyst Joo Kian wrote in a <a href="https://members.delphidigital.io/feed/cancun-upgrade-incoming-eip-4844-to-benefit-l2s?utm_source=twitter&amp;utm_medium=social&amp;utm_campaign=launch" target="_blank" rel="noreferrer noopener">blog post</a> late last month.



Sequencers, whose role is to receive and order transactions in a way that reduces the load on the main Ethereum blockchain, would effectively be allowed to “operate more efficiently and profitably,” Kian added.



In the wake of the <a href="https://blockworks.co/tag/shanghai-upgrade" target="_blank" rel="noreferrer noopener">Shanghai hard fork</a>, Ethereum&#8217;s staking landscape has seen a significant transformation. The upgrade, which introduced the ability to withdraw staked ETH, has catalyzed a surge in staking deposits, while demand for withdrawals has been scant.



Notably, the volume of ETH staked surpassing or equalling exchange inflows post-upgrade, Glassnode wrote.



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Cancun upgrade

Upcoming Ethereum update stimulates liquid staking token growth

Macauley Peterson

To scale Ethereum, researchers came up with a plan to make storing data from layer-2 rollups much cheaper. The first phase entails <a href="https://blockworks.co/news/ethereum-cancun-upgrade-blobs">the introduction of EIP-4844</a> — known as proto-danksharding — to Ethereum mainnet, anticipated to happen with the Dencun upgrade by year’s end.



But to do that, they needed some entropy — random data, or “secrets” if you will — and preferably lots of it.



EIP-4844 will introduce a new “blob-carrying transaction” — a temporary data storage mechanism for layer-2’s to pass data to Ethereum mainnet validators.



Blockspace on Ethereum is at a premium, so to cut down on the requirements for verifying layer-2 data, Ethereum will use a polynomial commitment scheme known as <a href="https://notes.ethereum.org/@dankrad/kzg_commitments_in_proofs">KZG commitments</a>, which is necessary for <a href="https://blockworks.co/news/sovereign-rollups-blockchain-scaling">data availability sampling</a> under proto-danksharding.



KZG commitments, in turn, require a &#8220;trusted setup&#8221; — a way to generate a common set of parameters that provers and verifiers use to function. For the setup to be trusted, there needs to be a set of random values used as inputs that nobody knows. When done improperly, it can compromise the proof system, as famously <a href="https://electriccoin.co/blog/zcash-counterfeiting-vulnerability-successfully-remediated/">happened to Zcash</a> in 2018.



Without getting too deep into the technical nuances of <a href="https://www.blockworksresearch.com/glossary#merkle-tree">Merkle Trees</a> and <a href="https://dankradfeist.de/ethereum/2020/06/16/kate-polynomial-commitments.html">Kate proofs</a> (the “K” in “KZG”), it’s important to know just one thing:



You only need one honest participant to guarantee the validity of the trusted setup for everyone.



Ethereum researchers devised a way <a href="https://ceremony.ethereum.org/">to let anyone</a> with an Ethereum address participate, with some history of using the network required to join in. It’s a goodwill gesture — you get nothing in return except for peace of mind.



As a participant, you only need to trust yourself and no one else, because each contribution contributes to the randomness of the system —&nbsp;effectively guaranteeing that there can be no collusion in the trusted setup. It’s easy and takes just a minute of work and some waiting at <a href="https://ceremony.ethereum.org/">ceremony.ethereum.org</a>.


<div class="wp-block-image">
<figure class="aligncenter size-large"><img loading="lazy" decoding="async" width="1400" height="610" src="https://blockworks-co.imgix.net/wp-content/uploads/2023/05/ethereum-kzg-ceremony.jpg?w=1024&amp;h=1024" alt="" class="wp-image-57342" srcset="https://blockworks-co.imgix.net/wp-content/uploads/2023/05/ethereum-kzg-ceremony.jpg?w=1400 1400w, https://blockworks-co.imgix.net/wp-content/uploads/2023/05/ethereum-kzg-ceremony.jpg?w=300 300w, https://blockworks-co.imgix.net/wp-content/uploads/2023/05/ethereum-kzg-ceremony.jpg?w=1024 1024w, https://blockworks-co.imgix.net/wp-content/uploads/2023/05/ethereum-kzg-ceremony.jpg?w=768 768w, https://blockworks-co.imgix.net/wp-content/uploads/2023/05/ethereum-kzg-ceremony.jpg?w=428 428w, https://blockworks-co.imgix.net/wp-content/uploads/2023/05/ethereum-kzg-ceremony.jpg?w=470 470w, https://blockworks-co.imgix.net/wp-content/uploads/2023/05/ethereum-kzg-ceremony.jpg?w=389 389w, https://blockworks-co.imgix.net/wp-content/uploads/2023/05/ethereum-kzg-ceremony.jpg?w=80 80w" sizes="auto, (max-width: 1400px) 100vw, 1400px" /><figcaption class="wp-element-caption">Contributing entropy; Source: <a href="https://ceremony.ethereum.org/" target="_blank" rel="noreferrer noopener">ceremony.ethereum.org</a></figcaption></figure></div>


When opened to the public on April 17, contributions <a href="https://twitter.com/carlbeek/status/1647752476328878080">were limited</a> to Ethereum users with a lot of transaction history to cut down on the wait time. But those limits were gradually reduced such that today you can contribute with only 16 transactions.



That lowered bar is one reason why the number of total contributions has been on the up and up, recently passing 100,000 unique contributions.



That doesn’t necessarily mean 100,000 individuals — one person can have more than one address — but only one contribution per address is allowed, and each one contributes a small measure of security to the rollup-centered future of Ethereum.



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100,000 Addresses Are Helping Ethereum Scale — You Can Too

Ethereum’s developer community has had time to <a href="https://blockworks.co/news/ethereum-shapella-ok-despite-bug">recover from the Shanghai-Capella (Shapella) upgrade</a> a little over two weeks ago. Now, they have turned their attention to planning what will ship next.



The consensus on Thursday’s bi-weekly all-core devs call, was that the upgrade, known as Cancun-Deneb — shortened to “Dencun” — will focus on a feature vital to the success of the network’s <a href="https://blockworks.co/tag/rollups">rollup-centric</a> roadmap: proto-danksharding, the nickname for Ethereum Improvement Proposal (EIP) 4844.



Proto-danksharding introduces a new transaction type — the “blob-carrying transaction” — a temporary data storage mechanism that is <a href="https://www.eip4844.com/">expected</a> to reduce transaction costs for users on layer-2 <a href="https://www.blockworksresearch.com/glossary#roll-ups">rollups</a>, by orders of magnitude.



Péter Szilágyi, team lead at the Ethereum foundation, summed up the overarching view in the Zoom room: “I kind of feel that 4844 should be the thing that everybody focuses on, and the rest is ‘nice to have’.”



Szilágyi was the chief proponent of making 4844 a priority back in January, <a href="https://blockworks.co/news/ethereum-devs-opt-for-withdrawals-in-march-and-nothing-else">when he suggested</a> it should take precedence over the withdrawal of staked ether in Shapella, but was overruled by his peers.



This time, he’s all but certain to get his wish. There was no disagreement that Cancun — the execution layer part of the upgrade that was the focus of the call — will have proto-danksharding front and center.



But what goes into Cancun besides 4844?



<h2 class="wp-block-heading">Deactivate SELFDESTRUCT</h2>



It may sound like an urgent task for your movie hero of choice, but <a href="https://ethereum-magicians.org/t/eip-6780-deactivate-selfdestruct-except-where-it-occurs-in-the-same-transaction-in-which-a-contract-was-created/13539">in Ethereum-speak</a> it’s an “attempt at getting rid of the SELFDESTRUCT opcode in order to pave the road for statelessness.”



The concept of a stateless Ethereum goes back to co-founder Vitalik Buterin’s October 2017 <a href="https://ethresear.ch/t/the-stateless-client-concept/172">post</a>. “State” refers to all the key information at a point in time for the blockchain: all Ethereum accounts, their balances, all deployed smart contracts and the storage associated with these.



A future upgrade or set of upgrades will shift responsibility for storing the blockchain&#8217;s full state to more specialized “archival nodes,” allowing for a much larger set of full nodes to store much less. That would make it even easier for anyone to run a <a href="https://ethereum.org/en/developers/docs/nodes-and-clients/">node</a>, furthering the goal of network decentralization.



For now, this precursor EIP-6780 was agreed to merit inclusion in Cancun by all client teams.



Call moderator and project coordinator Tim Beiko concluded that “clearly the self-destruct [proposal] is the second most mentioned EIP beyond 4844.”



He noted that an external auditor has been hired to ascertain, using on-chain data, whether currently deployed smart contracts could be broken by the change. The results are about a month away, Beiko said, yet there was no objection to making plans for the destruction of SELFDESTRUCT now and, as pseudonymous Geth developer lightclient said, “revisit it after the report comes.”



<h2 class="wp-block-heading">Transient storage</h2>



One EIP that was <a href="https://www.merriam-webster.com/words-at-play/eighty-six-meaning-origin">eighty-sixed</a> from Shapella, despite being ready to go, was EIP-1153.



EIP-1153 proposes new, cost-effective ways to temporarily store data in Ethereum smart contracts, improving communication between different parts of a transaction. This update would support various applications, such as enhanced security features and streamlined token approvals.



“I don’t see much effort to push it out, so I don’t see a point for it to be delayed,” Lukasz Rozmej from the Nethermind client team said on the call.



Justin Florentine from the Besu client team said, while he would stop short of calling 1153 “a must-have,” he remained in very strong support.&nbsp;



EIP-1153, or “transient storage” is popular enough to have its own &#8220;<a href="https://www.eip1153.com/">fan page</a>,&#8221; and was pushed hard by the Uniswap team in late 2022, in a manner that rubbed some Ethereum developers <a href="https://twitter.com/hudsonjameson/status/1602366046928867349?s=20">the wrong way</a>.



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">1/24 TLDR: EIP 1153 is a technical gas optimization EIP with a ton of uses written by a prominent core dev before uniswap v1 was launched <a href="https://t.co/ymuBh3xc4G">https://t.co/ymuBh3xc4G</a>&mdash; hayden.eth 🦄 (@haydenzadams) <a href="https://twitter.com/haydenzadams/status/1602308874224209926?ref_src=twsrc%5Etfw">December 12, 2022</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



But, in the intervening months, the proposal has truly become uncontroversial, and Erigon’s Andrew Ashikhmin tipped the consensus in favor of its inclusion when he singled it out for endorsement on the call as “a small EIP that people are mostly in favor of.”



<h2 class="wp-block-heading">EOF remains a ways off</h2>



One upgrade that was also <a href="https://blockworks.co/news/ethereum-devs-opt-for-withdrawals-in-march-and-nothing-else">originally a part of Shanghai</a>, known as EVM Object Format (EOF), was broadly lauded by the assembled core developers, but once again considered a poor match for the 4844-centered Cancun plan — essentially reaffirming the consensus <a href="https://twitter.com/TimBeiko/status/1641505333825925120?s=20">from late March</a>.



The EVM Object Format (EOF) is an extensible and versioned container format for the Ethereum Virtual Machine (EVM) that introduces a one-time validation during contract deployment. It aims to improve code and data separation, making it easier to introduce new features or deprecate old ones.



Long-time Ethereum core developer Greg Colvin articulated the importance of getting EOF implemented from his perspective.



“We’ve been discussing this for 7 years,” Colvin said.



Other developers were of the opinion that EOF was “too big to be the second place in a fork,” as Ansgar Dietrichs, a researcher at the Ethereum Foundation, put it. He suggested it should be the focus of the next major upgrade, called Prague.



Danno Ferrin, principal software engineer at Swirlds Labs concurred. “As much as it hurts, I think it’s the right decision,” he told his colleagues on the call.



Beiko analogized the pair of major upgrades — 4844 and EOF — to the prior two — the Merge and withdrawals — telling Colvin, “I think the strongest commitment we can make is to have it be the main thing for the next fork, but even that is not something we can 100% commit to today.”



EOF remains a “quick follow” candidate, meaning developers would likely make it a priority within six months after Cancun.



“It’s just time,” Colvin said. “I’ve got work I’ve been wanting to do on the [Ethereum Virtual Machine] for 7 years that I can’t do until this is in.”



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