Ethereum’s Dencun Upgrade saw gas fees for layer-2 scaling solutions like Optimism plummet this week, and now layer-2 swaps on DEX platforms like Uniswap are cheaper than ever – but could this spell disaster for the centralized exchange (CEX) industry? Could this mark the end of big players like Coinbase and Binance?
In the biggest upgrade to the Ethereum network since the transition to proof-of-stake back in September 2023 (the Merge to Ethereum 2.0), the highly anticipated Dencun Upgrade was successfully introduced on March 14 – temporarily sending ETH prices surging above $4,000.
(ETHUSDT)
With Dencun successfully achieving its intended purpose of reducing transaction costs for layer-2 scaling solutions like Optimism and Arbitrum, the cost of conducting L2 decentralized exchange (DEX) trades has become significantly cheaper on platforms such as Uniswap.
Beyond hitting back at the shift in activity to Solana (a developer migration fuelled by high gas fees across Ethereum layer-1, and layer-2 solutions), the Dencun Upgrade may trigger increased decentralization across the industry – inspiring a potential move away from CEXs like Binance and Coinbase.
Blob morning
Median gas cost to swap on Optimism after Dencun 🔴 pic.twitter.com/wwaxbMISnO
— Uniswap Labs 🦄 (@Uniswap) March 14, 2024
In a post on X (formerly Twitter), Uniswap Labs, the developer behind the Uniswap DEX, said clients swapping assets on Optimism can now do so far more cheaply than ever before – at an almost negligible cost.
Dencun Upgrade Fuels Shift to DEXs: Uniswap Riding On Dencun Benefits
Uniswap is one of the largest decentralized exchanges, managing over $5 billion worth of assets across multiple platforms (according to TVL).
Unlike Binance, a centralized exchange, users on Uniswap maintain self-custody of their assets, and can even engage in basic DeFi activities like locking funds and earning yields – enabling token holders to increase their income base without losing control of their assets (after all, not your keys, not your coin!).
At the heart of this development lays popular layer-2 scaling solutions like Optimism, Ethereum layer-2s enable developers to deploy decentralized applications (dApps) at a fraction of the cost of deploying on layer-1 – while still enjoying the same security as on the main layer-1 Ethereum network.
A big part of the Dencun Upgrade was introducing a solution that further reduces gas fees on layer-2 platforms like Optimism – removing barriers to development and ecosystem growth.
This fee reduction is evident now on Optimism since the cost of trading, as Uniswap Labs notes, is down from around 1 Gwei to less than 0.05 Gwei (USD 0.0016).
In order to achieve this feat, the Dencun Upgrade saw the passage and approval of the Ethereum Improvement Proposal (EIP)-4844 – otherwise known as Proto-Danksharding.
This proposal introduces “blobs,” a new transaction type that allows for cheaper processing of bulky data, by separating important transaction information from others. Therefore, EIP-4844 leads to more easy processing, reducing costs.
The Bottom Line: Will Binance and Coinbase Reduce Trading Fees?
Uniswap researcher Austin Adams compiled data using Dune Analytics, clearly showing what has unfolded in the past 24 hours.
Based on Adams’ finding, Uniswap’s trading fees on Optimism now hover around 0.0059 Gwei, or near zero in USD terms.
This contrasts centralized exchanges like Coinbase, which charge a minimum trading fee of 0.10% – a significantly higher cost, especially for smaller transactions.
The near-free swapping offered by Uniswap on layer-2 solutions like Optimism following the Dencun Upgrade may attract more users, and in response centralized exchanges may face pressure to adapt and reduce trading fees.
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Disclaimer: Crypto is a high-risk asset class. This article is provided for informational purposes and does not constitute investment advice. You could lose all of your capital.
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