The Dencun Update includes various Ethereum Improvement Proposals (EIPs).
Through EIPs, it is possible to propose new blockchain functionalities, disseminate significant technical contributions, and track changes in Ethereum.
The EIP guidelines of October 25, 2015 (EIP-1) establish that to introduce an EIP, it must be accompanied by a concise technical description and a motivation justifying its introduction. EIP-1 guidelines state that the approval process of a single EIP occurs through peer review by the Ethereum community.
Furthermore, since EIP-1 stipulates that “the EIP author is responsible for building consensus within the community and documenting dissenting opinions,” 1 it is suggested that the author discusses it in advance within one of the main community forums called “Ethereum Magicians.”
Despite such approval mechanisms being part of a blockchain characterized by a “form of organization without organization,” 2 their existence is justified by the respect for principles that some argue are the “Constitution” of Ethereum. Although not formally codified, this “Constitution” consists of general principles that first emerged in the well-known “Dao Hack” case. On that occasion, due to an illegal act contrary to those general principles that – in fact – govern the community 3, the Ethereum ecosystem was modified through the rewriting of the ledger itself 4. In light of this, EIPs are therefore legitimate and part of Ethereum’s primary rules.
Turning to a more detailed analysis of Dencun, one of the most important changes is related to EIP-4844, also known as “protodanksharding.” The importance of this EIP stems from the fact that it makes storage management more efficient by introducing “blobs,” which are spaces for temporarily storing data related to the blockchain’s Layer 2 (L2). Cryptographic engineer Noah Citron describes EIP-4844 as follows:
“Think of Ethereum as a highway. Mainnet transactions are the people riding alone in cars. Rollups are the buses that group people, helping alleviate traffic. EIP-4844 basically adds a “dedicated bus lane” to Ethereum, making the network more efficient. The Dencun upgrade also paves the way for additional “bus lanes” to be added in future.”
Secondly, Dencun improves the security and quality of node outsourcing by introducing, among others, EIP-7044. This EIP is relevant for providing the staking service on Ethereum, especially in jurisdictions like Switzerland, where, for example, the Swiss Financial Market Supervisory Authority (FINMA) has already legally qualified the staking service. Specifically, this authority believes that, under certain conditions, authorization for banking activity may not be necessary for staking service providers. Therefore, providing the staking service on Ethereum may not qualify as a public deposit service. Indeed, this qualification depends on technical measures to ensure that “crypto assets are always available to the customer 5.”
In Ethereum, the staking service is provided in two ways:
- The staking provider directly manages the technical infrastructure of the validator nodes on the blockchain; thus, both withdrawal keys and validator keys are held by the custodian, allowing the customer to have access to their crypto assets at any time (as per Art. 16 para. 1bis of the Federal Act on Banks and Savings Banks);
or - The staking provider outsources the management of the nodes on the blockchain to a third party, and the custodian only holds the withdrawal keys.
To maintain constant management autonomy of crypto assets, it is necessary for the outsourcer to apply techniques and procedures that assign staking rewards and the initial 32 ETH solely to the customer’s wallet address. Furthermore, the customer must be able to terminate the relationship with the custodian at any time, regardless of third-party intervention. Before Dencun, this was done with so-called voluntary exits or VEMs, which were pre-signed by the service provider and continuously exchanged with the third party; this was because the validity of VEMs depended on the number of blockchain updates.
As a result, if VEMs lost validity, the staking provider no longer had full control over the deposited crypto assets, and thus, this activity was qualified as a reserved activity under banking law. EIP-7044, however, guarantees the validity of VEMs even in the case of multiple updates on Ethereum, making this blockchain more compliant with regulatory requirements regarding the staking service.
1 Ethereum Improvement Proposals, EIP-1: EIP Purpose and Guidelines, October 27, 2015, available at: https://eips.ethereum.org/EIPS/eip-1.
2 S. Capaccioli, Interpretive Paradigm of Cryptoassets, in Cryptoassets, Cryptocurrencies, and Bitcoin, 2021.
3 A. Z. Robertson, Blockchain Governance: An Outsider’s Perspective, cit.
4 David Z. Morris, CoinDesk Turns 10: 2016 – How The DAO Hack Changed Ethereum and Crypto, May 15, 2023, available at: https://www.coindesk.com/consensus-magazine/2023/05/09/coindesk-turns-10-how-the-dao-hack-changed-ethereum-and-crypto/.
5 FINMA Communication on Supervision 08/2023, available at: https://www.finma.ch/en/documentation/legal-basis/laws-and-ordinances/banks/.
Some interesting readings that inspired this article:
A. Z. Robertson, Blockchain Governance: An Outsider’s Perspective, Harv. J.L. & Tech. Dig., June 12, 2018, available at: https://jolt.law.harvard.edu/digest/blockchain-governance-an-outsiders-perspective .
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