Author: Ac-Core, researcher at YBB Capital Translation: Shan Ouba, Golden Finance

1. Background of the Pectra hard fork

The Ethereum Pectra upgrade was officially launched on March 5. The upgrade combines the two updates of Prague and Electra to enhance Ethereum's execution layer and consensus layer. The Pectra hard fork marks an important milestone in the development of Ethereum, with the goal of improving the ETH staking mechanism, improving the scalability of the second layer (L2), and expanding the network capacity by introducing 11 Ethereum Improvement Proposals (EIPs). The upgrade will be implemented as early as February 24, 2024 on the Holesky testnet, and is scheduled to be deployed to the Ethereum mainnet on April 8, 2024, depending on the successful completion of the Holesky and Sepolia testnet upgrades.

After the March 2024 Dencun upgrade, Pectra expects to integrate multiple EIPs to address challenges in scalability, security, and user experience. According to ethereum.org, the upgrade is divided into two phases:

Phase 1: Mid-March 2025

• L2 Blob capacity doubled: Increase the Blob capacity of each block from 3 to 6, reducing network congestion and lowering transaction fees.

• Account abstraction: Allow users to use stablecoins such as USDC and DAI to pay for gas fees, increasing payment flexibility.

• Increase the validator staking limit: Increase the staking limit of a single validator from 32 ETH to 2,048 ETH, supporting large-scale staking operations.

Phase 2: End of 2025 - Early 2026

• Introduction of Verkle Tree: Replace the Merkle-Patricia Tree with the Verkle Tree to optimize data storage and improve synchronization efficiency.

• PeerDAS (Peer Data Availability Sampling): Allow nodes to verify without storing all transaction data, improving scalability.

2. Key Ethereum Improvement Proposals (EIPs) in the Pectra Upgrade

The Pectra upgrade includes 11 Ethereum Improvement Proposals (EIPs) aimed at enhancing scalability, security, account abstraction, and validator staking mechanisms. The following highlights some key proposals based on their potential impact on Ethereum development (depending on personal research perspective):

1. EIP-7702: Account Abstraction

• Overview: Allow externally owned accounts (EOAs) to perform certain smart contract functions, enabling batch transactions and gas fee sponsorship.

• Viewpoint: This will significantly enhance account abstraction wallets, enabling them to operate like smart contracts - processing batch transactions and enabling third-party gas payments. (The related EIP-7840 further expands account functionality, enabling customizable account behavior).

2. EIP-7251: Increase validator stake

• Overview: Increase the maximum stake of validators from 32 ETH to 2,048 ETH, simplify validator management and allow larger-scale staking nodes.

• Viewpoint: Although this increases the degree of staking centralization of Ethereum, it also raises the entry threshold for validators, making the staking process more suitable for institutions rather than retail participants.

3. EIP-7002: Withdrawal Improvement

• Overview: Allow execution layer addresses to trigger withdrawals, reduce reliance on the consensus layer, and simplify the withdrawal process.

• Viewpoint: Make withdrawals more direct and efficient, eliminating unnecessary steps in the pledge withdrawal process.

4. EIP-6110: Validator Activation Delay Optimization

• Overview: Reduce the validator activation delay from about 9 hours to about 13 minutes, significantly improving network participation efficiency.

• Viewpoint: Faster validator joining can improve Ethereum's resource efficiency, reduce network congestion, and reduce operating costs.

5. EIP-7691: Block Size Expansion

• Overview: Increase the block size by 50%, enabling the network to process more transactions and improve overall scalability.

• Viewpoint: Reducing congestion and increasing transaction speeds will help Ethereum handle higher traffic, especially during peak usage. (Related EIP-7742 dynamically adjusts the blob capacity of each block to further optimize L2 expansion).

6. EIP-7516: Enhanced MEV Transparency

• Overview: Provide more visibility into Maximum Extractable Value (MEV), helping users and developers better understand and monitor MEV activity.

• Viewpoint: Although increased transparency reduces arbitrage opportunities, it enhances the fairness of Ethereum transactions.

7. EIP-7549: Gas Fee Adjustment

• Overview: Optimize the gas fee structure to reduce congestion and stabilize transaction costs.

• Viewpoint: Helps alleviate gas fee spikes during periods of network congestion and makes fees more predictable. (EIP-6046 also adjusted gas fees, but EIP-7549 introduced a more dynamic and flexible pricing mechanism).

8. EIP-7685: Governance Mechanism Optimization

• Overview: Improve Ethereum's governance structure to make it more decentralized, transparent and efficient.

• Viewpoint: It can speed up proposal approval and improve community-driven decision-making.

9. EIP-7021: Improvement of the Validator Penalty Mechanism

• Overview: Adjust the penalty mechanism to better align validator incentives with network security and minimize malicious behavior.

• Viewpoint: As a balance to increasing the validator staking limit (EIP-7251), ensure fair competition among validators.

10. EIP-7683: Smart Contract Performance Optimization

• Overview: Improve the gas efficiency of smart contract execution, reduce execution costs and improve on-chain efficiency.

• Viewpoint: This will benefit DeFi applications, reduce costs and increase transaction speeds - it is possible to optimize Uniswap's trading mechanism.

11. EIP-6123: Cross-chain Compatibility Improvement

• Overview: Enhance the interoperability of Ethereum with other blockchains and promote seamless cross-chain operations.

• Viewpoint: Strengthen Ethereum's role as a multi-chain hub, making cross-chain asset transfers and interactions smoother.

3. Pectra’s Dual-Layer Upgrade

Pectra adopts a dual-layer upgrade approach, merging the execution layer (Prague) and the consensus layer (Electra) to solve synchronization problems that may arise from separate upgrades. Historically, Ethereum’s execution layer and consensus layer have been upgraded independently due to their different functions:

• Execution Layer (Prague): Responsible for processing user transactions, executing smart contracts, and managing state changes. This is the layer where users interact directly with Ethereum, and it is the core infrastructure for decentralized applications (DApps) and smart contracts.

• Consensus Layer (Electra): Operates under the Proof of Stake (PoS) mechanism, manages validators, ensures block production, and maintains network security. This layer ensures the consistency and integrity of the blockchain, and validators stake assets to align their interests with the security of the network.

Notable EIPs that require layer modifications

Several EIPs in the Pectra upgrade require modifications to the execution layer or consensus layer:

EIPs that modify the consensus layer:

• EIP-6110、EIP-7002、EIP-7251、EIP-7549、EIP-7685、EIP-7691

EIPs that modify the execution layer:

• Other key EIPs in Pectra

  EIP-7623: Enhanced cross-chain messaging mechanism

  • Overview: Improves cross-chain message handling and enhances the efficiency and security of cross-chain communication.

  • Significance: While Pectra focuses primarily on Ethereum’s internal execution and consensus layer, EIP-7623 aims to optimize interoperability with external blockchains, especially in cross-chain asset transfers and data transmission.

  EIP-2537: BLS12–381 Curve Operations

  • Overview: Introduces support for the BLS12–381 cryptographic curve, which is critical for zero-knowledge proofs (ZKPs) and cryptography.

  • Significance: Unlike Pectra’s broad focus on transaction processing, gas fee optimization, and validator mechanisms, EIP-2537 specifically enhances cryptographic capabilities, especially in privacy-centric applications and proof verification.

  EIP-2935: Validator Recovery Mechanism

  • Overview: Provides a more flexible mechanism for validators to regain their status after losing their validator role.

  • Significance: EIP-2935 ensures that validators can be reintegrated into the consensus process under certain conditions. In contrast, Pectra's EIP-7251 and EIP-7021 focus on staking limit adjustments and penalty mechanisms, improving validator incentives and security measures.

  4. Pectra's Impact on Ethereum and the Cryptocurrency Market

  Decentralized Applications

  The Pectra hard fork introduces smart contract functionality to regular wallets, simplifying the development process and expanding potential applications. Features such as social recovery and batch transactions make it easier to create user-friendly DApps, thereby improving the reliability and efficiency of decentralized applications in DeFi, GameFi, and other fields.

  However, Ethereum faces a growing challenge, namely the Layer 2 (L2) "parasitic" effect. L2 chains have absorbed a large portion of DeFi activity, causing mainnet transaction fees to fall and ETH inflation to rise. While L2s are part of the Ethereum ecosystem, their centralized sorter and independent economic models raise concerns about Ethereum's long-term value proposition.

  The Long-Term Value of Ethereum

  Many Ethereum holders have been disappointed with ETH's price performance during this cycle, and some believe Pectra could be a game changer, especially in terms of staking improvements and L2 scalability. The upgrade introduces several key enhancements:

  • More flexible wallet operations, support for batch transactions and sponsored gas fees

  • Increase in validator staking limits, resulting in faster withdrawals and validator onboarding

  • Increase in block capacity, resulting in faster transaction processing and higher gas fees

  Higher staking thresholds increase MEV transparency, increase MEV costs, and improve the transparency and efficiency of network governance. Smart contract execution becomes cheaper, cross-chain compatibility is enhanced, and transaction processing becomes more cost-effective.

  However, Ethereum's fragmentation problem remains unresolved. The ecosystem faces a fundamental question: Should Ethereum aim for a high-throughput single-chain model, or continue to rely on fragmented L2 aggregation? This dilemma may become a long-term constraint on Ethereum's development.

  Solana Factor

  Solana's price surge is mainly due to high throughput, low transaction costs, and strong U.S. capital support. Unlike Ethereum's decentralized liquidity on L2, Solana's monolithic liquidity model unifies assets in a single network. Ethereum successfully solved the scalability problem through L2 solutions, but at the cost of decentralized and repeated innovation, which makes the monolithic chain model increasingly attractive.

  From a market perspective, Ethereum's biggest advantage remains its dominance in decentralized finance (DeFi) - the core value driver of the Ethereum ecosystem.

  Compromise on decentralization

  The biggest advantage of the Pectra upgrade is improved security and scalability, but EIP-7251 also brings a double-edged sword:

  • Pros: Consolidate the number of validators, reduce the burden of large-scale storage and reduce network operating expenses.

  • Cons: Increased centralization, making Ethereum more popular with large investors and institutions, but may alienate retail participants.

  The strategic question now is whether Ethereum can use the 2,048 ETH staking cap to attract institutional capital, just as Solana and Sui are attractive to US investors. Can the price of Ethereum be pushed higher by attracting institutional funds at the expense of decentralization?

  Ethereum now faces a new version of the "Impossible Triangle":

  • Narrative power

  • Centralized price control

  • Decentralized PoS staking

  Finding the right balance between these elements will be the biggest challenge facing Ethereum in the future.

  Where is Ethereum's North Star?

  Ethereum seems to have lost its way. The decentralized ETH supply is gradually expanding, and DeFi activities have moved to L2 chains, causing a sharp decline in mainnet fee capture. In fact, L2 chains operate as independent blockchains, while centralized sorters actually operate as independent ecosystems.

  • Base’s revenue goes to Coinbase

  • Arbitrum’s profits go to Arbitrum DAO

  • Ethereum mainnet fails to capture this value

  Meanwhile, other blockchains have clear narratives:

  • Bitcoin = digital gold

  • Solana = On-chain Nasdaq

  • AI applications = the next frontier

  Solana’s DeFAI and AI Agent narrative drives SOL/ETH The rise in the ratio has realized its vision as Ethereum's strongest competitor. Metis has repositioned itself as an AI-centric blockchain, competing with DeFAI for an intent-driven ecosystem.

  So, what is Ethereum's North Star?

  Ethereum's ETF application continues to struggle, mainly due to two key issues:

  1. Lack of Staking Income

  • Unlike BTC ETF, Ethereum ETF does not provide staking rewards.

  • Holding ETH through an ETF will miss out on about 3.5% APY staking rewards.

  • Investors also have to pay management fees and cannot access DeFi income opportunities.

  2. Lack of institutional coordination

  • Ethereum’s strong decentralization makes it difficult for Wall Street to dominate.

  • Unlike Bitcoin, Ethereum’s core value has not yet been fully grasped by traditional finance.

  • Institutional participants mainly participate in Ethereum through stablecoins and DeFi, rather than directly touching ETH.

  However, Pectra’s 2,048 ETH pledge cap foreshadows a potential shift. By allowing larger institutional holdings, Ethereum may align with institutional capital through RWA integration, which could make Ethereum pledge ETFs as strategically important as Bitcoin reserve adoption.

  Ethereum’s short-term North Star could be a staking-based ETF that elevates ETH’s price narrative to the level of Bitcoin’s strategic reserve status.