Ethereum Pectra Upgrade Is Imminent, Can It Drive The Market Into An Upward Trend?

[TL；DR]:

Ethereum is about to carry out Pectra upgrade in early April, involving three major directions: account abstraction, staking mechanism optimization, and data storage expansion, aiming to improve user experience, staking efficiency and Layer2 expansion capabilities.

The Pectra upgrade introduced multiple Ethereum Improvement Proposals (EIPs), including EIP-7702 account abstraction, staking-related EIPs (such as EIP-7251, EIP-7002, EIP-6110), and L2 eco optimization-related EIPs (such as EIP-7691, EIP-7623).

The market is bullish on the Pectra upgrade, but historical experience shows that major upgrades of Ethereum are often accompanied by fluctuations of “buy expectations, sell facts”, and investors should be wary of risks.

Introduction

Since switching to Proof of Stake (PoS) in 2022, Ethereum has optimized network performance through regular hard fork upgrades. The upcoming Pectra upgrade in April is regarded by the community as the “most critical iteration after the merger”, aiming to solve the three major pain points of user experience, staking efficiency, and Layer2 expansion.

Although macro factors still suppress the crypto market, Pectra’s technical narrative attracts considerable attention. This article will explore the details and impact of this upgrade from multiple perspectives and examine whether it can become a turning point for the ruation of Ethereum.

Pectra Upgrade Is Imminent, and the Market Layout Begins

Ethereum’s Pectra upgrade (also known as the Prague/Electra upgrade) is a highly anticipated technical update. On February 24, the Pectra upgrade was launched on the Holesky testnet. Immediately afterward, on Wednesday (March 5), the Sepolia testnet Pectra upgrade encountered problems. A fix has been deployed, and the network has been restored to normal, and the official deployment to the Ethereum mainnet is expected to be completed on April 8.

Source: ethroadmap.com

As the Pectra upgrade approaches, the Ethereum eco will significantly enhance network performance, speed up transactions, and improve staking mechanisms. Major improvements will be introduced in areas such as account abstraction and validator operations. The market has also begun to show bullish expectations for ETH.

The futures market is particularly evident in terms of market pricing. According to data from Derive. XYZ, the open interest of Ethereum futures contracts, began to gradually increase before the upgrade news was released. After the upgrade news was officially announced, the open interest reached a staged high, an increase of about 50% from before the news was released.

The options market is also active. According to data from options trading platform Deribit, after the upgrade news was released, the term structure of the Ethereum options market was significantly distorted near the March expiration date, especially the surge in demand for ETH call options. The market-implied probability of ETH breaking through $3,000 by the end of this quarter rose from 28% to 30%.

Source: Gate.io

However, with the overall collapse of the crypto market at the end of February, the positive sentiment brought by this upgrade was quickly drowned out. However, as of the date of writing, market sentiment has recovered again, and the positive sentiment of Pectra’s upgrade is on the rise again.

Pectra Upgrades Three Axes: User Experience, Staking Efficiency, and Layer2 Scalability

The Pectra upgrade was a major technical update of Ethereum, introducing multiple Ethereum Improvement Proposals (EIPs). These proposals cover account abstraction, staking experience optimization, L2 eco optimization, and other aspects, aiming to improve Ethereum’s scalability, decentralization, and user experience.

Account Abstraction: EIP-7702 is a key technical improvement introduced in the Pectra upgrade. It implements the expansion of smart contract functions for Ethereum external accounts (EOAs), including transaction batch processing, gas payment, and more authentication and recovery mechanisms.

Staking experience optimization: To improve the user experience and funding flexibility of validators, Pectra upgrades introduced a series of staking-related EIPs. For example, EIP-7251 increases the maximum balance limit of validators, allowing validators to simplify management by merging multiple small validator accounts; EIP-7002 allows ution layer addresses to trigger withdrawal operations, reducing the validator’s dependence on trusted parties; EIP-6110 improves the efficiency of the staking process by eliminating the delay time of validator deposits.

Source: notes.ethereum.org

L2 Eco Optimization: The Pectra upgrade also introduced a series of EIPs related to the L2 eco to support a more efficient L2 expansion solution. For example, EIP-7691 increases the capacity of data blocks to support larger L2 storage space, and EIP-7623 adjusts the call data cost to encourage the L2 network to use Blob rather than traditional Calldata to store state data.

Source: @francescoweb3

In addition, there are several other important proposals as follows:

EIP-2537: Increase the number of secure bits for operations from the current over 80 bits to over 120 bits, improve the efficiency of zero-knowledge proof (ZK), enhance interoperability with chains such as ZCash, and resist more potential security attacks.

EIP-2935: To cope with the arrival of stateless clients, the proposal suggests storing historical block hash values ​​in the state as part of the block processing logic, preparing for the future transition to a stateless client eco and ensuring the integrity and traceability of Rollup data.
EIP-7549: Focuses on improving the efficiency of Casper clients by reducing the number of pairings required to verify consensus, thereby improving the block production efficiency of the entire network.

EIP-7623: Proposes to increase the cost of calling data, aiming to adjust market behavior through economic means, guide more economical and efficient data transmission methods, optimize network resource allocation, and especially have a greater impact on Layer2 that publishes high-frequency data, thereby promoting its network efficiency.

From Pectra to Osaka, What Is the Prospect of ETH?

It is not difficult to see from the above that the Pectra upgrade is a key step for Ethereum to shift from functional improvement to user experience-driven. Specifically, the Pectra upgrade will enable Ethereum to process more transactions, reduce gas fees, and increase transaction speed by optimizing account functions, improving validator experience, and expanding data blob processing capabilities, attracting more developers and users to participate in the Ethereum eco.

A data expectation closely related to investors is that if Pectra pushes the staking rate from 28% to 40%, the deflationary pressure on ETH will further increase, thereby significantly raising the price of ETH.

After the Pectra upgrade, Ethereum will continue to promote future technology upgrades and development plans. According to information revealed by core developers such as Vitalik, the Osaka Upgrade, after the Pectra upgrade, may introduce long-awaited technical features such as the Verkle tree state solution. Verkle tree is a new type of data structure with higher space efficiency and query performance. By introducing Verkle tree as one of Ethereum’s state data structures, the Osaka upgrade is expected to further improve Ethereum’s transaction processing capabilities and network performance.

Source: @VitalikButerin

However, it is worth noting that all major upgrades of Ethereum have been accompanied by dramatic price fluctuations. In the last two upgrades, The Merge in September 2022 was in a bear market, and ETH rose by more than 100% in the three months before the upgrade, but fell by 40% after landing due to profit-taking. The Shanghai upgrade in April 2023 was in a bull market. At that time, the market was worried that the unlocking of staking would cause selling pressure, but the actual selling pressure did not appear, and ETH rose by 30% in the following three months.

Source: Gate Research public data

In summary, this upgrade has undoubtedly brought high market attention to the Ethereum eco, which lacks innovation. Pectra is not only a technological iteration, but also a stress test to test the resilience and innovation of the Ethereum eco. For investors who generally bet on bullishness, Ethereum upgrades are often accompanied by fluctuations of “buy expectations and sell facts,” so we should also pay attention to the sustainability of bullishness under the recent short-term trend dominated by speculative funds.