Author: YBB Capital Researcher Ac-Core Translation: Shan Oppa, Golden Finance

1. Background of Pectra Hard Fork

Ethereum Pectra upgrade was officially launched on March 5. The upgrade combines two updates, Prague and Electra, aiming to enhance Ethereum's execution 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 layer two (L2), and expanding network capacity by introducing 11 Ethereum Improvement Proposals (EIPs). The upgrade was first implemented on the Holesky testnet on February 24, 2024 and is scheduled to be deployed to the Ethereum main network on April 8, 2024. The specific time depends on the successful completion of the Holesky and Sepolia testnet upgrades.

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

Phase 1: mid-March 2025

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

•Account abstraction: allows users to pay Gas fees using USDC, DAI and other stablecoins, improving payment flexibility.

•Verifier staking ceiling increased: Increase the staking ceiling for a single verifier from 32 ETH to 2,048 ETH, supporting large-scale staking operations.

Phase II: End of 2025 - Early 2026

•Introduce Verkle tree: Replace the Merkle-Patricia tree with Verkle tree, optimize data storage, and improve synchronization efficiency.

•PeerDAS (peer data availability sampling): AllowNodes can verify without storing all transaction data to improve scalability.

2. Key Ethereum Improvement Proposal (EIP) in Pectra Upgrade

Pectra Upgrade includes 11 Ethereum Improvement Proposal (EIP) aimed at enhancing scalability, security, account abstraction and validator staking mechanisms. The following highlights some key proposals based on the potential impact on Ethereum’s development (depending on personal research perspective):

1. EIP-7702: Account Abstraction

Overview: Allowing externally owned accounts (EOA) to perform certain smart contract functions, enabling bulk transactions and gas fee sponsorship.

Viewpoint: This will significantly enhance the account abstract wallet, allowing it to run like a smart contract - processing batch transactions and implementing third-party gas payments. (The relevant EIP-7840 further expands the account function and realizes customizable account behavior).

2. EIP-7251: Increase the validator staking

Overview: Increase the validator maximum staking amount from 32 ETH to 2,048 ETH, simplify validator management and allow larger staking nodes.

Viewpoint: Although this increases the degree of centralization of Ethereum's staking, 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: Allows execution layer address to trigger withdrawal, reduces dependence on the consensus layer, and simplifies the withdrawal process.

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

4. EIP-6110: Verifier activation delay optimization

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

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

5. EIP-7691: Block Size Expansion

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

View: Reducing congestion and increasing transaction speed 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: Provides more visibility into the maximum extractable value (MEV), helping users and developers better understand and monitor MEV activities.

Point: Although improving transparency reduces arbitrage opportunities, it enhances the fairness of Ethereum transactions.

7. EIP-7549: Gas fee adjustment

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

Point: Helps alleviate the surge in gas fees during network congestion, making the 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 the governance structure of Ethereum to make it more decentralized, transparent and efficient.

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

9. EIP-7021: Verifier Punishment Mechanism Improvement

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

Point: As a balance between increasing stakes for validators (EIP-7251), ensures 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

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

Viewpoint: Strengthen the role of Ethereum as a multi-chain hub to make cross-chain asset transfer and interaction smoother.

3. Pectra's double-layer upgrade

Pectra adopts a double-layer upgrade method, merging the execution layer (Prague) and the consensus layer (Electra) to solve the possible synchronization problems of individual upgrades. Historically, Ethereum's execution layer and consensus layer have been independently upgraded due to its different functions:

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

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

Notable EIPs that require layer modification.

Pectra upgrades several EIPs need to be modified to the execution layer or consensus layer:

Modify the EIP of the consensus layer:

EIP-6110, EIP-7002, EIP-7251, EIP-7549, EIP-7685, EIP-7691

Modify the EIP of the execution layer:

Modify the EIP of the execution layer:

left;">EIP-2537, EIP-2935, EIP-6110, EIP-7002, EIP-7623, EIP-7685, EIP-7702, EIP-7840

Other keys in Pectra EIP

EIP-7623: Cross-chain messaging mechanism enhancement

Overview: Improve cross-chain message processing and enhance the efficiency and security of cross-chain communication.

Significance: Although Pectra focuses on Ethereum’s internal execution and consensus layer, but EIP-7623 is designed to optimize interoperability with external blockchains, especially in cross-chain asset transfers and data transfers.

EIP-2537: BLS12–381 curve operation

Overview: Introducing support for the BLS12–381 encryption curve, which is critical for Zero Knowledge Proof-of-Law (ZKP) and encryption.

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

EIP-2935: Verifier recovery mechanism

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

Significance: EIP-2935 Ensures that validators can reintegrate into the consensus process under certain conditions. In contrast, Pectra's EIP-7251 and EIP-7021 focus on pledge limit adjustments and punishment mechanisms, improving validator incentives and security measures.

4. Pectra’s impact on Ethereum and cryptocurrency markets Decentralized applications

Pectra hard fork brings smart contract functionality into regular wallets, simplifying the development process and expanding potential applications. Features such as social recovery and bulk transactions make it easier to create user-friendly DApps, increasing the reliability and efficiency of decentralized applications in DeFi, GameFi and other areas.

Ethereum, however, faces an increasingly greater challenge, the "parasitic" effect of layer 2 (L2). The L2 chain absorbs a large part of DeFi activity, resulting in a decline in main network transaction fees and an increase in ETH inflation. While L2 is part of the Ethereum ecosystem, their centralized sorters and independent economic models have raised concerns about Ethereum's long-term value proposition.

The long-term value of Ethereum

Many Ethereum holders are disappointed with ETH's price performance in this cycle, and some believe that Pectra may change the game, especially in qualityand L2 scalability aspects. This upgrade introduces several key enhancements:

More flexible wallet operations, support bulk transactions and sponsor gas fees

Elevate the staking limit for validator, thereby enabling faster withdrawals and validator onboarding

Increase block capacity, thereby speeding transaction processing and increasing gas fees

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

However, the fragmentation problem of Ethereum is still unresolved. The ecosystem faces a fundamental problem: Should Ethereum target a high-throughput single-chain model, or should it 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 with its L2 solution, but at the cost of innovation decentralization and repetition, which makes the monolithic chain model increasingly attractive.

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

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

Advantages: Integrate the number of validators, reduce the burden of large-scale storage and reduce network operation overhead.

Disadvantages: Increased centralization makes Ethereum more popular among large investors and institutions, but may alienate retail participants.

The current strategic question is whether Ethereum can use 2,048 ETH stakeTo attract institutional capital, just as Solana and Sui are attractive to American investors. Can Ethereum prices push up by attracting institutional funds at the cost of decentralization?

Ethereum is now facing a new version of the "impossible triangle": Narrative power

Centralized price control

Decentralized PoS staking

Finding the right balance between these elements will become the biggest challenge Ethereum faces in the future.

Where is the North Star of Ethereum?

Ethereum seems to be lost. The dispersed ETH supply is gradually expanding, and DeFi activity has shifted to the L2 chain, resulting in a sharp decline in mainnet cost capture. In fact, the L2 chain runs as an independent blockchain, while the centralized sorter actually runs as an independent ecosystem.

Base's revenue flows to Coinbase

Arbitrum's profit flows to Arbitrum DAO

Ethereum mainnet failed to capture this value

At the same time, other blockchains have clear narratives:

Bitcoin=digital gold

Solana=Nasdaq on the chain

Artificial Intelligence Application=Next Frontier

Solana's DeFAI and AI Agent narratives have driven the SOL/ETH ratio to achieve its vision as Ethereum's most powerful competitor. Metis has repositioned itself as an AI-centric blockchain, competing with DeFAI for an intent-driven ecosystem.

So, what is the North Star of Ethereum?

Ethereum's ETF application continues to be in trouble, mainly attributed to two key issues:

1. Lack of staking returns

Unlike BTC ETFs, Ethereum ETFs do not offer staking rewards.

Holding ETH through ETFs will miss about 3.5% of APY staking rewards.

Investors also have to pay management fees and cannot obtain DeFi earnings 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 mastered by traditional finance.

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

However, Pectra's 2,048 ETH staking cap indicates a potential shift. By allowing larger institutional holdings, Ethereum may pass RWA integration is consistent with institutional capital, which may make Ethereum staking ETFs of strategic importance as Bitcoin reserves.

Ethereum's short-term Polaris may be a staking-based ETF that elevates the price narrative of ETH to the level of Bitcoin's strategic reserve status.