A Closer Look at the Ethereum Pectra Upgrade: What Investors Need to Know

Like any nascent technology, the Ethereum network experiences regular improvements and innovations. Before the Shapella upgrade in April 2023, validators could not even withdraw their 32 ETH and staking rewards! Imagine that. Now, another big change is coming to the network. The Ethereum Pectra upgrade is a major protocol enhancement to improve the user experience of crypto wallets and network staking. The Ethereum Foundation, the network’s main governance body, has proposed implementing Pectra sometime in late 2024 to early 2025. In this article, we'll tackle the details of this important upgrade:

• What upgrades are coming with Ethereum Pectra.
• What benefits users can expect.
• What can happen post-upgrade.

Time to dive in!

What is the Ethereum Pectra Upgrade

Pectra consists of a combination of two big upgrades (Prague and Electra). Ethereum researchers love mixing names together to simplify discussions. These two upgrades further comprise several EIPs. EIP stands for Ethereum Improvement Proposal and consists of standards used to introduce new features and processes for the Ethereum network. These EIPs act as the source of truth and contain technical specifications and the motivation behind the proposal. Pectra includes several key EIPs.

EIP-3074

This proposal aims to improve the user experience on the Ethereum network, opening up crypto to a wider range of non-crypto native users.  Based on the proposal’s official GitHub, two new operations are introduced: AUTH and AUTHCALL. Put together, these would grant smart contract functionality to an externally owned  account (EOA) like your MetaMask wallet. EIP-3074 enables users to delegate control of their EOA to a smart contract, opening a wide range of use cases such as approval of batch transactions, sponsored transactions, and social recovery.  

EIP-7251

This proposal increases the upper bound to the 32 ETH validator staking requirement. This would allow large staking providers such as Lido Finance to consolidate their validators. Similarly, smaller solo stakers could also operate a single validator with more than 32 staked ETH. As of writing, there are nearly a million validators on the network. While this large number looks like increased decentralization, it can inadvertently result in future network centralization and bandwidth issues. As more validators enter the network, Ethereum’s bandwidth increases. Bandwidth, in this context, is defined as how long data needs to travel. By removing the 32 ETH staking limit, large stakers could reduce their redundant validators.

Benefits of the Pectra Upgrade

Ethereum Pectra follows a series of major network upgrades over the past 2 years. Ethereum completed the Merge in September 2022, officially migrating the network to a Proof-of-Stake (PoS) consensus. In April 2023, the Shanghai upgrade followed, opening the floodgates to more staking activity. With Pectra, users can expect a drastic improvement on a transactional level regarding how one engages with decentralized apps.

Heightened User Experiences

Ethereum's Pectra upgrade will bring smart contract functionality to everyday wallets. This solves many issues, from the high technical barriers to entry to the cost of transacting on the network. Users stand to witness a wave of benefits.

1. Sponsored Gas Fees: Transacting on the network can get quite expensive. Performing an on-chain crypto swap incurs transaction fees of $7 of ETH. Selling a Non-Fungible Token (NFT) is even worse at $15. With Pectra, sponsored transactions allow another account to subsidize gas fees on behalf of the user. This would allow decentralized applications to take over costs and further scale their user base.
2. Account Recovery: During wallet creation, a user needs to memorize a set of 12 or 24 words to back up the account. The internet is filled with stories of people losing access to their accounts by similarly losing access to the seed phrase. Pectra introduces a social recovery feature that would enable a user to still gain access without a seed phrase.
3. Simplified Transactions: Actions on the network can be more complicated than needed. For example, performing a simple crypto swap requires two signatures. One for the token and another for the swap action. Grouped transactions would simplify this process as a single signature would execute multiple transactions.

Staking Rewards Compounding

EIP-7251 directly reduces validator count and brings down computational requirements, making the network more efficient. Perhaps what is less talked about is how it benefits solo stakers financially. By removing the 32 ETH cap, a solo staker can now compound staking rewards. Previously, an individual staker had to deposit the rewards in a separate platform to earn a yield on the account.

General Network Improvements

Aside from EIP-3074 and EIP-7251, Pectra includes other proposals that improve the overall performance of the network. This includes EIP-2537, which improves network security and stability. Note that Pectra will implement many more EIPs. A full list of the Pectra EIPs, may be found on the main EIP-7600. 

Predictions for Ethereum Post-Pectra

While it’s impossible to predict what will truly happen post-upgrade, we can speculate based on the perceived benefits to come:

Increased Network Activity

Sponsored transactions have the potential to rock the industry. By having decentralized applications subsidize gas fees for users, there could be more transactions and meaningful activity on the network. From NFT trading, lending, and to staking.

More Solo Stakers

More of a fearless forecast, with the lifting of the 32 ETH staking cap and optimized staking experience, a new wave of solo stakers will step in. This will benefit network decentralization and put the balance back in household stakers hands.

New Business Models

Ethereum Pectra plans to deliver significant changes to how users conduct their transactions. New business models, such as subscription-based decentralized apps, could emerge. A user could be given a plan with a specified number of gas less transactions every month.

Conclusion

Ethereum Pectra forecasts to deliver major Ethereum network improvements. Given the size of the blockchain, as the 2nd largest crypto by market capitalization, this could change the crypto landscape as we know it.   How will you be preparing for Pectra?   At the very least, reflect on your personal risk tolerance.

The content of solostakers.com is for informational purposes only and should not be considered financial advice. It represents the personal views and opinions of the author(s) and is not endorsed by any financial institution or regulatory body. Cryptocurrency and staking investments carry inherent risks and readers should conduct their own research and consult with a financial professional before making any investment decisions. The owner and author(s) of solostakers.com will not be liable for any losses, damages, or consequences arising from the use of the information on this site. By accessing solostakers.com, you agree to bear full responsibility for your investment decisions.