Enter Pectra
The next evolution of the Ethereum network is here.
Pectra, Ethereum’s latest network upgrade, brings with it many powerful enhancements to both the consensus and execution layers, advancing Ethereum’s scalability, performance, security, and user experience. We believe that, collectively, the Ethereum Improvement Proposals (EIPs) introduced with this upgrade will reshape the staking landscape and fundamentally improve everyday functions for all end users.
We expect that living within the onchain world and using the applications built on top of it will become easier and more intuitive. Wallets and externally owned accounts (EOAs) will become smarter and will gain the ability to run code, empowering both users and developers with a host of powerful features including batched transactions, gas sponsorship, and customized key management as the path towards pure account abstraction moves forward. Performing routine tasks or complex operations on the network will continue to be more like their web2 counterparts, but in many ways much more potent. No more two-step approvals to perform a token swap: everything can be done in one atomic step.
Validators, stakers, and applications alike could have a staking experience that is more streamlined and optimized for real-world utility. Launching a validator, withdrawing stake, and earning staking rewards will become resolutely more seamless. Capital efficiency will improve considerably and unnecessary bloat on the network will be trimmed.
On the operational side, we expect data processing and storage capabilities to improve, while gas fees decrease. Multi-sig verifications and proofs will become more optimal as we move towards a zero-knowledge future.
Ultimately, Pectra represents a significant step forward for the Ethereum network as well as the machine economy being built on top of it. We believe the network will emerge more performant, with leaner infrastructure, and smarter wallets, to support the ever-growing number of applications building on top of it. It is poised to unlock a series of technological improvements that pave the way towards the next frontier of innovation and real-world adoption.
Towards True Account Abstraction
The entire space is starved for consumer applications, new users, and organic growth. Part of this hurdle still centers on user experience. It’s still quite challenging, and often unintuitive, to live within the onchain economy and perform the same routine tasks as in the traditional world without friction.
The arrival of EIP-4337 and account abstraction laid the foundations for removing these frictions. It started with a system revamp for accounts on Ethereum and the introduction of smart accounts. Through this upgrade, the Ethereum network gained a more standardized and decentralized way of supporting account recovery, session keys, transaction batching, gas abstraction, and more.
Source: https://www.bundlebear.com/erc4337-overview/all
The account abstraction infrastructure initiative by ERC-4337 has become widely used on the network with monthly user operations growing by 310% since January 2024 and weekly active smart accounts more than doubling during the same period. Yet implementing endgame account abstraction in practice has been difficult.
Current EOAs have several limitations. They cannot execute code and are effectively limited to signing simple transactions. This impedes their functionality and ultimately places steep hurdles towards a future of true account abstraction. While EIP-4337 allows smart contracts to function as user accounts and enables complex transaction logic, it has no support for converting EOAs into smart contract accounts, no backward compatibility, and can make transactions more expensive.
EIP-7702 creates a new paradigm in which an EOA can execute code directly from their address during a transaction. This transforms a user wallet into a programmatic smart account. Wallet functionality and utility will be improved drastically, making Ethereum more user-friendly for end users, developers, and applications alike. As wallets gain new functions around transaction batching and gas abstraction, this enables applications to do all of the heavy lifting for their end users underneath the hood: providing gasless transactions, batching multiple transactions all at once, and enabling payment options in assets beyond just ETH (e.g. USDC).
Our expectation is that users will no longer be required to handle complex transaction payments. These can be subsidized by the application or paid in the application’s native token. Wallets can also make use of highly customizable permissioning schemes to enable users to provide authorizations on both a single chain and cross-chain.
This is a particularly powerful upgrade to the network because it meets users exactly where they are: at the wallet level. It builds on existing infrastructure like paymasters, bundlers, and RPCs and enables them to work in the same way. Performing actions onchain, sending payments, and participating in the machine economy should not require a user to be intimately familiar with all of the inner workings underneath the hood. And now this is becoming possible with EIP-7702 and smart accounts. Part of the power of this upgrade is that transitioning will be seamless to the user in most cases. Metamask, for instance, is ready on day one. So when a user or application attempts to submit a batch of transactions, it will automatically handle upgrading the wallet to support these new features.
Redesigning the Staking Layer
Five of the eleven Pectra upgrades center around optimizing staking for both the end user and for network performance. One of the most immediately impactful EIPs included within this upgrade is EIP-7251, which increases the max effective balance of validators. A fundamental constraint within the current Ethereum staking design is the 32 ETH cap for validators. More specifically, both the minimum and maximum effective balance is set to 32 ETH. This means 32 ETH is both the lowest balance required to become a validator and simultaneously the highest balance that a validator can earn rewards on. So any ETH balance above this limit does not earn staking rewards, creating a pervasive capital efficiency problem within the staking ecosystem.
Large stakers and staking pools must not only split up their ETH deposits into many different validators, which requires a non-trivial operational cost, but as soon as any validator begins to generate any staking reward, it simply sits idly then is eventually withdrawn automatically from the validator. This further compounds the capital efficiency problem as staking rewards do not compound automatically like they do on other Proof-of-Stake networks like Solana. It also creates additional friction through the lens of user experience: running a validator requires users to actively manage their staking rewards if they want to maximize their utility.
Source: https://www.kiln.fi/post/ethereum-pectra-upgrade---everything-you-need-to-know
EIP-7251 resolves these issues by increasing this cap by 3100% to 2048 ETH. This represents a tremendous improvement to staker capital efficiency and user experience, and is a welcomed quality of life improvement to all agents within the system. Solo stakers can continue to run their validators with the original 32 ETH requirements while now having the ability to autocompound their staking rewards instead of having them sit idly and then withdrawing them, while larger staking entities can consolidate their ETH deposits into a more manageable, less operationally expensive, set of validators. A user with 2048 ETH, for instance, can now simply run just one validator rather than being forced to split this into 64 separate validators. Moreover, the added attribute of autocompounding boosts staking rewards by about 1.5% relative to standard staking.
Source: https://beaconcha.in/charts/validators
One particularly powerful implication for the broader Ethereum network is the consolidation of validators. There are currently more than 1,000,000 validators active on the network. With larger staking entities being able to allocate more ETH to a single validator, this means that there are fewer validators that need to communicate with each other on the chain and thus fewer messages that need to be exchanged. The underlying outcome is that the network will have less overhead and can operate more efficiently, with much less congestion caused by an arbitrarily expansive validator induced by the original 32 ETH cap. There are powerful operational benefits emerging from this upgrade in addition to financial ones.
An interesting aspect worth monitoring, however, is how much validator consolidation actually takes place after Pectra and how rapid this shift becomes. While consolidation offers a simplified validator setup, increasing a single validator stake to 2048 ETH carries more risk in the face of a slashing event. Slashing is relatively rare, but it is certainly a consideration that large validators must weigh.
Validator Entry and Exit
Pectra will also impact the way in which we enter and exit the staking layer, significantly accelerating validator deposits and making exits more secure and seamless.
The current process of activating a new validator is unnecessarily complex and burdensome for both stakers and for the Ethereum network itself. Part of this involves the reliance on different voting mechanisms within the consensus layer, and block proposers to validate and include a given deposit based on the current execution layer state. Overall this process can take up to 12 hours to finish and creates undue complications for all agents in the space, including solo stakers, delegated stakers, and staking protocols.
If a user wants to begin running a validator, for instance, they must first deposit 32 ETH into the execution layer. The ETH sits in a deposit contract, but the user’s new validator does not immediately enter the activation queue. On the Ethereum side, block proposers track and manage deposits manually and must reach an agreement about the current state of the execution layer and the deposit in question before accepting it and moving it to the execution layer. For the end user, their deposit sits idly in the deposit contract for several hours while a series of voting and confirmations occur underneath the hood. This can become a relatively long process with capital waiting to be put to work for days.
EIP-6110 streamlines this process and reduces the timing of deposits from hours to minutes (estimated at 13 minutes) by pushing deposits directly to the execution layer. This is accomplished by appending deposits to blocks on the execution layer, removing the need for all of the voting, communication, and coordination currently required to finalize a new deposit. This speeds up all aspects of the deposit process, while making staking capital slightly more efficient and client software much less complex.
On the other end of the spectrum, the validator exit process involves a major trust assumption that largely goes unnoticed, specifically when users rely on delegated staking and staking services. Currently, a validator’s signing key must be used to trigger withdrawal. Once the key is used to sign this exit message, it gets submitted to the consensus layer where it is processed and then finalized. However, when a user decides to use a third-party staking service to manage their validator, they also entrust them with the validator’s private key and thus the ability to trigger an exit. While there are some workarounds, this is a fundamentally suboptimal approach and introduces potentially serious security risks. EIP-7002 mitigates these risks by allowing stakers to exit directly on the execution layer. This creates a self-service withdrawal feature that users can access without requiring an operator signature. It also decouples a validator’s signing key and withdrawal key. In short, users can trigger an exit by using their validator’s withdrawal credentials directly on the execution layer, reducing vulnerability and reliance on third-party private key management. As users have a new alternative way to manage validator exits, this also creates an added layer of security through redundancy.
Overall, these upgrades make initiating and winding down a validator easier and more streamlined for both end user stakers and the network itself, while shoring up security.
Ethereum and the Next Wave of Innovation
Payments and programmable money are at the forefront of the next wave of adoption and have demonstrated the strongest product-market fit. Fiat-based stablecoins continue to reach new record highs and show no signs of slowing. In April, there was more than $218B in circulation, settling over $722B in transaction volume.
Source: https://visaonchainanalytics.com/
Legacy institutions continue to push legacy assets onchain. Tokenized money markets like BlackRock’s BUIDL and Franklin Templeton’s BENJI have grown to $2.7B and $715M, respectively. Collectively, the tokenized treasury market has grown by 360% over the last 12 months and has now surpassed $6.3B.
Source: https://app.rwa.xyz/treasuries
The advantages of programmable money are vast. In order for them to work, however, end users need to have a way of easily using them. Similarly, developers need a way to build applications that can function at enterprise-grade levels.
Smart accounts and EIP-7702 make this possible. User frictions like cross-chain permissions, gas fees, and approving multiple transactions all at once can finally be abstracted away. For instance, even basic operations like token swapping currently require multiple steps (i.e. approve and swap). An onchain neobank can leverage EIP-7702 to combine these actions into a single atomic transaction, making it faster, less expensive, and more 1-click. This can further be extended into more advanced batching in which the output of one step becomes the input to the next or some other form of logic.
Under this scenario, this upgrade also paves the way for a neobank, or any financial application, to pay for its users’ transactions in any form of payment (ERC-20 based) they want. A user no longer needs to hold ETH, they could simply hold USDC or some other stablecoin. From here, more UX enhancements can be layered on, such as guardrails around daily spending limits (e.g. $500 daily transfer limits), whitelabeling certain applications (e.g. an onchain savings account can only interact with Aave), or even whitelabeling tokens themselves (e.g. an onchain savings account can trade USDC and USDT, but not ETH).
Consumer applications are at the other side of retail adoption. These require the same, if not more, of these advanced features and functions. Portfolio automation tools like Glider [1] stand to benefit tremendously from gas optimization, transaction sponsoring, and batched transactions.
The same is true for onchain prediction markets like Noise [1]: better user experience to explore different betting markets and leverage trade on trends. This is especially critical as we move towards a mobile-first future, where developers must juggle different permissions and session keys while still delivering instant, 1-click web2 experiences.
One interesting thing to watch will be how wallet providers and applications balance upgradeability with user experience.
Source: https://dune.com/hildobby/eth2-staking
Finally, Pectra could be a boon for staking service providers. Lido, for instance, currently manages over 9.1M ETH ($16.7B at current prices) across roughly 287,000 validators. Expanding the max effective balance to 2048 through EIP-7251 could reduce Lido’s validator set to just 4,493, a reduction of 98%. This means less manual upkeep and overhead. The same applies to centralized exchanges like Coinbase and Binance as well as DeFi protocols like EtherFi. We anticipate Ethereum to emerge leaner, faster, cheaper, and perhaps most importantly, easier to use for everyone on the network. Part of the beauty of Pectra is that these upgrades will largely happen automatically. Users remain exactly where they are, applications remain exactly where they are. Ultimately, Pectra sets the stage for endgame account abstraction and will further blur the lines between web2 and web3. The design space is quickly transforming and is once again wide open.
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[2]Anagram Ltd. and its affiliates may consult on, build, invest in, or otherwise have interest in companies or projects that are written about in this space. This content is for educational purposes only and does not constitute advice, marketing or solicitation for funding. Please see the disclaimer below for more information.