Key Takeaways:
Rollups increase transaction speed by aggregating mass transaction data off-chain into batches, and send results back to Ethereum main network when consensus is reached. However, it takes 7 days to withdraw assets back to Layer 1
Arbitrum and Optimism are the two hottest optimistic-rollup projects. They are different for various dispute-resolution processes and EVM compatible abilities. Arbitrum has more TVL and active addresses than Optimism does
Polygon is the biggest Layer 2 project so far, it uses sidechain and plasma as its scaling solution to achieve faster transaction speed and lower gas fees
Optimism is the first rollup project that launched the token called OP, but the performance of OP is far from satisfaction
In the short term, Optimism can keep its leading position in the rollups field. However, in the medium to long term, Optimism will be increasingly threatened by improving technologies of Arbitrum and the on-going development of zero-knowledge rollups
What is Optimism?
Optimism is a Layer 2 optimistic rollup scaling solution that aims to solve Ethereum's congestion and high transaction fee problems. This project was first revealed in June 2019, and officially launched its main network in December 2021. Since Optimism was designed to be compatible with Ethereum Virtual Machine (EVM), developers can easily deploy existing Ethereum smart contracts on Optimism. As a blockchain built on top of Ethereum main network, Optimism is using Ethereum's proof of work (PoW) consensus method to validate transactions until Ethereum transitions to a proof of stake (PoS) mechanism, which is scheduled for the upcoming months. Optimism's native token OP was initially distributed among Optimism users via the first airdrop on May 31th, 2022.
How does Optimism work?
On Optimism, transactions sent to Layer 2 will be received by Sequencers who have a responsibility to accurately execute the transactions received. Sequencers are rewarded for executing transactions properly but are punished if they act maliciously by having their staked funds slashed. The withdraw time from Optimism to Ethereum main network is now 7 days.
To be more specific, when a user sends his transactions to the Sequencer, the Sequencer checks the validity of the transaction, if it is valid, then Sequencer applies the transaction to its local state as a pending block. These pending blocks will be compressed by the Sequencer into large batches, and then the Sequencer will periodically submit these large batches to Ethereum main network for finalization.
The general process to submit fraud proofs is as following: if someone questions that a Sequencer has acted fraudulently, they may alert the adjudicator contract on the Ethereum mainnet. This contract can verify the validity of the results produced by the Sequencer by using the Optimistic Virtual Machine (OVM), an Ethereum Virtual Machine (EVM) compatible execution environment built for Layer 2. If the OVM determines that a Sequencer's results are invalid, the Optimistic Rollup executes a fraud proof and the Sequencer's funds are slashed. Part of the slashed funds are awarded to the whistleblower. Whistleblowers challenge the results of the sequencer during a period known as the "challenge period". This period typically lasts around 7 days which results in one-week delay in moving assets from Optimism back to Ethereum.
The Overview of Optimism Ecosystem
Total Value Locked (TVL):
As of 28th August, 2022, according to L2BEAT and DeFi Llama, Optimism's TVL is $1.58 billion, occupied 30.84% market shares of all Layer 2 projects. The TVL of all DeFi protocols on Optimism is $894.69 million, which is 56.63% of the entire Optimism ecosystem.
Investors:
Optimism raised $3.5 million in its seed round led by Paradigm and IDEO CoLab Ventures in 2020. After one year, it closed a $25 million Series A funding round led by a16z in February 2021. In March 2022, leading by a16z and Paradigm, Optimism raised $150 million in Series B funding round.
Token Economics:
According to the Optimism Governance Overview, the OP token will be distributed as following:
Based on the comparisons above, the sketch of Optimism users will be people who want their assets or projects to rely on Ethereum mainnet's unbreakable security (the advantage of Rollups), and need to withdraw their crypto assets to Layer 1 more often, because its withdraw time (7 days) is relatively faster than Arbitrum's (up to 2 weeks).
Potential Challenges:
From my own point of view, Optimism will be affected by the following 3 challenges from now and the near future:
Arbitrum Nitro - Arbitrum One has successfully migrated to Arbitrum Nitro on August 31st, 2022. This upgrade enables Arbitrum to increase transaction throughput by 7 to 10 times higher than pre-Nitro's. It also achieves lower gas fee by applying a more advanced calldata compression technique. This upgrade improves the efficiency of Arbitrum, making it more competitive than Optimism.
Arbitrum Token Offering - We can see Arbitrum's huge popularity from Arbitrum Odyssey, which is a NFT give-away event that caused a temporary downtime on Arbitrum network for attracting too many people to participate. This event can be regarded as a pre-game or rehearsal of the future Arbitrum token launch. Considering Arbitrum has more active addresses and social media followers, I think once Arbitrum token start to airdrop, the price of $OP will be affected.
Zero-knowledge Rollups - Zero-knowledge rollups are developing very fast. Comparing to optimistic rollups, Zk-rollups are able to achieve lower gas fees, faster transaction time, provide more data privacy, while maintain the same security level. Once the Zk-rollups become proven technology, Optimistic rollups will be considered out of date. Polygon is aiming to switch its scaling mechanism from the combination of sidechain and plasma to zero-knowledge rollup. On the ZK-rollups track, ZkSync and StarkNet are the two most competitive players, besides, Polygon is also aiming to switch its scaling mechanism to Zk-rollups by developing Polygon Nightfall, Miden, Zero and zkEVM projects.
OP Token Chart Analysis:
According to the candle chart from CoinMarketCap, at the first day, June 1st, the closing price, $1.23, is lower than opening price, $1.44. There are 2 possible explanations for the fall-on-debut situation. First, institutional investors, Paradigm and a16z, pulled out of their positions. Second, there were a lot of airdrop participants who wanted to cash out their OP token, but the market did not see positive signals of Optimism in the near future. Both of the possible reasons explain why OP price and transaction volume decreased in the following month.
Notably, OP's price rallied by nearly 300% in over a month to reach $2.31. The skyrocketing happened because Ethereum announced the complation progress of the Merge and Rollup-Centric roadmap. As the only rollup project that had native token, Optimism was back to the spotlight undoubtedly. This market reaction was the reflection of positive perception of Ethereum 2.0. Optimism was only a beneficiary, as itself did not make some remarkable breakthroughs. Therefore, after the weekly madness, OP price went down gradually.
As for now, OP transaction volume maintains to be low, and daily price fluctuation is limited. The investment strategy should not be put forth until the price to drop to around $0.8, which is the starting point of its last surge (refer to circled point in Figure A) as it could be a notable dip.
Conclusion:
Optimism, in the short term, is possible that Optimism can keep its leading position in the Layer 2s' track. However, since Arbitrum fully migrates to Nitro stack to improve its efficiency, and plans to issue their native token in the near future, the gap between Optimism and Arbitrum may get bigger if Optimism makes minor improvement in response. Therefore, in the medium term, Optimism's performance will be questionable. As the development of zero-knowledge rollups, once they become proven technologies, optimistic rollup projects are highly likely to be substituted. In this case, Optimism will not be a favorable project to invest in the long term.