How Optimism is Helping Ethereum Overcome Its Limitations and Process More Transactions
The Ethereum blockchain has been facing two major challenges: low latency and high throughput, all while trying to comply with resource constraints.
The more people that use Ethereum, the more its capacity is limited, which has resulted in expensive network access. But fear not, as “scaling solutions” have emerged to address these issues. Layer 2 scaling solutions promise to elevate Ethereum’s transaction processing capacity to 100,000 transactions per second in the future.
These solutions are built on top of Ethereum and offer higher throughput by combining several transactions into a single Ethereum transaction that periodically settles with Ethereum.
Although they sacrifice a bit on security and decentralization, layer 2 blockchains have already proven their worth, with working prototypes processing billions of dollars.
Among the top layer 2 solutions based on optimistic rollups is Optimism, which we will explore in this report.
Optimism – A Layer 2 Scaling Solution for Ethereum
Optimism was created using cutting-edge data compression methods to quickly settle ETH transactions on another blockchain, with cost-effectiveness as a priority.
- The method uses optimistic rollups, combining multiple transactions into a single transaction set up on a different blockchain while also lowering gas fees.
- On the Ethereum main network, users can see and participate in the transactions.
How does it work?
Optimism is like a list of transactions stored on Ethereum’s Canonical Transaction Chain. If a user doesn’t submit their transaction directly to that chain, a sequencer confirms and executes valid transactions on Optimism’s layer 2 blockchain, which is built on top of Ethereum. The sequencer groups transactions into batches called “rollups” and compresses the data to save money before submitting it back to Ethereum.
- Optimism’s layer 2 blockchain, which is a blockchain that sits on top of the L1 blockchain, in this case, Ethereum, is created and executed after this sequencer instantly confirms that valid transactions have occurred.
- The “rollups” in these blocks are collections of Ethereum transactions. The sequencer further compresses this data to make the transaction smaller and cheaper before returning transaction data to Ethereum.
Architecture of an Optimistic Rollup (source : alchemy.com)
Optimism : Key Benefits
- Scalability: Optimism can achieve a 10–100x improvement in scalability, depending on the nature of the transaction.
- Reduced Fee: Optimism can significantly reduce the overall cost of the transaction. Its rolling technology combines multiple transactions into a single transaction, which helps reduce transaction costs.
- Security: Transactions are settled on the Ethereum Mainnet, allowing users to take advantage of the security and decentralized nature of the Ethereum blockchain as Optimism’s Layer 2 layers up on top of Ethereum.
- Improved User Experience: New projects using Optimism Layer 2 scaling solutions enjoy lower fees, quicker transactions, and an improved user experience.
What’s the Gas Fee Situation?
Optimism transaction costs operate similarly to ETH fees. But because Layer 2 introduces innovative paradigms, it will never be a perfect replica of Ethereum. Fortunately, these differences are simple to comprehend and even simpler to handle within your app, thanks to Optimism’s EVM equivalent.
Rollup Cost – On Ethereum, Optimism has a rollup cost for a portion of the transactions instead of charging for the entire transaction. This fee consists of the transaction input fees plus a fixed cost to include the transaction in the bundled group. Additionally, Optimism has a safeguard against sudden increases in the price of Ethereum gas fees.
Execution Cost– Although Optimism has a standard gas cost of just 001 gwei, its gas fees use the same amount of gas as an equivalent transaction on Ethereum would. This fee makes up only about 04% of the typical total transaction.
Optimism’s simple transfers cost a fifth of Ethereum’s, but more complicated transfers can save over 200 times as much money. Optimism is constantly coming up with innovative ways to lower the price of gas to make using the network even more affordable for users, value everywhere!
Tokenomics
Optimism launched its OP token on May 31. 231,000 addresses were eligible to claim 214 million OP tokens through an airdrop. OP governs upgrades to the protocol and network parameters and creates an ongoing system of incentives for projects and users in the Optimism ecosystem.
The project currently has a market cap of just over $600k. With a total supply capped at 4,294,967,296 tokens, the circulating supply is only slightly over 234 million, with an inflationary rate of 2%.
Source: Coingecko
• 25% — Ecosystem Fund: set aside for financing various neighborhood initiatives within the Optimism ecosystem. The governance, partner, and seed funds will each get a 5.4% share of these funds. Community members will decide how to spend the remaining 8.8%.
• 20% — Retroactive Public Goods Funding: projects will be rewarded through this fund based on how they affect the general welfare. A mechanism that aims to fairly and consistently reward public goods calculates this impact. Since there is no set payout for a specific time frame, the Optimism Foundation can use these funds whenever it wants.
• 19% — User Airdrops: active contributors, token owners, and other stakeholders are rewarded through airdrops. A 5% portion of the total token supply was given to the general public as part of the first airdrop. Strict distribution criteria determine how many OP tokens should be distributed to a wallet. Future airdrops will use the remaining 14% of tokens.
• 19% — Core Contributors: the core team members will each receive a sizable number of tokens. These people drive the Optimism Collective project. The fund will gradually distribute a certain amount to each team member as a token of appreciation for their work. It’s important to remember that each allocation has a lockup period.
• 17% — Project Investors: the project continues to receive significant financial support from investors. As a result, such investors are entitled to 17% of the total allocation. A lockup period will be part of any funding provided to investors.
Governance: Token House and Citizens’ House
Optimism runs its governance as a dual entity and functions as a Collective (a band of companies, communities, and citizens working together to reward public goods and build a sustainable future for Ethereum).
Source : Cryptostars
The Token House and the Citizens’ House are two of these faces. The Optimism Collective has an ambitious goal – to balance the incentive of making a profit with the motivation of doing good.
- The Collective thinks that the current incentive structures between these two elements aren’t well-aligned, and rightly so. The Citizens’ House has a higher purpose because of this. This includes casting a vote on issues that support a closer connection between impact and profit. In other words, the Citizens’ House decides whether to fund public goods in a way that promotes doing good.
- The Token House, on the other hand, is in charge of making votes on technical matters. One of these is voting on upcoming improvements, problems, and the umbrellas around that.
Optimism Ecosystem
The top 5 protocols on Optimism at the time of writing are:
Synthetix (SNX) – a derivatives liquidity protocol that makes it possible to create synthetic assets on the blockchain. With on-chain tools, Synthetix provides exposure to real-world assets like stocks. Its primary offerings include decentralized perpetual futures, synthetic versions of tech stocks, and commodities like gold. Oracles are used to keep track of the underlying assets’ prices.
When a position is liquidated, SNX tokens, which act as collateral for the created synthetic assets, are burned. The most extensive protocol on Optimism is Synthetix, with a TVL of more than $100 million.
Velodrome (VELO) – an incentive protocol for Optimism’s liquidity. The foundation established by Solidly Exchange, a decentralized exchange for protocols, is expanded upon by Velodrome. It aims to improve DeFi protocol interoperability and give protocols access to their liquidity in the Optimism ecosystem.
Aave V3 (AAVE) – is a lending platform and DeFi money market protocol that enables users to borrow and lend various crypto assets. Users can earn interest on their crypto assets by depositing them across multiple liquidity pools or using their existing crypto holdings as collateral to borrow money.
Curve (CRV) – is one of the most significant exchanges for trading stablecoins with a stablecoin DEX. With a TVL of $68 million as of the time of writing, it is one of the biggest decentralized exchanges on Optimism. Curve has integrations with all relevant blockchains and gained popularity thanks to its AMM model.
Uniswap V3 (UNI) – is one of the largest DEX by TVL on Optimism (at the time of writing, over $64 million). One of the first DEXs to offer to trade using an AMM model was Uniswap, primarily known for this. Along with Ethereum, Uniswap is accessible on Arbitrum and Polygon.
The Leading Optimism Bridges
The three main bridges to Optimism are:
· The official – Optimism Bridge.
· Synapse – a cross-chain bridge.
· Hop Exchange – a bridge between L2s and Ethereum.
Synapse– Synapse aims to join Optimism to other layer-one blockchains like Ethereum. Synapse is powered by the SYN token, which serves as a reward for liquidity providers and a gas fee subsidy, and is secured by cross-chain multi-party computation validators. Synapse offers token swaps, liquidity pools, and expansion across additional layer-one and layer-two chains.
Hop Exchange – Hop Exchange links Ethereum with layer-two networks like Optimism and Arbitrum. The Hop Exchange allows users to transfer tokens almost instantly, similar to Synapse, without waiting several days. Hop’s connectivity with other networks enables asset movement to provide the desired asset on layer one, making this possible. To rebalance the liquidity across the network, Hop Exchange employs automated market makers to swap between each token and its corresponding canonical token on each roll-up.
There are close to 200 apps and protocols in Optimism’s ecosystem that include:
NFTs — OptiPunks, Optimistic Apes.
On-ramp — Binance, Kucoin, MEXC.
Wallets — Coin98, MetaMask, Trust Wallet.
Tools — Chainlink, Dune Analytics, The Graph.
Portfolio trackers — DeBank, Nansen, Zapper.
DAOs — Bakery DAO, BoringDAO, Olympus DAO.
Optimism profits and announced upgrade
Over the past few days, Optimism’s profits have increased along with the token price and have become one of the most profitable major crypto assets of the entire week with this result.
The Optimism network token, OP, has risen more than 30%:
The “global warming” of the cryptocurrency market can be considered one of the causes of the explosive growth of OP in quotes. The second is that interest in and growth in the number of users, transactions, and locked value is exploding in Ethereum’s Layer 2 networks. Optimism is among the top performers, with a TVL of $635 million, 2.64 million unique addresses, and 70,000 daily users.
They have recently given some ground to Arbitrum, their main rival, though Optimism has an upgrade planned.
According to charts, Arbitrum has higher TVL and lower transaction costs:
The Bedrock upgrade from Optimism aims to make it the least expensive L2 and lays the groundwork for subsequent upgrades like:
2022 was quite the year
OP governance was established in 2022. The Optimism team introduced us to the Optimism Collective in April, and the Token House went live shortly after. Iterative governance is now in its third season.
In 2022, Optimism continued to increase. More people are using Optimism, and more dApps are debuting, both taking advantage of Ethereum’s security. Optimism transactions have increased by more than 10 times in the year since the EVM Equivalence Upgrade. Simply put, more people are utilizing the chain to complete more tasks.
The overall value of the assets held by Optimism has also significantly increased. The on-chain value of Optimism has nearly multiplied, rising from 116k ETH ($540M) to 995k ETH ($1.3B) over the course of a year. Although this metric by itself does not indicate the chain’s health, it is a small piece of a larger picture illustrating the sustainability of the entire ecosystem.
Conclusion
The innovative project Optimism Collective is building the foundation for significant projects. It is supported by a strong team, a sizable community, and a collection of devoted investors. There is no doubt that OP will achieve its goal of dominating Layer 2 scaling for Ethereum much sooner than anticipated if there is another bull run. There are plenty of reasons to be optimistic about Optimism.