Can Optimism emerge victorious in the Layer 2 battle?

*Author: Daniel Li, *CoinVoice

The Layer2 star project Optimism's token OP has seen a significant increase in the past week, rising from a low of $0.98 to a high of $1.39, an increase of over 40%. Although there have been tokens that doubled in value over the past week, most of these are meme coins, driven by institutional manipulation and lacking long-term investment value. In contrast, OP is a token with long-term investment potential, and its increase has outpaced most blue-chip coins. The main reason for OP's optimistic outlook is the impressive performance of the Optimism project team over the past year and the favorable expectations surrounding the upcoming Bedrock mainnet upgrade in 2023.

The Impressive Performance of Optimism in 2022

The year 2022 was extremely turbulent for the crypto industry, with numerous star projects collapsing and a sharp decline in investment during the crypto bear market, casting a shadow over the development of the entire crypto industry. However, amidst this gloom, there were still some standout projects that grew against the trend, driving the continuous advancement of the crypto industry through technological innovation and the establishment of ecological scenarios. As one of these standout projects, Optimism's performance in 2022 was nothing short of impressive.

Optimism Collective Innovates a New Model of Digital Democratic Governance

The most significant innovation for Optimism in 2022 was undoubtedly the introduction of a digital democratic governance model in the crypto industry, initiating a large-scale experiment in digital democracy. As early as the beginning of April 2022, Optimism launched the Optimism Collective, a team composed of the community, companies, and citizens aimed at promoting the rapid and sustainable development of a decentralized ecosystem, temporarily managed by the Optimism Foundation.

Traditionally, "on-chain governance" has mostly adopted two models: the first is one token, one vote (combined with Ve or token age); the second is one person, one vote (public chain BFT nodes or some PFPs). Building on these two models, Optimism innovatively proposed a third model, the Optimism Collective, which combines the first two models and is jointly managed by the Token House and Citizens' House.

Token House is primarily responsible for voting on project incentives and protocol upgrades, as well as managing the treasury fund. It was established during the first OP token airdrop, composed of OP token holders and their representatives. Token House adopts the traditional coin voting model of one token, one vote to manage the core economy of the Optimism Collective, including ecosystem donations, oversight of the OP token treasury, and certain network parameters. Under the traditional one token, one vote model, the more tokens one holds, the more voting power one has, and the existence of whales often leads to short-sighted behavior that sacrifices long-term interests for price increases, which is unacceptable for Optimism, which emphasizes "public good." Therefore, Optimism added a one person, one vote model, namely Citizens' House.

Citizens' House focuses on allocating funds for public goods, with the raised funds collected from the network's profits. Citizenship is granted by non-transferable tokens and will be distributed to an increasing number of citizens over time. This ensures that Optimism is represented by a broad range of ecosystem participants (not just token holders), and governance is not driven by a plutocratic system. In the one person, one vote model, users' rights are based on their identity rather than their economic capacity, and the existence of Citizens' House is equal to that of Token House, with both making decisions for the collective.

The OP Token Fuels Optimism's Growth

The issuance of the Optimism token OP was undoubtedly the biggest airdrop event in the crypto industry in 2022. On the day of the OP token issuance, June 1, its price achieved a 40% increase. Additionally, the OP token also drove Optimism to achieve significant growth in various areas such as cross-chain bridge TVL, ecosystem TVL, and unique address counts.

According to Dune data, within two months of the OP token issuance, the total assets in Optimism Bridged TVL reached nearly $1.427 billion, while before the issuance, this figure was only $667 million, marking an increase of 113.94% in just two months. Meanwhile, the TVL of the Optimism ecosystem has repeatedly set new historical highs since June 1. According to data from L2BEAT, the locked amount for Optimism was $893 million before June 1, and this figure doubled to a historical high of $1.78 billion within two months. Although the current TVL of the Optimism ecosystem still has a considerable gap compared to the top-ranked Arbitrum, the issuance of the OP token is narrowing this gap.

In the past week, the OP token has increased by over 40%. According to third-party data, as of now, the OP token price is $1.35, with a market cap ranking of 79th globally and a popularity ranking of 19th. As the governance token of Optimism, the potential of OP is being recognized by more investors.

What Surprises Will Optimism Bring in 2023

As a leader in the layer2 track, Optimism has been striving to maintain its position at the forefront of rollup architecture. Therefore, despite achieving remarkable results in 2022, Optimism continues to maintain its enthusiasm for technological innovation and ecological development. In the new year of 2023, Optimism will continue to bring us more surprises.

1. Bedrock Will Become the Cheapest, Fastest, and Most Advanced Rollup Architecture

Bedrock is the next major version of the Optimism network, scheduled for release in the first quarter of 2023. Subsequently, the ecosystem on Optimism will migrate to "Bedrock." The direct benefits of the upgrade include a fourfold reduction in deposit time from L1 to L2 and approximately a 20% reduction in data submission costs to L1. Bedrock aims to build the best rollup architecture to date.

According to official information from Optimism, the upcoming Bedrock will approach the theoretical optimum in various aspects—optimal transaction fees, optimal differentials, optimal networks, and optimal block production. Bedrock is so advanced because it combines modularity and simplicity, with the design concept of transforming Ethereum's existing code into Rollup code. After achieving this transformation, the client differences are reduced to just 500 lines of code.

Additionally, Bedrock is equipped with a new L2 derivative pipeline, which is the only rollup infrastructure that can maximize gas savings during the process of sending transaction data to the Ethereum network. At the same time, Bedrock is also the only rollup that uses the Ethereum engine API to separate consensus clients from execution clients. Once Ethereum's scaling solution EIP-4844 (proto-danksharding) is launched, Optimism can seamlessly integrate with data blobs, significantly reducing gas fees. In the future, these advantages of Bedrock will help Optimism become the first truly decentralized, EVM-based Rollup.

Changes brought by Bedrock include:

• Theoretically optimal call data submission, surpassing compression, providing users with the cheapest possible transactions for any rollup (forever).
• Following Ethereum's lead in separating consensus/execution clients, allowing Optimism to seamlessly integrate cost-minimizing EIP-4844.
• Micro-client differences, opening the door for alternative clients and providing additional security levels for Optimism users.
• A fast peer-to-peer network, including support for Snap Sync, making it easier than ever to run Optimism nodes and laying the foundation for decentralized ordering (although this will not appear with Bedrock, it is expected to emerge shortly after the mainnet).
• Shortened deposit times, reducing deposit time from 10 minutes to 2.5 minutes.
• Smarter synchronization, ordering, and state submission to ensure Optimism can withstand all Ethereum network conditions.

2. RetroPGF: An Experimental Mechanism for Funding Positive Impact

The second round of RetroPGF (Retrospective Public Goods Funding) by Optimism Collective will take place in the first quarter of 2023. During this time, RetroPGF2 will allocate 10 million OP tokens to fund public goods that support OP Stack development and usage. Optimism will also introduce the first generation of "Citizens' House" to manage the allocation of funds.

From January 3 to 17, 2023, anyone can nominate projects or individuals for funding on the Optimism Governance Forum. To qualify for funding, nominated projects or individuals must complete a project overview in the Gitcoin Grants Hub between January 3 and 24. Holders of the RetroPGF 2 badge will vote on how to allocate funds to the projects.

RetroPGF is Optimism's process of funding public goods for the benefit of the collective and other groups; it is a continuous experiment. As early as 2021, Optimism ran the first round of RetroPGF, where community members voted to allocate $1 million among 58 open-source software projects. The second round of RetroPGF funding will take place in early 2023, focusing on supporting OP Stack development and public goods in three main categories:

• Infrastructure + Dependencies: Software for building or deploying OP Stack; contributions to protocols or standards relied upon by OP Stack; experiments supporting the future development of core OP Stack protocols.
• Tools + Utilities: Helping builders create applications on the Optimism mainnet, build on OP Stack, interact with the governance of the Collective, or use applications built on Optimism.
• Education: Efforts to spread awareness and knowledge of how Optimism works, both technically and socially.

For a long time in the field of public goods, due to the public and free nature of products, contributors to public goods often cannot obtain sufficient profits to sustain their continuous creation of new public goods, which is detrimental to the construction of the entire ecological community. Optimism believes that public goods contribute to creating high-quality communities, and as contributors to public goods, they should enjoy the fruits of their labor. Therefore, Optimism has long been committed to funding public goods. RetroPGF is an iterative process to achieve this goal.

Layer2 Landscape: Can OP Prevail?

In the past three months, the transaction volume of layer2 networks has been continuously increasing. In contrast, since October, the transaction volume on the Ethereum network has declined by about 33%, except for a few peaks. According to Dune Analytics, Ethereum processed over 1.06 million transactions on January 10, while the combined transaction volume of layer2 projects Arbitrum and Optimism exceeded 1.12 million transactions. In terms of daily transaction volume, layer2 networks have surpassed the Ethereum network. As more and more layer2 star projects emerge, layer2 projects with high throughput and low fees are gradually gaining market favor, and more users are starting to use L2 networks. So, among many layer2 projects, can OP win the final victory?

Optimistic VS Arbitrum

Arbitrum and Optimism are both scaling solutions based on Optimistic Rollup, and the technical differences between the two are very subtle, making it difficult for ordinary users to perceive. However, there are significant differences in ecosystem and community scale.

In terms of total locked value (TVL), Arbitrum remains the leader in the entire layer2 market, with approximately $2.34 billion in collateral, accounting for 52.5% of the market share. Optimism ranks second, with a TVL of $1.28 billion and a market share of 28.6%. Arbitrum is nearly twice the size of Optimism, indicating a huge gap between the two. In terms of ecosystem, both Arbitrum and Optimism have seen considerable growth since the launch of their dapp ecosystems. Arbitrum's ecosystem statistics site lists over 280 projects, while Optimism's ecosystem statistics site lists over 200 projects.

From the data, it seems that Arbitrum is developing better than Optimism, but Optimism also has its advantages. For example, in terms of incentives, Optimism airdropped its governance token OP on June 1, 2022, and expanded its governance to community members through the creation of Optimism Collective and Optimism Foundation. In contrast, Arbitrum has yet to disclose its token plans, and its current user attraction relies mainly on organizing the Arbitrum Odyssey NFT event, which is evidently less effective than token incentives for attracting users and developers. As a result, after the launch of the OP token, Optimism's daily transaction numbers once exceeded those of Arbitrum. Furthermore, with the upcoming Bedrock mainnet upgrade in 2023, the positive expectations are likely to bring more explosive data to Optimism.

Both Optimism and Arbitrum have their advantages. Arbitrum's rollup architecture, due to its excellent anti-fraud mechanism and proprietary VM, outperforms Optimism in terms of security and longevity. In contrast, Optimism emphasizes protocol decentralization and governance, excelling in DAO governance and incentive measures. Objectively, neither has an absolute advantage, and who will ultimately prevail in the future may only be determined by the market.

Optimistic VS ZK-sync

The competition between Optimistic and ZK-sync essentially represents a contest between two different models, with Optimistic representing Optimistic rollups and ZK-sync representing ZK rollups. Unlike Optimistic rollups, which use a dispute resolution process to protect transactions, ZK rollups use zero-knowledge mathematical proofs for transaction verification. Some key differences between them are as follows:

1. In terms of fund withdrawal time, Optimistic Rollups have a longer withdrawal period.
2. Optimistic rollups are less computationally complex, resulting in lower hardware requirements for second-layer nodes.
3. Ethereum Virtual Machine (EVM) compatibility is much simpler on Optimistic rollups than on ZK rollups.

ZK-sync has a significant gap compared to Optimism in terms of total locked value, daily transaction volume, and user scale. However, ZK-sync is theoretically and technically stronger than Optimism, which is its advantage but also limits its rapid development. The advanced theory of ZK-sync leads to enormous development challenges; for example, the official ZKEVM circuit code from the Ethereum Foundation has over 30,000 lines. As Vitalik Buterin stated, it requires "very long development and continuous testing," and "the security brought by ZK systems cannot be fully relied upon for years." Therefore, in the foreseeable future, Optimism will still maintain a significant advantage over ZK-sync. Whether ZK-sync can surpass Optimism may only be known when ZKEVM truly matures.

Conclusion

After experiencing the turbulent industry events and absurd collapses of 2022, 2023 may become a year of restoring confidence in the industry. Crypto projects represented by Optimism, which emphasize technological innovation and do not engage in false concept marketing, are gaining increasing favor from users. The crypto industry is gradually returning to rationality, and people are beginning to recognize the need to hold a sufficient reverence for this market, adhere to bottom lines and principles, and then focus on working hard, improving products, and serving users for long-term sustainability and industry development.