Looking forward to the Cancun upgrade, is OP worth being "optimistic"?
The current OP Mainnet is also engaging in a grander narrative and layout, having completed the Bedrock upgrade on June 6, 2023, which lays the foundation for rapid development in the future.Author: Fred, LD Capital Research
I. Introduction
OP Mainnet (formerly Optimism) has had excellent resources and continuous acclaim since its inception. This "phoenix" of Ethereum was born from Ethereum's core developers with the aim of solving the ecosystem's most pressing scalability issues. However, its subsequent development has encountered many detours. Initially, to quickly scale Ethereum, it used the EVM-compatible OVM 1.0, which required a significant amount of time for protocol and application customization on L2. This led to further time spent on upgrading Ethereum equivalency. However, the upgrade sacrificed "optimistic proofs," rendering the Optimistic Rollup somewhat misleading. In contrast, Arbitrum One, another Optimistic Rollup solution, launched its token nine months after OP Mainnet but has garnered more attention and users.
Currently, OP Mainnet is also pursuing a grander narrative and layout. On June 6, 2023, it completed the Bedrock upgrade, laying the foundation for rapid future development. The next upgrade will focus on completing the next-generation Fault Proof-Cannon, with the Ethereum developer conference in June confirming the Cancun upgrade centered around EIP-4844, which will be completed in the second half of the year. The macro environment is also changing rapidly, first with the SEC suing Binance and Coinbase, causing panic in the market, followed by top traditional financial institutions on Wall Street investing in new U.S. cryptocurrency exchanges. As these changes unfold, whether OP can regain its "optimism" will be explored in this article.
II. The Aura of OP Mainnet
1. Excellent Core Team and Investors
In 2017, Vitalik and Joseph Poon co-authored the paper "Plasma: Scalable Smart Contracts," which was one of the earliest solutions to address Ethereum's scalability issues. After the Plasma proposal, it resonated with three core Ethereum developers, leading to the establishment of the Plasma Group, a non-profit research group focused on scalability. The project later abandoned the Plasma architecture and proposed the Optimistic Rollup solution, showcasing a decentralized application demo created with Uniswap at the Devcon conference. Shortly thereafter, top VCs like Paradigm began to approach them. With $3.5 million in support from Paradigm and IDEO, the Plasma Group transitioned from a non-profit research organization to a for-profit startup, officially giving birth to Optimism (*On June 24, 2023, OP officially named the blockchain network OP Mainnet to distinguish it from other meanings of Optimism).
The OP Mainnet team consists of core Ethereum developers and researchers, with investors including top VCs like Paradigm and A16z, raising a total of $178.5 million across three funding rounds, achieving a valuation of $1.65 billion. Coinbase also joined OP Labs as a core developer and launched the L2 network Base based on the OP Stack architecture this year, making it a top-tier resource.
Figure: Core Team, Image Source: Cypherhunter
Figure: Funding Information, Image Source: Rootdata
2. Early Token Launch OP, Coupled with Strong Narrative Tokenomics and Governance Vision
OP Mainnet has two important organizations: OP Labs and Optimism Collective, with one focusing on technology and the other on governance. The philosophy of the Optimism Collective is to create a prosperous and valuable ecosystem through the development of public goods, utilizing a three-step process to create value and a flywheel effect.
The ecosystem has three types of roles: token holders, contributors, and builders, as well as users and community members. As an L2 project, the primary goal of the tokenomics is to provide an efficient, stable, and inexpensive network ecosystem for ecosystem roles to use. The funding for the OP economy comes from the ownership of the OP mainnet and the value of its block space, generating income from the demand for OP block space.
In driving the flywheel, OP Mainnet first builds the network and provides applications, generating revenue through a centralized sequencer that accumulates to The Optimism Foundation for redistribution --- holders can become citizens of OP Collective after meeting certain conditions, granting them voting rights to fund public goods through the foundation's funds RetroPGF (*RetroPGF includes many projects beyond just the OP ecosystem, with many being ETH ecosystem projects; OP's positioning is to coexist with ETH) --- public goods will airdrop some tokens, and users and builders will also use the OP token --- the use of public goods is based on OP's blockchain network --- requiring the sequencer to support the network, completing a cycle.
Figure: RetroPGF2 Funding Situation, Image Source: Optimism
A good tokenomics is a "nuclear weapon" for accelerating project development. After announcing its tokenomics, OP launched its token on June 1, 2022, with an initial total supply of 4,294,967,296 OP tokens. The total supply of tokens will expand at a rate of 2% per year. Of the tokens, 25% are allocated to the ecosystem fund, 20% to RetroPGF, 19% are reserved for user airdrops, 19% for core contributors, and 17% for investors. In the first year after the initial token launch, 64% of the tokens will be allocated to the community (*Tokens for investors and core contributors will unlock after one year). OP's first airdrop distributed 5% to users (*248,699 addresses), sparking a wave of enthusiasm. However, due to a lack of strong competitors among ecosystem projects compared to other chains, the token's popularity has not matched that of ARB in the absence of airdrops and event nodes.
Figure: OP Token Distribution Framework, Source: Optimism Docs
Figure: OP Token Unlock Schedule, Image Source: Optimism Docs
OP aims to bring the blockchain network into the internet by providing an L2 network and public goods ecosystem, promoting the construction of public goods through tokenomics, possessing a strong narrative vision, and demonstrating its commitment through the public disclosure of RetroPGF (*In the second phase, projects like L2BEAT and EIP-4844 received funding), OP is indeed fulfilling its promise. On June 22, RetroPGF announced the launch of its third phase, which will distribute 30 million OP tokens to ecosystem builders and projects.
Figure: Optimism's Ecological Vision, Image Source: Optimism
3. Significantly Reduced On-Chain Costs
Since the launch of OP Mainnet, it has significantly reduced Ethereum's usage fees, compressing them to below 90%. Compared to Arbitrum One, OP Mainnet saved even more in transaction fees in the early stages, while subsequent technical upgrades from both sides will shorten or further widen the gap in fees.
Figure: Transaction Fees, Image Source: Dune
III. Issues with OP Mainnet
1. Centralized Sequencer Usage
The network architecture of OP has four important modules: Sequencer (Sequencer), Verifier (Verifier), CTC (Transaction Chain), and SCC (State Chain). Among them, Sequencer and Verifier are hardware entities of Layer 2 nodes, essentially forming the node network of Layer 2, while CTC and SCC are contracts deployed on Ethereum. 
The Sequencer is a centralized mining pool node responsible for block production locally on Layer 2 (similar to mining). It decides which transactions can be packaged. A healthy Sequencer should be entrusted to decentralized nodes, which will be penalized if successfully challenged by the Verifier. Currently, the Sequencer nodes are operated by Optimism officials, leading to significant centralization issues that do not align with the decentralized characteristics of blockchain networks (Optimism plans to complete the decentralization of the sorting nodes in the 10th milestone of its roadmap).
2. Failure of Optimistic (Fraud) Proofs, Defaulting Trust in the Verification Process
In a normal Optimistic Rollup solution, the Layer 2 Sequencer would initially "optimistically" assume that transactions are valid. After submitting the Rollup to Layer 1, there is a time window (*known as the challenge period) during which anyone can challenge the rollup's transaction results by calculating fraud proofs. If fraud is successfully proven, the Rollup protocol re-executes the transactions and updates the rolled state accordingly.
However, as a sacrifice for the EVM equivalency upgrade, the fault proof mechanism of OP Mainnet has been temporarily disabled. This means that users of the OP mainnet currently need to trust the Sequencer nodes to publish valid state roots to Ethereum. This has led to the Optimistic Rollup solution applying fraud proofs running for months without legitimacy, as no one can verify if fraud has occurred. (*This issue needs to be resolved in the next Cannon upgrade of the OP Mainnet network).
3. Lack of Native Popular Projects in the Ecosystem, Key Operational Data Lagging Behind Arbitrum One
In the entire L2 track, Arbitrum One and OP Mainnet are in an absolute leading position, with their market share exceeding 83% of the total track. However, there is a significant gap between OP Mainnet and Arbitrum One, with a TVL of only about 40% of Arbitrum One.
Figure: TVL Situation of Various L2 Ecosystems, Image Source: L2BEAT
Looking at the project situation on both L2 ecosystems, the TVL of projects on Arbitrum One is generally higher than that of projects on OP Mainnet, and it has many popular native projects such as GMX, Radiant, Camelot, and Arbdoge AI. In contrast, OP Mainnet appears to be lacking, with fewer popular projects, and the top-ranked Velodrome and Synthetix have a TVL that is 50% or even lower than that of corresponding projects on Arbitrum One.
Figure: TVL Situation of DeFi Projects on Arbitrum One, Image Source: DefiLlama
Figure: TVL Situation of DeFi Projects on OP Mainnet, Image Source: DefiLlama
In terms of other key data comparisons, the key data on OP Mainnet generally lags behind that of Arbitrum One, primarily due to the lack of high-quality projects that can attract more users and activity, which also results in OP's market cap being lower than ARB. From the ratios of MC/TVL and FDV/TVL, ARB currently has a relative growth advantage over OP. However, in terms of fees, OP Mainnet is relatively lower, thanks to the recently completed Bedrock upgrade. In the future, OP Mainnet still holds a competitive advantage in technical potential and fees, but it needs to focus on attracting more high-quality projects and users.
Figure: Comparison of Key Ecosystem Data (*Data captured on June 27, 2023; for some data not captured on that day, the most recent data from mid-June was used instead), Image Source: L2BEAT, Dune
Figure: Comparison of Token Data (*Data captured on June 27, 2023; TVL calculated using L2BEAT standards), Image Source: Coingecko, L2BEAT
Regarding token unlocks, tokens for investors and core contributors have begun to unlock, with 0.562% of tokens being released periodically, with each release amounting to 24 million OP tokens, indicating that OP will continue to face selling pressure.
Figure: Token Unlock Schedule, Image Source: TokenUnlocks
Image Source: Figure: Next Release Plan, TokenUnlocks
### IV. New Narratives
#### 1. Modular OP Stack Technology Stack
OP Stack is a general development stack for building L2 blockchain ecosystems, utilizing a modular approach to create a series of modules that work together to form a coherent and reliable blockchain, powering the next-generation architecture of OP Mainnet. The Bedrock completed in June of this year is the first official version of the OP Stack.
Each layer of the OP Stack is built with well-defined APIs, allowing builders to easily modify existing modules or create entirely new ones to meet the needs of any application being built. This architecture will also seamlessly support the vision of the OP Superchain in the future.
Image Source: Figure: OP Stack Architecture, OP Stack Docs
Breaking down the various layers of modules, the bottom layer is the data availability layer, which defines the location of the original inputs based on the OP stack chain. OP Stack chains can use one or more data availability modules to obtain their input data. Ethereum DA is currently the most widely used data availability module in the OP Stack, serving as the foundation for all Layer 2 builds. When using the Ethereum DA module, source data can be obtained from any information accessible on the Ethereum blockchain, including Ethereum call data, events, and 4844 data blocks. Here, EIP-4844 is specifically highlighted in the architecture diagram, indicating that OP Stack will have high compatibility with the future release of EIP-4844.
Above the data availability layer is the sorting layer, which determines how to collect user transactions on the OP stack chain and publish them to the data availability layer module in use (*the tasks mentioned earlier that the Sequencer needs to perform). OP has high hopes for this layer, which will play an important role in the superchain in the future. However, the current OP Sequencer is still operated by the officials, making it a core module that urgently needs optimization.
* Derivation Layer: This layer defines how to process the raw data in the data availability layer to form processed inputs, mainly responsible for packaging data, such as using Rollup solutions to send data to the sorting layer before entering the data availability layer.
* Execution Layer: Defines the state structure within the OP stack system and the state transition functions that change that state. When inputs are received from the derivation layer via the engine API, state transitions are triggered. It mainly handles data transformations between layers, such as using the same state representation and transitions as the Ethereum Virtual Machine.
* Settlement Layer: Primarily serves a verification role and is a key part of the consensus mechanism. Once a transaction is published and completed on the corresponding data availability layer, it is also completed on the OP Stack chain. It cannot be modified or deleted unless the underlying data availability layer is compromised. Here, the next-generation fault proof-Cannon of OP is mentioned, also implying that zero-knowledge proofs can be adapted to OP Stack.
* Governance Layer: A set of general tools and processes for managing system configuration, upgrades, and design decisions, such as voting and token governance. This is a relatively abstract layer that includes the management behaviors of OP Stack itself, as well as mechanisms and behaviors from third-party chains that may affect other layers of OP Stack.
Once this modular technology stack is officially launched, developers can easily abstract the various components of the blockchain and modify them by inserting different modules. For example, if a certain Optimistic Rollup wants to transform itself into a ZK Rollup, it only needs to replace its fraud proof module with the validity proof module of the settlement layer. This modular architecture provides significant imaginative space for the development of projects in the OP Mainnet ecosystem on a technical level (*provided that OP completes the decentralization of the key sorting sequencer and its own Cannon mechanism).
#### 2. Next-Generation Fault Proof - Cannon
As a "side effect" of the Ethereum equivalency upgrade, OP has lost its core optimistic proofs. According to the roadmap, the next milestone after completing Bedrock is to release the next-generation fault proof-Cannon to replace the lost optimistic proofs. Currently, Cannon is still in the building and testing phase, with a long way to go before deployment in the production environment.
According to OP's official documents, Cannon will be the world's first EVM-equivalent fault proof method. It does not re-implement EVM on L2 but utilizes the existing EVM, introducing minigeth - a minimal modification subset of go-ethereum (*without JSON-RPC, without proof of work) - compiled into MIPS. This simple abstraction allows the fault proof program to access anything in the L1 or L2 state, and the on-chain overhead is independent of the size of that state. Other L2 implementations, such as Arbitrum's AVM, require implementing state management from scratch to achieve this.
Theoretically, Cannon can achieve the lowest ETH-Calldata gas costs, thanks to OP Mainnet's completion of EVM equivalency. After Bedrock, it will further compress L2 transaction fees and is an important part of the OP Stack architecture, requiring attention to when project nodes will land.
Figure: OP Roadmap, Image Source: Optimism Docs
#### 3. Becoming a Platform for Various Chains - Superchain
Based on the OP Stack architecture, OP expresses its grand narrative of wanting to build a superchain. The superchain is conceptually a horizontally scalable chain network that shares security, communication layers, and an open-source development stack, highly compatible with explosive growth in L2 and L3.
The superchain relies on the modular OP Stack technology stack, allowing other chains to share and contribute to an enhanced, standardized, and modular codebase, becoming OP-chains without the need for custom adapters for each chain.
Image: OP Superchain Architecture Concept, Source: Optimism StackDocs
Multiple OP-chains will share a sequencer, and a sequencer that generates blocks across multiple chains can ensure atomic interactions between these chains. This is feasible because a single entity has the capability to generate blocks on each chain --- they do not need to rely on other validators to include these atomic transactions. OP-chains that join the shared Sequencer Set of the Optimism Collective become part of the system, erasing the boundaries between chains.
If OP's superchain advances, the OP token and ecosystem will experience a massive explosion. At that time, the resources of the OP Collective will not only be open to Optimism but also to many different OP-chains inserted into the superchain, allowing the superchain ecosystem to collaborate on the infrastructure provided by OP. The concept of the superchain again highlights OP Mainnet's resource advantages, as top U.S. cryptocurrency exchange Coinbase has already joined the development of OP Stack and launched the "OP-chain" Base chain. On June 19, BNB also announced the launch of the opBNB testnet based on OP Stack.
Figure: opBNB Testnet Launch, Image Source: BNB Chain
#### 4. Conclusion
The concept OP envisions for the future is grand, aiming to become Ethereum itself at the L2 level, supporting the scalability of the entire ecosystem by providing standardized, modular, and customizable standards and code to support all chains and protocols in the Ethereum ecosystem. If it can quickly complete various milestones, OP will truly become Ethereum's phoenix, which requires breakthroughs in key technical aspects of OP Stack and the ability to outpace competitors in completing all of this.
### V. Review of the Bedrock Upgrade
#### 1. What is Bedrock?
Bedrock is the name of the first official version of OP Stack, completed on June 6. The Bedrock version mainly includes the core software required to run L2 blockchains, built for modularity and upgradability, reusing existing Ethereum code and aiming for as close to 100% Ethereum equivalency as possible.
Bedrock has brought several improvements:
* Further approach to EVM equivalency: Before the Bedrock upgrade, the difference between OP and Ethereum's client code was around 3,000 lines; after the upgrade, the difference was reduced to less than 500 lines.
* Further reduction of fees: Bedrock implemented optimized data compression strategies to minimize data costs, removing all L1 execution gas and reducing L1 data fees to theoretical minimums. This additionally reduced fees by 10% compared to previous versions of the protocol.
* Shortened deposit times: Bedrock introduced support for L1 reorganization in node software, significantly reducing the time users have to wait for deposits. The early versions of the protocol could take up to 10 minutes to confirm deposits. With the Bedrock version, deposits can theoretically be confirmed within 3 minutes.
* Improved proof modularity: Bedrock abstracts the proof system from OP Stack so that rollups can use either fault proofs or validity proofs (*e.g., zk-SNARK) to prove the correct execution of inputs on the rollup. This abstraction lays the groundwork for future applications of Cannon.
* Two-step withdrawals: Introduced a withdrawal step requiring users to pre-publish their withdrawal proofs. Users must wait for a valid output root to be proposed before their withdrawal proofs can be verified on-chain. Once the 7-day waiting period ends, users can complete their withdrawals and receive funds. By pre-publishing proofs, it provides enough time for on-chain monitoring tools to detect fraudulent withdrawal proofs and attempt corrective measures. Ordinary users can also conduct this monitoring.
Figure: Optimized Withdrawal Visualization Process, Image Source: Optimism Docs
#### 2. Changes in Tokens Before and After Bedrock Launch
On the day of the Bedrock upgrade, OP experienced a brief surge after a large-scale token unlock, but soon fell sharply, beginning to rise again on June 20 due to new positive news.
Figure: Recent Price Trends of OP, Image Source: Binance
Looking back at the recent price trends: According to OP's tokenomics, a planned unlock of 286 million tokens was set for May 30, 2023, primarily from core developers and investors, leading to strong selling pressure on holders. After May 29, the token price began a nearly 7-day period of fluctuating decline, with a cumulative drop of nearly 25%. On June 6, the day OP Mainnet announced the completion of the Bedrock upgrade, the token price rose by 10%. Unfortunately, on the evening of June 6, the SEC sued Coinbase, and subsequently, on June 8, announced a document identifying 19 tokens as securities. Although OP was not included, concerns about U.S. regulation led many U.S. institutions and investors to choose to hedge and sell their tokens, resulting in a continuous market drop over four to five days. As a close partner of Coinbase, OP was naturally affected, with a drop of nearly 40%. After about a week of sideways trading, the market received positive news on June 20, with Wall Street capital starting to launch its own cryptocurrency exchange in the U.S., leading to BTC leading the charge, and the OP token price being pushed back to levels before the SEC lawsuit.
#### 3. What Changes Did Bedrock Bring to the Ecosystem?
After the Bedrock upgrade, the most intuitive change is the further reduction in fees. The average L1 fee saved per transaction after the upgrade improved by 54.5% compared to before the upgrade. In specific categories, the savings for NFT minting, ERC20 token transfers, Ethereum transfers, and DEX trades exceeded 60% compared to before the upgrade. The line charts provide a more intuitive view of the impact of the upgrade on fees.
Figure: Bedrock Upgrade Change Data 1, Image Source: Dune @oplabspbc
Figure: Bedrock Upgrade Change Data 2, Image Source: Dune @oplabspbc
### VI. Outlook on the Cancun Upgrade
#### 1. Latest Progress on the Cancun Upgrade
Each major Ethereum upgrade is a significant event in Web3. The Shanghai upgrade in the first half of this year initiated a wave of LSD Summer. At the latest Ethereum developer conference in June (*June 15, 2023 - 111th ACDC Conference), the scope of the Cancun upgrade was finalized, including EIP 4844 (*proto-danksharding), EIP 4788, EIP 6988, EIP 7044, EIP 7045, and EIP 4788, among which the most noteworthy is the proposal centered around scalability, EIP-4844.
#### 2. What is EIP-4844?
The biggest issue currently facing Ethereum is scalability. The core of the L2 track is to scale Ethereum. Currently, this is mainly achieved through Rollup solutions, which aim to compress and package data before sending it to the L1 chain. However, as the blockchain network becomes increasingly prosperous and the market price of ETH rises, the current L2 fees cannot meet future demands.
The reason lies in the composition of L2 fees: L2 gas fee = L1 portion + L2 portion. Because the current Rollup solutions ultimately need to write transactions into Ethereum's Calldata, which is processed by Ethereum nodes and permanently stored on-chain, the L1 portion of fees has always been expensive. To further reduce the overall L2 fees, it is not enough to rely solely on L2 projects; optimizations are also needed from L1 Ethereum.
Ethereum's long-term solution to scalability issues is data sharding, but this will take a considerable amount of time to implement and deploy. Rollups will be the only trustless scaling solution for Ethereum in the short, medium, and even long term. Currently, there are two main solutions: the first is to reduce the gas costs of executing call data, and the second is to use a format similar to sharded data without actual sharding. Past rollups have focused on the first solution, while the introduction of EIP-4844 allows L2 projects to use the second solution.
The proposal of EIP-4844 introduces a new transaction format called "blob," which implements a transaction format that will be used in future sharding, rather than actually sharding these transactions. However, this format is fully compatible with the format used in full sharding (*avoiding major upgrades to the Rollup solution during future full sharding). Blobs serve as temporary expansion data packets to store data without needing to write it into Calldata, and a new method is used to encrypt proofs that verify that nodes have validated a minimum subset of Rollup data, rather than submitting and verifying all data as is currently done. Blobs can store a larger amount of data compared to Calldata, with lower fees (*individually priced), and will be deleted after a fixed storage period (*1-3 months), significantly reducing the L1 portion of fees.
Figure: Illustration of EIP-4844 Introducing Blobs, Image Source: Ethereum Community
#### 3. Cancun Upgrade and OP
The Cancun upgrade, centered around EIP-4844, will expand through optimizations on Ethereum L1, which will benefit the entire L2 track by reducing fees.
OP completed the Bedrock upgrade in June, further lowering fees, making it the chain with the lowest fees in the entire L2 track. Additionally, from Optimism's official documents, it is understood that OP is deeply involved in promoting EIP-4844, which is also reflected in the modular architecture of OP Stack. As a project closely aligned with ETH core developers, OP is expected to efficiently adapt after the Cancun upgrade, further reducing fees.
Image Source: Figure: Comparison of Fees Across Various L2 Chains, L2Fees ```
Compared to other L2 projects, ARB also has strong positive expectations. As the leading ecosystem in L2 TVL rankings, ARB has many leading application projects, such as GMX, RDNT, JOE, etc. These projects have high daily activity, trading volume, and greater price volatility. The impact of the Cancun upgrade on these user-linked applications may be more direct.
VII. Conclusion
Currently, OP Mainnet faces issues such as centralized sequencers, the failure of fraud proofs, and the need for further improvement in network ecosystem activity. However, OP Mainnet's new narrative is grand and is being practically implemented. From the planning, it is clear that OP Mainnet intends to complete the next-generation fault proof Cannon in 2023, paving the way for network decentralization in 2024, and expanding the influence of the entire OP ecosystem through RetroPGF funding and superchain aggregation. Currently, RetroPGF has entered its third phase, and Coinbase and BNB Chain have launched their respective chains based on OP Stack.
The recently completed Bedrock has effectively advanced the new narrative nodes of OP Mainnet and further improved network efficiency and reduced costs, with the market responding positively. The Cancun upgrade in the second half of the year will be an important event that cannot be ignored in the entire L2 track. Let us optimistically anticipate OP's performance in the Cancun upgrade.
References
- "Optimism Docs," Optimism
- "OP Stack Docs," Optimism
- "CANNON CANNON CANNON: Introducing Cannon," Optimism
- "Fellowship of Ethereum Magicians," Ethereum Magicians
- "The 'Growth History' of Optimism: Valuation Reaches $9 Billion in 5 Years," Block Beats
- "In-Depth Analysis of Optimism's Scalability Solution: Basic Architecture, Gas Mechanism, and Challenges," CatcherVC Research
- "Bankless: A Discussion on Optimism's Vision for Modular Scaling OP Stack," Bankless
- "A Hundred Chains Blooming or a Hundred Chains Battle? Discussing OP Stack and Anxious Ethereum," Jason Chen
Risk warning Risk warning
Popular articles
