During the last bull run, we had DeFi Summer and NFT Summer bring forth excitement and buzz around new technology, and we saw an onboarding of a large amount of new users to the Ethereum Ecosystem (and Crypto as a whole). As we are always looking forward to the horizon, it is hard to not be excited about what we think will be a hot topic during the next bull run, Layer 2s. To understand the Layers of a Blockchain and understand what each layer contributes to the ecosystem, there is a prior Stake N’ Eggs article diving into that here.
A brief recap: Ethereum as a Layer 1 network acts as the consensus layer for transactions within its ecosystem. Ethereum provides a highly secure and decentralized network, but sacrifices on scalability to preserve these two key attributes. This is a concept known as the Blockchain Trilemma. This is where Layer 2 solutions come in.
A Layer 2 blockchain communicates with Ethereum by “rolling up” transactions on its network into large bundles and submitting them to the Ethereum consensus layer as one transaction. All this requires no changes to the Layer 1 protocol (Ethereum). This lets Layer 1 handle security, data availability, and decentralization, while Layer 2s handles scaling. Layer 2s take the transactional burden away from Ethereum and post finalized proofs back to its consensus layer.
Optimism is the second-largest Ethereum layer 2 to Arbitrum with a total of $440 million in TVL (total value locked into its smart contracts) as of this writing per DeFi Llama). Optimism uses rollups, specifically Optimistic rollups to scale Ethereum and reduce transaction fees in relation to the main Ethereum consensus layer. Basically, all of the transactions in an Optimism block are rolled up into a single transaction and submitted to the Ethereum consensus layer, therefore the blockchain transaction fee, or "gas," fee required to pay comes down to only one transaction, which cost is distributed across the transactions within its block.
Optimistic rollups are a type of rollup that ‘optimistically’ assumes all transactions in the rollup are valid. This saves time, since individual transactions do not have to be submitted with direct proof of their validity. Validators in the rollup have a week to query the entire rollup if they believe that it contains fraudulent data. Further, there are rewards for anyone who is able to prove that a transaction is fraudulent, and there are penalties for those who try to submit fraudulent transactions.
All of its rolled-up blocks are stored on an Ethereum smart contract called the Canonical Transaction Chain. While a user can submit their transaction directly to the Canonical Transaction Chain, new blocks are typically produced by something called a sequencer. This sequencer instantly (around 1 second) confirms valid transactions, then creates and executes blocks on Optimism’s layer 2.
Optimism launched its OP token on May 31, 2022. A total of 231,000 addresses who had previously used the Optimism network to some extent were eligible to claim 214 million OP tokens for free (known as an “airdrop”). That accounts for 5% of the total 4.29 billion supply, meaning 95% of the supply has yet to hit the market. The OP token gives holders participation rights in The Optimism Collective, a two-tier governance system composed of Token House and Citizens’ House. Citizens’ House will come live later in 2022. Token House, which is already active, governs technical decisions related to Optimism, such as software upgrades. The Citizens’ House governs retroactive public-goods funding decisions. Important to note is that while there is an OP token, ETH is still the native currency of Optimism in the sense that gas fees are paid in ETH.
Retroactive Public Goods Funding is an exciting concept. The core principle behind the concept of retroactive public goods funding is simple: it’s easier to agree on what was useful than what will be useful. Therefore, rather than funding companies or individuals who are providing a public good, which I would define in this case as something that makes the Optimism ecosystem better for its users as a whole than it would be without it, OP holders get to decide which public goods deserve to get a portion of the funding allocated retroactively, after they have proven the need and usefulness of their public good. Public Goods funding was pioneered by entities like Gitcoin and MolochDAO, but Optimism puts a spin on this by applying the funding retroactively rather than proactively. This is important because it creates a market for investing in early stage public goods ideas or companies, meaning we can now incentivize people to break away from purely entrepreneurial ventures as it introduces a way for investors to see a return on their investment for a public good.
The Future for Optimism
Optimism has institutional support from some of Crypto’s largest venture capitalists, namely Andreessen Horowitz (a16z) and Paradigm. In March 2022, they raised a total of $150 million in a Series B funding round at a valuation of $1.65 billion.
In the press release announcing the Series A funding for Optimism, a16z said:
One of the most exciting things about what Optimism has built is that it can be seen in many ways as an extension of Ethereum — from its philosophy down to its tech stack. This close adherence to Ethereum development paradigms results in a very easy transition for developers, wallets, and users: no new programming languages, minimal code changes to existing contracts required and out-of-the-box support for the majority of existing Ethereum tooling.
Optimism is now focusing on onboarding users and growing. One of the ways they are doing this is through the “Get Started” Initiative. Per the Optimism Twitter Account:
Get Started walks you through a simple process to start using Optimism. From setting up a wallet, to loading it with ETH from your choice of bridges and fiat on-ramps, Get Started is an intuitive intro to the ecosystem…. [The new] onboarding flow designed to introduce Optimism to new users in an accessible way regardless of their previous experience with crypto. After completion you'll be able to claim an NFT with art reflecting your interests
Not financial, legal or tax advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. All opinions expressed are solely those of the individual author. This newsletter is not legal advice and does not create an attorney-client relationship. This newsletter does not constitute tax advice. Talk to your independent attorney and/or accountant for any questions specific to you. Always do your own research and use caution when interacting with smart contracts or the blockchain. At the time of writing, @AdamETH_ does not own any OP tokens.