Introduction
Everyone has heard of Ethereum 2.0 and how it’s the solution to Ethereum’s scaling problems. What if I told you that Ethereum is already scaling, with or without Ethereum 2.0? Shifting from a Proof-of-Work (PoW) to Proof-of-Stake (PoS) consensus model is just the tip of the iceberg. The real end game is to create a whole new framework for blockchain scalability, a shift from monolithic blockchains to modular blockchains. It is Ethereum’s answer to the blockchain trilemma, with the goal of maintaining decentralization and security while increasing throughput. The blockchain trilemma is the concept that a blockchain has to make trade-offs between the three core tenets (Decentralization, Speed, Security) and is unlikely to be able to improve in one area without sacrificing another.
Monolithic blockchain is a fancy way of describing a blockchain that does all of the computation and processing on a single chain. Most Layer-1s (L1) built today follow that structure and are monolithic blockchains. Modular blockchains, on the other hand, split chains up into execution, security, and data availability layers. Each chain has a specific role and is built on top of another in order to inherit the qualities of the underlying blockchain. In Ethereum’s case, the Ethereum L1 becomes the security and data availability layer while the Layer-2s (L2) built on top of it acts as the execution layer.
The promise of modular architecture is to be orders of magnitude better than monolithic blockchains on every level. The aim is for L2s to be able to do anything that a monolithic L1 can do but better and be seamlessly interoperable with other L2s. Optimism is an example of an Ethereum L2 aiming to do just that.
Monolithic vs Modular blockchain structure
What is Optimism?
Optimism is the first Ethereum L2 to develop an Ethereum Virtual Machine (EVM) compatible Optimistic Rollup solution. Optimism sits in parallel with Ethereum and is able to process transactions at scale while inheriting the security of Ethereum.
Optimistic Rollup gets its name from the way transactions are processed. By default, transactions are optimistically assumed to be accurate and no computation is performed. It relies on a fraud-proof mechanism to ensure the legitimacy of the transactions. Verifiers (anyone running an Optimism ‘full node’) are able to challenge the validity of transaction proposals submitted by sequencers and the rollup will then carry out a check by executing the transaction’s computation on Ethereum. Transactions proposals can be challenged within the challenge period, set to 1 week for Optimism, before they are finalized and submitted to the Ethereum mainnet.
If the proposal is proven to be fraudulent, the verifier is rewarded while the sequencer gets penalized. The reward is taken from a pool of bonded ERC-20 tokens that sequencers are required to bond. In the case of Optimism, the token required is ETH. This creates an incentive alignment where verifiers are incentivized to catch bad actors and sequencers are incentivized to only submit accurate transaction proposals. The fraudulent proposal is removed and the correct proposal is finalized in its place. Transactions themselves are not reverted, only the fraudulent proposed outcome of the transaction is removed.
Simplified overview of how fraud proofs work
Beyond its technological prowess, an interesting fact about Optimism is that the organization behind it is a Public Benefit Corporation with the goal of supporting public good projects. As the project is not fully decentralized yet, the team is donating all of its profits from running a centralized sequencer towards scaling and sustaining public goods being built on Ethereum. The team donated $1M to such projects in 2021.
What benefits does Optimism bring?
Optimism has 4 main benefits: EVM equivalence, Data Security, Speed, and Cost.
Optimism is one of the most, if not the most EVM compatible chain out there, with the focus on going a step further and being EVM equivalent. Optimism is able to support any Ethereum application using its Optimistic Virtual Machine (OVM) which is an EVM compatible Virtual Machine. Developers are able to deploy any Ethereum based dApp onto Optimism with little to no architectural changes required. This allows decentralized applications (dApps) that are built on Ethereum to integrate seamlessly onto Optimism.
Unlike sidechains such as Ronin which have their own security as they operate independently, rollups like Optimism get their security from the Ethereum mainnet. Transactions are processed on Optimism but the transaction’s data is written and stored on Ethereum. This allows Optimism to inherit the security of Ethereum while remaining scalable.
Computation is the slow and costly part of using Ethereum. By not computing transactions by default, Optimism is able to achieve a 10-100x improvement in scalability depending on the nature of the transaction. Optimism has near-instant transaction finality giving users the ability to check the outcome of their transactions almost immediately. Transactions on Optimism are cheap as well, costing a fraction of what a transaction on Ethereum would cost. Currently, fees for basic transfers are $1.66 on Optimism vs $8.77 on Ethereum (See live fees here). Optimism estimates that a total of $335m+ in gas fees have been saved from transactions that have been processed on the network.
Ethereum vs Optimism gas fees paid
Curious about how Optimism is performing against Ethereum? Check our our publicly available Optimism dashboard here!
Are there any downsides to Optimism?
There are 3 main downsides to Optimism: Long and costly withdrawals, potential incentive misalignment between network participants, and the underlying L1 censoring transactions.
Due to the 1 week challenge period for fraud proofs, withdrawals via the official Optimism bridge have a 1 week wait period. It is an important point to take note of when using the network as withdrawals via the main bridge cannot be canceled once submitted. Withdrawals via the main bridge are costly, potentially costing more than $100, due to the amount of security implemented in the bridge. Such a long and costly withdrawal period can have a negative impact on adoption and composability. In order to combat this, third-party bridges such as Hop exchange have emerged. These bridges offer instant withdrawals and are typically cheaper than the main bridge. Optimism is working on lowering the withdrawal fees but is still a few months away from making the necessary updates.
The network relies on verifiers being incentivized to challenge fraudulent proposals and sequencers to submit correct proposals. If there are lesser or no fraudulent proposals, verifiers gain lesser or no reward from operating a node as they’re only rewarded when they successfully challenge a fraudulent proposal. This disincentivizes verifiers from operating a node. If there are no verifiers, sequencers are able to submit fraudulent transactions at will, leading to the failure of the network. However, it is unlikely that such a situation would occur. There are incentives for users to act as an honest verifier beyond the potential network rewards that one might receive. Applications building on Optimism (e.g. third-party bridges, DeFi protocols) have incentives to be honest verifiers in order to maintain the functionality of their protocol.
A sequencer can potentially bribe Ethereum miners to allow fraudulent proposals to pass during the computational check at a very low cost should the particular transaction be of sufficient value. This would break any trust in the network and lead to its failure. Such an attack is unlikely due to the incentive alignment of miners with the Ethereum network. If such an attack would occur, the value of the Ethereum network itself would be negatively affected. Miners would be diminishing the long-term value of being an Ethereum miner for a one-time reward. The honest sequencers and verifiers are inclined to bribe the miners with a higher payout as the total value at stake would likely be higher than that of the single transaction.
How does Optimism compare to Arbitrum?
Optimism was the first to invent an EVM-compatible Optimistic Rollup protocol but delays in the mainnet launch allowed Arbitrum to gain an edge. For example, Uniswap had prioritized launching on Optimism but due the delay, the Uniswap community raised a proposal to have Uniswap integrate onto Arbitrum while waiting for Optimism’s launch.
Both Optimism and Arbitrum are Optimistic Rollups and are similar in many aspects due to that. Their key difference lies in their fraud-proof logic. Optimism opts for non-interactive fraud proofs which re-executes the entire transaction and performs the computing required on the L1 to find out the truth. Arbitrum, on the other hand, opts for interactive fraud proofs which only executes the specific step that is being disputed on the L1. The dispute gets dissected and broken down until the exact step that is causing the disagreement is surfaced. The dissection is carried out by the sequencer and verifier and only the specific step that the dispute is narrowed down to will get computed on the L1 to determine the correct end state.
The benefits of non-interactive fraud proofs is that it is much simpler to design and removes the need for the parties involved to coordinate amongst themselves, which in turn makes fraud proofs instant. Interactive fraud proofs require two or more parties to work together to dissect the challenge, taking a longer time to resolve. The downsides are that the cost to compute the entire transaction on the L1 is much higher than a single step. There are also limitations on the size of blocks and transactions (based on the L1) that can be effectively verified in a non-interactive method while an interactive method does not face this constraint as only the single step is verified.
Optimism is currently working on switching towards an interactive fraud-proof model that is EVM equivalent, aligned with their overarching vision. The difference between EVM equivalent and EVM compatible is that the former does the processing on the EVM while the latter does the processing on a compatible virtual machine such as the Arbitrum Virtual Machine (AVM) like what is currently done on Arbitrum. The Arbitrum team is working on moving towards EVM equivalence as well. Iron sharpens iron and it’s clear that both projects are pushing the boundaries of Optimistic Rollups, constantly innovating and learning from each other.
In terms of the last 30-day unique active addresses, Optimism has 45.2k while Arbitrum has slightly more at 66.8k. Optimism and Abitrum both process roughly 2-3% of the total number of transactions on Ethereum, processing 21k and 34k transactions respectively. It’s only been a few months since the public release of the mainnet of both chains and it’s likely we will see more dApps and users engage with both chains as time goes by.
Number of daily transactions on Optimism
Number of daily transactions on Arbitrum
How do you interact with Optimism?
Large Ethereum based dApps such as Uniswap and Synthetix have already deployed on the chain and are fully functioning. The chain has a growing native ecosystem with DeFi projects such as Rubicon Finance and an NFT marketplace, Quixotic, that’s up and running. A few NFT collections have emerged on Optimism, with the top 3 being OptiPunk (CryptoPunks derivative), Optimistic Bunnies and OldEnglish. The most popular dApps at the current moment are DeFi dApps, with 4 of the top 10 applications by log occurrences being DeFi applications. Log occurrences are the number of times an entities’ smart contracts are successfully executed.
Log occurrences of dApps on Optimism
You would need an Ethereum wallet such as MetaMask to connect to the various platforms and dApps, similar to how you would on Ethereum. ERC-20 assets have to be bridged over to the Optimism chain before you’ll be able to use them. You can do so via Optimism’s own bridge or third-party bridges. Third-party bridges would suffice for most transactions and are the recommended option. It’s typically cheaper and has the added benefit of instant withdrawals compared to the 1 week waiting period when using Optimism’s own bridge.
What does the future hold for Optimism?
There is no native token for Optimism and there are no plans to release one any time soon but it is something to look out for in the future. Centralized exchanges may offer direct on-ramps onto Optimism similar to what exchanges such as Binance and Huobi have done for Arbitrum. This allows users to bypass the bridging process and deposit assets directly onto Optimism, reducing costs associated with bridging.
The team will progressively decentralize the network and it’s likely we start seeing that happen once key network upgrades and improvements have kicked in. Currently, the team has disabled fraud proofs while they work on building out their new and improved interactive fraud-proof model.
The Optimism ecosystem is growing day by day with governance proposals being raised on major DeFi applications such as Aave to deploy on the chain. The ease of deploying Ethereum based dApps on to Optimism removes barriers to entry for existing dApps. It’s only a matter of time before we see a wave of dApps deploying on the chain, creating a vibrant ecosystem. Given the low transaction fees on Optimism, we may see more DeFi, NFT and GameFi projects building on the blockchain in time to come.
Smart money overlap on Optimism with Ethereum
It appears that smart money has yet to explore the chain, with Smart NFT minter being the largest overlap with Ethereum at 8.6%. This suggests that it’s still early days for Optimism and there’s a lot of potential and room for the ecosystem to continue growing and thriving.
Current L2 solutions aren’t interoperable with each other and exist in silos. In order to create truly scalable Ethereum, interoperability is an important factor that needs to be addressed. It’s likely something that Optimism will be working towards once key upgrades have been rolled out and the chain is more decentralized.
The launch of Ethereum 2.0 will improve the capabilities of Optimism. Having a faster and more efficient Ethereum L1 means that everything that’s built on top of Ethereum and relies on it becomes more efficient as well. Ethereum 2.0 alone would likely be insufficient to meet the ever-growing demands for block space and L2s would be necessary to meet that need.
Conclusion
L2 solutions are here to stay and will be where the bulk of transactions on Ethereum occur in the future. There are criticisms of the added complexity that L2s bring to the user as users have to take extra steps to get assets on and off the chain. Such criticisms are valid given the current state of affairs but will be solved over time either via third-party applications streamlining the process or by the L2 teams themselves. ETH 2.0 doesn’t make them obsolete but instead empowers them to become more scalable and efficient.
Optimism is an L2 that will play an integral role in Ethereum’s scalability moving forward. They’ve set a high bar for themselves by striving for EVM equivalence and have continued to deliver despite the early delays in their launch. The ease of deploying onto Optimism will be a huge pull factor for many existing dApps to give Optimism a shot and the low gas fees will attract users to transact on the chain as its ecosystem gets built out. On top of building software, they’re actively supporting and growing high-impact projects in the Ethereum ecosystem by providing them funding.
We’re only at the beginning stages of a blockchain-powered world and Ethereum’s modular structure might be the key to unlocking a whole new realm of possibilities. Most of us have subscribed to the idea of a multi-chain future but maybe a more accurate description would be a multi-layered future.
