Research Analysis Report on OPTIMISM Project

Introduction

Optimism is Ethereum Layer 2 based on Optimistic expansion technology. Its vision is to become a world computer, and the settlement layer uses Ethereum. In line with Ethereum’s vision of a world settlement layer, it cooperates closely with the Ethereum Foundation. OP has great potential for growth in terms of VC support, on-chain data, ecological development, and market competitiveness, so it deserves continued attention and choice as an investment target.

1. Basic information

As a Layer 2 project for ETH expansion, Optimism is relatively mature and has its own ecology. Its Optimistic technology solution is being adopted by many Layer 2 projects. At the same time, OP+ZK’s hybrid proof scheme has also entered Optimism’s iteration plan.

1.1 Positioning and goals

The user group is mainly B-side, supplemented by C-side. Its vision is to become a world computer, and the settlement layer uses Ethereum to help Ethereum complete the vision of a world settlement layer.

1.2 Team structure

Optimism is managed by the Optimism Foundation, and OP Labs, a for-profit organization, is the entity responsible for the development of the Optimism project. Linkedin shows that OP Labs was founded in 2019. The company is registered in the United States, with a team size of less than 50 people and working remotely. Governance is driven by bicameral community organizations (Token House and Citizens’ House) within the Optimism Collective and managed by the Optimism Foundation.

Karl Floersch: CEO, received a bachelor’s degree in computer science from Stony Brook University and the State University of New York. Joined Consensys as a blockchain engineer in February 2016, he is mainly responsible for developing the Ujo Music project. In September 2017, he joined the Ethereum Foundation as a researcher, responsible for POS and sharding research. He joined OP Labs as CTO in January 2020 and was promoted to CEO in May 2023. He is a passionate fan of Ethereum, Casper, cryptoeconomics, blockchain, open source, and meditation.

Prithvi Subburaj: COO, received a master’s degree in computer science from Stony Brook University, with nearly 20 years of work experience. He once had more than 15 years of development experience at Google, mainly responsible for communications research and development. Later, he also served as the chief operating officer of the North American headquarters. Joined OP Labs as COO in August 2023, he is mainly responsible for OP Labs’ engineering, products and daily operations.

Nick Balestra-Foster: Engineering director, graduated from the University of Switzerland in Italy. With over 20 years of development experience, he has worked as an engineer at OpenTable, Cloudflare, and Meta. He joined OP Labs and worked as a software development engineer in June 2022, served as general manager of development in September 2022, and served as engineering director in June 2023.

Benjamin Jones: Co-founder, he graduated from Northeastern University with a bachelor’s degree in mathematics and science. He once worked at Microscope Development Company and joined a blockchain VC as an investment assistant. In September 2018, he established Plasma group to specialize in developing Plasma expansion technology. In December 2019, he joined OP Labs as CEO.

Mark Tyneway: Co-founder, studied neuroscience at Stony Brook University and received a bachelor’s degree in neuroscience from Binghamton University. In December 2016, he joined IBM to research artificial intelligence Watson. In May 2018, he joined Purse.io, a blockchain industry company, to research p2p networks, and then joined Handshake to develop domain name services. Later, he became the co-founder of OP Labs.

A large number of core members of the team have connections with Stony Brook University, and the team has strong overall technical strength. In fact, part of the team’s development work is undertaken by VCs, including A16Z, Base, Paradigm, etc.

1.3 Investment institutions

The current total financing is $178.5M, and the latest round of financing valuation is $1.65B. As of January 3, 2024, the token circulation market value is approximately US$3.5 billion, with full circulation of US$16.6 billion. We can see that these top VCs have given OP a lot of support, including financial and technical support. OP Stack technology is also jointly promoted by these VCs. According to Crunchbase, Series A investors include market maker Wintermute. According to on-chain address analysis, OP’s market maker is indeed Wintermute.

2. How it works

2.1 Background

Optimism was proposed in 2019 and is based on Layer 2 of Optimistic fraud proof technology. Its goal is to scale Ethereum. Its technical principle is equivalent to putting Layer1 transactions into Layer2 for execution. Ethereum changes its vision from a world computer to a world settlement layer, while OP has become the essential transaction execution layer, and its vision is also to become a world computer.

2.2 Underlying mechanism

The main operating mechanism of Optimism Layer2 is divided into three parts: block production, block execution, and fault proof. We will briefly introduce it and give its technical advantages and disadvantages as well as improvement directions.

Block production

Optimism block producers are mainly managed by “sequencers”. The sequencer mainly provides the following services:

• Provide transaction confirmations and status updates
• Build and execute L2 blocks
• Submit user transactions to L1

The sequencer is responsible for the specific state updates, meaning that every transaction on L2 needs to be confirmed by the sequencer before it can take effect. Additionally, the sequencing of my user’s numerous transactions is also determined by the sequencer, which is currently operated by centralized computers (currently run by the Optimism Foundation). The advantage is that if malicious attacks occur, the foundation can effectively prevent them during state checks, and centralized operation can improve efficiency. The downside is that once the sequencer manipulates user transactions to produce MEV (Miner Extractable Value), effective supervision becomes impossible. If the computer crashes, the entire network may go down, potentially causing significant losses to users, and we still need to trust the foundation. Therefore, decentralization of the sequencer has always been something Layer 2 projects are working on. However, some users currently believe that even if sequencers with such significant authority become decentralized, it is likely that only a limited number of sequencers will cooperate to maintain the network. In the face of regulatory pressure, these few sequencers could still organize user transaction operations collectively. Therefore, it is believed that a “way out” should be set up for Layer2, also known as a withdrawal window, allowing users to withdraw funds from L2 through a dedicated exit on L1 if they do not receive a response from the sequencer for a long time.

The excessive authority of the sequencer and the unresolved issue of partial regulatory pressure in decentralization are still being addressed by Layer 2 projects. On the one hand, efforts are being made to decentralize the sequencer, while on the other hand, an exit mechanism is being built.

Block Execution

The transaction execution engine identifies the content of transactions and then submits the state pre-updates to the entire network. This is executed by the op-node client. The main developers of the op-node client are OP Labs and Paradigm. The execution engine is mainly responsible for:

• Execution engines can use p2p networks for state and block synchronization with other execution engines. This is the same way L1 performs client-side synchronization of state over the network.
• Summary transactions can be updated in real time based on Ethereum’s deposit transactions, and then reflected to the Optimism state. Generally, it is necessary to wait for a certain degree of Finality confirmation from Ethereum before synchronizing the state in the block.

Therefore, the so-called compatibility with Ethereum means that the execution engine must fully recognize the solidity contract language of Ethereum and the corresponding underlying operation codes.

Failure proof

In Optimistic Rollup, the state commitment is published to L1 with a window period of 7 days. If the commitment is not challenged, the commitment will be confirmed as a final commitment. But if challenged, even if the challenge is successful, the OP mainnet itself will not be rolled back. Only published commitments on the chain state will be rolled back. Therefore, the OP team is redesigning its proof mechanism and renaming it. They believe that if a transaction is “fraudulent,” it can be deleted or restored. But this is not the case; all transactions are valid and can be included in the chain, and only the results of executed transactions can be questioned。

The fault proof function is currently being redeveloped, which means that all submitted transactions are correct by default.The final confirmation of the current status and the commitment of the block status are finalized through the centralized sequencer, which means that the sequencer occupies a great deal of power in this mechanism process.

3. Market operation analysis

3.1 Social media data

3.2 Roadmap and Progress

From the main roadmap of Optimism, we can see that the next generation of fraud proof is currently being developed. After Milestone 9, we expect that we may explore the hybrid proof method of OP+ZK.

In addition to the roadmap listed above, what is being developed is OP-STACK, a software component of OPtimism that componentizes the entire Optimism chain, making it easier for developers to develop a more Optimism-compatible Layer2 to realize the ultimate vision of Superchain. The launch of Superchain will merge the Optimism mainnet and other chains into a unified OP chain network (i.e., chains within the Superchain). Interoperability and standardization will enable tools and wallets to treat each chain homogeneously, allowing these chains to share liquidity.

3.3 Progress in community governance

According to the mid-year report of the Optimism Foundation, the maximum supply of OP tokens is 4,294,967,296. As of November 30, 2023, the tokens the foundation promised to distribute accounted for 52.1% of the total supply, but they are currently in circulation. The market share is roughly 21.2%. It is estimated that in FY2 (May 2023-April 2024), the full circulation will be 26.6%. That is, before April this year, an additional 5.4% of tokens will be released into the market. By April 2025, the market will have 42.1%. It is estimated that more than 50% of the shares may be in circulation before December 2025. This part of the circulation may exert certain selling pressure on the market.

OP Labs proposed that Optimism upgrade the Canyon network on January 11, 2024 at 17:00:01 UTC. This is the second upgrade after the Bedrock upgrade. This Canyon includes Ethereum’s Shapella network upgrade, changes to reduce base fee volatility (gas fees will decrease and increase at a lower rate when there are few transactions or when there are too many transactions), and some minor bug fixes. The Canyon upgrade will maintain EVM equivalency (by removing the Slefdestruct opcode) and improve the ease of use of OP Stack for developers and end users. Additionally, node operators will need to upgrade their nodes to stay in sync. Canyon has upgraded the OP Stack protocol version to v4.0.0.

4. Ecosystem

https://twitter.com/OptimismDailyTK/status/1633132990489575424/photo/1

From the ecological overview of Optimism, we can see that DeFi is the main type of ecological application, and Tool and Bridge applications are relatively abundant.

4.1 DEFI

The TVL of the DeFi ecology on OP has been reaching new highs. With the upgrade of Ethereum Dencun, its Gas Fee and throughput have increased significantly, which will be able to attract more developers and users.

Judging from the breakdown of DEFI projects, the current leading native projects in the ecosystem include derivatives protocol Synthetix, DEX Velodrome, and lending protocol Sonne.

Synthetix

Synthetix is ​​an Ethereum-based DeFi that provides on-chain exposure to crypto and non-crypto assets. Through Synthetix, users can create and trade synthetic assets called ERC-20 tokens called “Synth”. Traders are able to trade various synthetics in the form of commodities, fiat currencies, stocks and crypto assets without being affected by price “slippage”, but Synthetix does not provide a front-end trading interface and requires the support of a third-party platform.

Depending on Synthetix, you can perform the following operations:

• Synthetic Trading: With Synthetix users can trade and gain exposure to an off-chain asset without actually owning it. The various synthetic assets available on Synthetix include ETH, BTC, USD, EUR, JPY, and more. These assets can be traded using the Synthetix protocol’s collective collateral model.
• Staking: Staking on Synthetix is ​​very different compared to other DeFi protocols. Rewards can be earned by contributing collateral (SNX) to the Synthetix protocol. Users will be rewarded in two ways. First, the rewards come from trading fees in the form of sUSD. Secondly, the staking rewards are in the form of SNX, which is locked for 12 months in advance.
• Decentralized Perpetual Futures: In addition to spot trading, users can also trade perpetual contracts on Synthetix. Using simulated liquidity, Synthetix can offer very low to no slippage costs and up to 10x leverage. Currently, there are two DEXs available for trading Synthetix’s perpetual futures: Kwenta and Decentrex.

Synthetix has become the lowest level synthetic asset liquidity provider in the OP ecosystem, and its dAPP partners include Kwenta, Lyra, Curve, etc.

In the past six months, handling fees have been between US$700 million and US$800 million per week. During the recent upward trend, its weekly trading volume peaked at US$1.9 billion, which has far exceeded the US$1.2 billion weekly trading volume at the peak of the previous bull market.

Currently, Synthetix is ​​planning a V3 upgrade. Synthetix Perps V3 introduces key upgrades to enhance the trading experience. These features focus on improving the experience for traders and liquidity providers, simplifying the experience for integrators, and enabling further integration with the Synthetix ecosystem.

• Native cross margin: Unified margin system, open positions will use the same margin pool account. Gains from one position are allocated to offset losses from other positions. Allows easier trading account management.
• Expanded Collateral Options: Includes a variety of synthetics from the V3 spot market, expanding trader control. Users will be able to trade using sETH, sBTC, etc. as collateral.
• MEV-resistant liquidation process: Implement progressive, configurable liquidation to reduce the risk of MEV liquidation.
• Improvements to deterministic settlement: Enhance deterministic settlement and limit the possibility of selective front-running through improvements to low-latency oracles.
• NFT-based accounts: Accounts will be controlled via NFTs (positions for token users to trade), allowing traders to transfer their trading accounts or provide other accounts with permission to conduct limited activities on their behalf, such as trading.

Velodrome

Velodrome is an AMM DEX designed to serve as a market trading and liquidity center on the Optimism network. Velodrome’s TVL is currently close to half of the last bull market. Although it cannot compete with Uniswap, it benefits from the support of the OP Foundation. It currently firmly occupies the leading position of DEX in the OP ecosystem. Due to the Matthew Effect of DEX, its position is also relatively strong. However, the daily trading volume is still relatively sluggish, and there is still a large gap between the trading volume of the previous bull market.

Sun

Sonne Finance is a decentralized lending protocol for individuals, institutions and protocols to access financial services. It is a permissionless, open source Optimistic protocol that provides services to users on Optimism.

Users can deposit assets, use them as collateral and borrow against the assets. TVL is currently close to an all-time high. But transaction volume on the lending protocol remains sluggish. However, its market value is relatively low, only US$6 million, while its full circulation market value is US$8 million.

4.2 GameFi

Gamefi on Optimism has poor development and relatively weak ecological innovation.

Atlantis World

In Atlantis world, each project can apply for a space dedicated to its own community. At present, the Alpha test network has been closed and the V2 version is being developed. The project was funded with 23,656.03 OP tokens.

OPCRAFT

https://opcraft.mud.dev/

Opcraft is a full-chain game similar to “Minecraft”. It is a game application based on OP Stack technology. It is also the first application attempt after the launch of OP Stack. It builds an application chain exclusive to Opcraft based on OP Stack, and then brings our All behaviors built in the world on-chain, and the game experience is good and fast.

4.3 NFT

QUIX, the NFT market on OP, announced its suspension last year, mainly because the progress of NFT on OP was unsatisfactory and the overall transaction volume was extremely low. Currently, the only project with some trading volume is Optimistically Bored, but its floor price is very low, resulting in almost no development of the NFT sector in the ecosystem.

4.4 Others

WorldCoin

WorldCoin has also migrated to Optimism. The WorldCoin Foundation and Tools for Humanity (TFH), early protocol contributors, announced their commitment to support Optimism Collective to turn the visio of the super chain (OP Stack introduced next) into reality and jointly build a scalable blockchain ecosystem based on OP Stack. As a first step, World ID, a decentralized, privacy-first identity protocol, will be available on the OP mainnet. TFH’s World App is the first wallet to support transactions using Worldcoin, digital assets and stablecoins, and is also migrating to the OP mainnet.

OlympusDAO

The Olympus Protocol is a decentralized finance (DeFi) system responsible for the issuance and management of fully collateralized, algorithmic, free-floating stable assets OHM. Its goal is to become a credible and stable accounting tool on the chain, replacing centralized stablecoins. The total circulation of OHM is approximately 18 million. Currently, the algorithmic stable currency OHM has been anchored at around US$11.

What is revolutionary about Olympus is the introduction of the concept of “protocol-owned liquidity”. This means that every OHM staked can earn compound interest in the form of additional OHM via its community-owned and protected vault. This vault can introduce liquidity by selling OHM’s bonds at a discount, creating profits for the community. If OHM trades above its intrinsic value, the vault will sell new OHM bonds at a discount in exchange for DAI while increasing reserves, distributing most of the returns to stakers. If OHM trades below its intrinsic value, the vault will use its liquidity to purchase OHM, reducing the supply of OHM and theoretically increasing the price of OHM.

OPSTACK

OPSTACK is the code base after OP modularized its code and open sourced it. Its ultimate vision is to help developers develop application chains, Layer2, and Layer3 at the boundary. With the help of OP stack, it is not only fully compatible with EVM, but also can form a super network in the future for sharing sequencers and liquidity. This project is fully supported and developed by Base, Paradigm, and A16Z.

5. Data on the chain

The number of daily active addresses of Optimism has been on an upward trend, and the number of new addresses is also growing rapidly. The overall development momentum is good.

The number of daily transactions is slowly rising. With the Dencun upgrade bringing about 3-5 times the transaction volume and lower gas fees, OP is expected to hit a new high in the number of transactions.

Based on Defillama’s TVL statistical caliber, the TVL of its DEFI ecosystem is also close to a record high, and DEX trading volume is also showing obvious signs of recovery.

From a revenue perspective, most of the current Layer 2 cannot obtain substantial revenue, which shows that there is no positive correlation between revenue and price.

Generally speaking, Optimism’s fundamentals are relatively good, and the current active data on each blockchain are relatively eye-catching. With the arrival of the Dencun upgrade, it is expected that its data will have a high probability of hitting a record high, making it an investment target worthy of attention.

6. Market and Competition

6.1 Market Overview

There are three main areas of development in the Layer 2 market:

• Proof plan, in order to cooperate with Ethereum’s ZK Layer2-centered roadmap (The Verge stage), the OP system is preparing to switch to a hybrid proof plan of OP+ZK. The ZK system mainly optimizes the algorithm, and improves TPS, proof efficiency and verification efficiency;
• decentralization of sequencers;
• Modularization, such as Polygon’s Superchain, Arbitrum’s Orbit, Optimism’s OP Stack, zkSync’s ZK Stack, StarkWare, etc. are actively modularizing their code bases to facilitate other applications to build application chains, Layer2, and Layer3 based on them;

Looking at the entire Layer 2 ecosystem, Arbitrum still occupies the top TVL list, and Optimism’s market share continues to hit new highs. Currently, the entire market is dominated by OP series, and the top five TVLs all come from OP series. The main reason is that OP still has the best experience at present, while ZK technology still needs time to settle, and it also requires the cooperation of ZK acceleration chips. But there is no doubt that the entire ecosystem and Ethereum is growing in the direction of ZK.

6.2 Competitive analysis

The competition between Layer 2 is mainly between developers and ecology, relying on three major aspects: developer friendliness (EVM compatibility), user experience (TPS, Gas Fee), and future development routes. To compare with Optimism, we mainly took the OP series as an example, selected Arbitrum and Base, and conducted comparative analysis from the following different angles.

TVL data

TVL

Defillama statistics show that the current TVL of the three major OP series is about to reach a record high. Among them, the new upper limit of Base has reached the top three positions, which is closely related to the support of Coinbase. Coinbase Wallet is the wallet with the second largest number of users.

DAU data

DAU year-on-year

In terms of daily active users, there have been different growths recently. Arbitrum is still far ahead, and Base is about to approach the number of active users of Optimism. This is due to the huge inbound traffic from Base. OP’s user share is gradually being squeezed, and its ecology is developing mediocrely, mainly related to its strategic direction. It is still building its Superchain vision.

daily trading volume

In terms of daily trading volume metrics, Arbitrum benefits from its more mature ecosystem, far surpassing OP and Base. In year-over-year comparison, the daily trading volume on OP has remained unchanged in the last three months, while the daily trading volume on Arbitrum is gradually eating into Base’s market share. This is because Base’s ecosystem development is still very weak, and user stickiness is low.

Gas consumption data

From the 24H gas consumption table, we can intuitively see that Arbitrum’s Defi ecosystem is the most widely used, followed by wallet transfers between Arbitrums. Optimism is also the most used DeFi, but it is still far lower than Arbitrum, and Base is still in its infancy. At this stage, users are just bridging funds to the Base chain.

Token volatility data

In terms of tokens, the price fluctuations of OP and ARB coins are still quite large (Base has not issued tokens), but the fluctuation frequency of OP is higher than that of ARB. The effects of this are:

• The OP token has a larger rise and fall, which may attract a large number of algorithmic robots to perform swings, so its liquidity will be better.
• The overall IV (volatility) of the currency holder’s portfolio will also increase, and investors need to be mentally prepared.
• The market has higher expectations for OP and is more willing to speculate on OP, so its price fluctuates more frequently.

Developer data

Due to the unavailability of data from Base, purely comparing the developer communities of OP and ARB, OP has a greater overall number of developers, both in terms of core developers and ecosystem developers, compared to ARB.

Technical Direction

OP’s technical approach still closely follows the guidance of the Ethereum Foundation. In fact, OP has always been at the forefront of implementing Ethereum’s strategic goals, and its relationship with the Ethereum Foundation is the closest among all Layer 2 solutions. Therefore, both in terms of the development and future potential of the OP Stack and its own technological iterations, it has strong competitiveness.

Arbitrum’s modular solution is Arbitrum Orbit. Recently, Binance’s gaming chain xAI went live, using Arbitrum’s solution. Its advantage lies in its ecosystem, so it is steadily developing technically and maintaining a cautious attitude in technological iterations. This is different from OP’s vision of a superchain. In developer statistics, developers seem to be more willing to participate in OP’s superchain vision.

Base utilizes the OP Stack technology, so it primarily contributes to building the OP Stack for Optimism. Therefore, Base has an ecosystem competition with Optimism, but there is also cooperation, and a portion of its profits will also be given to OP.

TPS and Gas Experience

In terms of TPS, the maximum daily TPS tested by Arbitrum is 58.97, and the Base is also higher than OP. OP has not been hyped in this wave of inscriptions, so its TPS cannot be tested.

In terms of Gas, Arbitrum is cheaper. It has made more improvements on the OP solution, streamlined the size of data submitted to the main network, and achieved better compression rates. Base, however, is not included in the table because it is still in the early stages of construction.

7. Token $OP

7.1 Token Economics

The distribution of tokens is as shown in the figure:

https://community.optimism.io/docs/governance/allocations/#

Currently, OP tokens only have governance functions. People who hold OP tokens can participate in the governance and voting activities of the Open Platform community and determine the future development direction of the Open Platform. The total token supply will expand at a rate of 2% per year. There are no clearer rules (allocation/consumption) for the expansion part yet.

7.2 Token Analysis

At present, the total liquidity of OP tokens is relatively good, its IV is large enough, and the market popularity has remained good, attracting many strategy robots to provide liquidity.

The distribution of token concentration is shown in the chart below. Over the past 30 days, the main buying pressure has come from investors, who tend to be value investors. The holdings of retail investors are declining, as are the holdings of whales. Based on this indicator, the probability of a recent consolidation phase is high. (An increase in whale concentration may indicate a subsequent bullish trend, while an increase in retail concentration may indicate a phase of frenzy.)

Holders are users holding the assets for more than a year. The number of Holders continues to increase, which means that OP is optimistic about the long-term potential. The significant increase in Teaders this month means that it has a high interest in the market hype of OP’s Dencun upgrade.

7.3 Growth forecast

OP’s growth mainly stems from the continuous expansion of its business scale, the ongoing growth in user numbers, and the realization of its Superchain vision, which involves sharing liquidity and EVM compatibility in Layer2. In the future, OP may lean more towards a ToB (Business-to-Business) focus, with ToC (Consumer-to-Consumer) as a secondary aspect.

OP may continue to exchange tokens and future operating profits with other projects based on experiments with Base, forming a genuine common interest. Meanwhile, Arbitrum will continue to optimize its user experience and ecosystem support, which is why its ecosystem development and user base far exceed those of other chains.

Furthermore, the volatility of the OP token is relatively high, making it an attractive target for trading bots and potentially yielding substantial profit multiples from lows to highs. With strong support from numerous VCs, OP Stack aligns with industry trends and may become a major growth driver in the future.

8. Summary

OP is strongly supported by Paradigm, A16Z, Coinbase, and other major players. This support extends beyond financial backing to include development resources. They collaboratively built OP Stack to achieve the strategic goals of the Optimism Superchain, which has seen successful progress. Multiple Layer2 and RAAS projects are built on OP Stack.

Additionally, OP is currently updating its latest Proof of Stake (PoS) solution and will move towards a hybrid proof-of-proof (PoP) solution with ZK in the future. However, the current excessive power of the sequencer is still not decentralized, and efforts will be made towards decentralizing it in the future. This roadmap aligns with future trends in technical solutions. The main growth point in the future lies in OP Stack, allowing all Layer2, application chains, Layer3, etc., using OP Stack to share liquidity.

Although OP’s strategy differs from ARB, OP has a significantly larger number of developers than ARB. Therefore, in terms of VC support, ecosystem development, and market competitiveness, Optimism has considerable potential for upward growth and is therefore worthy of close attention.

Note: All the above views are for reference only and should not constitute any investment advice. If there are any objections, please feel free to contact us for corrections.

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