Optimism: A Comprehensive Analysis of the Popular Layer 2 Scaling Chain

Digging deeper into Optimism: Tokenomics, Governance Model, Concerns and more

Introduction

Optimism (OP) is a layer-two scaling solution for Ethereum, designed to improve the scalability, speed, and cost of transactions on the Ethereum network. The team behind Optimism aims to make decentralized finance (DeFi) more accessible and user-friendly by building a fast and efficient network that can handle large volumes of transactions without the high gas fees and slow transaction times that have become characteristic of the Ethereum network.

In this report, I will provide an unbiased and critical analysis of the Optimism network, including its history, tokenomics, governance model, concerns, and more. We will also compare Optimism to other layer-two scaling solutions like Arbitrum and Polygon to provide a broader context for investors who are considering investing in OP.

Origins of Optimism

Optimism was founded in 2019 by Jinglan Wang and Ben Jones, who previously worked together at Coinbase. The team was inspired by the growing popularity of DeFi applications on Ethereum, but recognized that the network was facing significant scalability challenges. They set out to build a layer-two scaling solution that could address these challenges and help DeFi applications to scale without compromising on security, decentralization, or user experience.

The team initially focused on building a scaling solution for decentralized exchanges (DEXs), which were struggling with high gas fees and slow transaction times on the Ethereum network. They developed a system called the Optimistic Virtual Machine (OVM), which allows DEXs to run on a layer-two network while still maintaining compatibility with the Ethereum Virtual Machine (EVM) and the rest of the Ethereum ecosystem.

About Optimism

Optimism is a layer-two scaling solution that operates as a sidechain to the Ethereum network. It uses the OVM to execute smart contracts and transactions off-chain, which allows it to process transactions much faster and cheaper than the Ethereum mainnet. Optimism operates as a trustless, decentralized network that relies on a network of validators to process transactions and secure the network.

The network is designed to be compatible with the Ethereum ecosystem, which means that developers can easily port their existing applications and smart contracts to Optimism without needing to make any significant changes to their code. This compatibility makes it easier for developers to build applications that can take advantage of Optimism's speed and scalability without needing to start from scratch.

At the time of writing, the total token supply of OP is 4.3 billion, with a circulating supply of 215 million (5%). The token price is $2.50, with a market capitalization of $539 million and a fully diluted cap of $10.8 billion. It is currently ranked 90th in terms of market capitalization.

Funding

Optimism has received funding from a range of investors, including Paradigm, Andreessen Horowitz, Polychain Capital, and others. In total, the company has raised over $150 million in funding to date, which has helped it to build out its network and attract more users.

Tokenomics

Optimism's tokenomics have a significant impact on the project's growth and adoption. With 19% of the total supply allocated for core contributors, the team behind Optimism has a significant stake in the project's success. While this allocation may seem high, it is not uncommon in the cryptocurrency industry. However, it is important to note that this allocation could potentially create a conflict of interest if the team decides to prioritize their own interests over the interests of the community.

In addition, 17% of the total supply is reserved for seed investors who participated in the project's early stages. While this allocation provides a strong incentive for early investment, it also creates a risk of a concentration of power in the hands of a few investors. This risk could lead to centralization and a lack of decentralization, which goes against the principles of blockchain technology.

The ecosystem fund represents 25% of the total supply and is dedicated to the growth and development of the Optimism ecosystem. This allocation is positive as it will help to drive the adoption of the Optimism network by supporting grants, partnerships, and seeds to new protocols. However, it is essential to ensure that the fund is used transparently and for the benefit of the community as a whole.

Retroactive Public Goods Funding represents the remaining 20% of the total supply and is used to support public goods projects that benefit the Optimism community. This allocation is also positive as it will help to support open-source development, research, and other projects that promote the growth of the ecosystem.

Overall, the Optimism tokenomics are designed to incentivize early adoption and promote the growth of the ecosystem. While some allocations may seem high, they are not uncommon in the cryptocurrency industry. However, it is essential to ensure that the allocations are used transparently and for the benefit of the community as a whole.

Head over to token.unlocks.app/optimism for in-depth data.

Governance: Optimism’s Model

Optimism has a unique governance model that is built around its native governance token, OP. This token provides voting rights to users, who can use it to vote on proposals and decisions that affect the Optimism ecosystem. Unlike traditional utility tokens, OP is purely a governance token, meaning that it cannot be used for transaction fees or other similar purposes.

The Optimism governance model is based on a bicameral system, which means that it is divided into two distinct chambers. The first chamber is the Token House, which is composed of all the OP token holders. This chamber is responsible for voting on proposals related to the allocation of funds and other matters related to the Optimism treasury. The second chamber is the Citizen’ House, which is composed of a smaller group of delegates who are responsible for more technical matters related to the Optimism protocol.

The Optimism governance system is designed to be transparent and inclusive. Any user can submit a proposal for consideration by the community, and all users are encouraged to participate in the decision-making process by voting on proposals. In addition, the governance system is designed to be flexible and adaptable, so that it can evolve over time as the needs of the ecosystem change.

One notable feature of the Optimism governance model is its emphasis on delegation. Users can delegate their voting power to other users who they trust to make informed decisions on their behalf. This delegation system allows users who may not have the time or expertise to fully participate in the governance process to still have a say in important decisions.

Airdrops

Optimism has conducted two airdrops for its governance token, OP, which have been well received by the community.

The first airdrop occurred in May 2022, and distributed over 200 million OP tokens to 250,000 early adopters and engaged users. The goal of this airdrop was to establish a bicameral governance system that provides the foundation for the growing digital city of Optimism. The Token House has matured as the first piece of Optimism governance, and as of February 2023, 88k addresses have voted on over 90 proposals to distribute more than 55 million OP tokens across the ecosystem.

The second airdrop, which took place on February 9th, 2023, distributed 11,742,277.10 OP tokens to 307,965 unique addresses to reward positive-sum governance participation and power users of Optimism Mainnet. The airdrop rewards users for their involvement in Optimism governance and covers a portion of their network usage costs, including governance delegation rewards based on the amount of OP delegated and the length of time it was delegated, partial gas rebates for active Optimism users who have spent over a certain amount on gas fees, and multiplier bonuses determined by additional attributes related to governance and usage.

Airdrop #2 was distributed directly to eligible wallets, and did not require any claiming on behalf of the user. However, it is important to be cautious of fraudulent websites pretending to help users claim their tokens for the airdrop. If an address was eligible, it had tokens sent directly to it on February 9th, 2023 by 8pm ET.

$OP 3rd Airdrop? (credits to Pedro)

We don’t know when and how, but it is almost certain that Optimism will release another drop and if you want to be part of the next wave, interacting with the Optimism Network is definitely the way.

Optimism vs Polygon vs Arbitrum

In recent months, several Layer 2 scaling solutions have gained momentum in the Ethereum ecosystem. While Optimism has been making headlines for its performance and recent upgrades, it is important to consider how it compares to other scaling solutions such as Polygon and Arbitrum.

Polygon, formerly known as Matic Network, has quickly emerged as a popular Layer 2 solution due to its fast transaction speeds and low fees. It has been successful in attracting a wide range of decentralized applications (dApps) to its platform, particularly in the gaming and NFT spaces. Polygon's architecture is based on a hybrid model of PoS (Proof of Stake) and PoA (Proof of Authority), which enables it to offer fast, scalable and secure transactions. However, some critics argue that Polygon's centralized approach is not in line with Ethereum's decentralization principles.

Arbitrum, on the other hand, has positioned itself as a more decentralized and trustless solution. It has gained attention for its compatibility with Ethereum's smart contracts and robust developer tooling. Arbitrum's Optimistic Rollup architecture allows it to batch transactions on Layer 2 while retaining Ethereum's security and decentralization. One downside, however, is that Arbitrum's transaction fees can be higher than other Layer 2 solutions.

In comparison, Optimism's approach is also based on an Optimistic Rollup architecture, but with some differences. Optimism has been designed to prioritize security and decentralization, while still maintaining fast and low-cost transactions. The recent Bedrock upgrade is expected to improve the performance of the network even further. However, concerns have been raised about the potential for token dilution and the slow pace of network adoption.

Each of these Layer 2 solutions has its own strengths and weaknesses, and choosing the best option will depend on the specific needs of a project or investor. While Optimism has been performing well in recent months, it is important to keep an eye on how it stacks up against the competition. The competition between these Layer 2 solutions is healthy for the ecosystem, as it drives innovation and progress.

WEB3 (by Pedro)

Optimism Quests

Optimism has a Quests Section on their Website:

https://app.optimism.io/quests -> that they guide you to complete some on-chain actions in exchange for a NFT (and possibly a participation in the next airdrop?)

Currently Quests season 1 is finished, waiting for next news on season 2

How to maximise earnings on $OP?

Not only holding $OP and waiting for token appreciation, what you can do:

Delegate your voting powers to a renowned delegator to vote in your place (Beginner)
Provide Liquidity on Rubicon Finance for a %APY on your $OP (Intermediate)
Lock your $OP on QiDao, Borrow $MAI a form a LP of MAI-USDC on Beefy Finance (Advance

Concerns

Despite its impressive growth and potential, Optimism is not without its concerns. One of the primary concerns is the potential for dilution of the token supply, which could lead to significant price fluctuations and volatility. As more tokens are released into circulation, there is a risk that the price of OP could decline, especially if early investors and core contributors decide to sell their holdings.

Another concern is that the OP token faces potential dilution in the future. The total token supply is 4.3 billion, with a circulating supply of only 5.4%, or 235 million tokens. This low circulating supply can lead to increased volatility, as seen with the recent price surge of nearly 200% in a little over a month. Additionally, over 30% of the tokens are out of lockup since we're currently in Year 0, and tokens from early investors and core contributors will be added to the supply later in 2023. If these tokens enter the market too quickly, it could significantly deflate the price of OP tokens. However, the tokenomics of the OP token are unique in that it is a pure governance token, meaning Optimism users do not pay gas fees with OP. This could potentially mitigate some of the negative effects of potential dilution.

Personal Opinion

Andy

Based on my analysis of Optimism, I believe the project has a lot of potential with its innovative layer two scaling solution on Ethereum. I am impressed with the features that Optimism offers, such as faster transaction times and lower gas fees, as well as its integration with many popular DeFi protocols.

I am considering buying into this project when the time is right. Currently, the price has come down about 20% from its recent all-time-high in February, so I am keeping a close eye on its development to identify some good entry points for my investment. With the impending release of the Bedrock upgrade and the potential for future airdrops, I believe Optimism could be a promising investment opportunity in the coming months. However, as with any investment, it is important to conduct thorough research and consider the potential risks before making a decision.

Stefan’s Opinion

So far I don’t have Optimism in my portfolio, but I like the project and I want to get a piece of the pie. Therefore, I will add Optimsm to my public wallet in the next few weeks. I’m just waiting for a pullback on the price. I will keep you updated when I add a limit order for the portfolio.

Categories: Report