What is Optimism (OP)? Layer-2 solution brings scalability to Ethereum

One of Ethereum’s main L2 platforms released its token in May, though not without a hiccup or two

Scale icon against background of numbers and digits in futuristic design – Photo: Shutterstock                                 
Blockchains need to scale. Platforms like Optimism can help – Photo: Shutterstock
                                

Contents

What is Optimism (OP)?

Optimism (OP) is an Ethereum Layer 2 (L2) solution focused on providing low-cost, easy-to-use scalability for Ethereum-based decentralised applications (DApps). Co-founded in 2019 by chief scientist Benjamin Jones, chief executive officer Jinlan Wang and protocol product manager Kevin Ho, the US-based Optimism released its native OP governance token on 31 May 2022.

Optimism’s backend technology stack is dubbed the Optimistic Virtual Machine (OVM), in reference to Ethereum Virtual Machine (EVM). Since Optimism’s technology closely matches Ethereum’s, all Ethereum-based smart contracts can be deployed on Optimism to take advantage of the platform's higher transaction speeds and cheaper gas fees.

Screenshot of various icons of Dapps running on Optimism – Source: optimism.io
Some of Ethereum’s premier Dapps, including Uniswap, Aave and 1inch, run on Optimism – Source: optimism.io

In the following guide, we dive into the nitty gritty of this platform and the OP cryptocurrency. What is Optimism (OP) and how does Optimism work? Stay with us to find out.

Why is Layer 2 important?

Despite being far and away the most popular smart contract platform in use today, Ethereum has some considerable scalability issues. Prohibitive gas fees and poor throughput of only 15 transactions per second (TPS) causes a bottleneck for Ethereum-based DApps, resulting in developers being unable to meet users’ demands.

Never more evident was this issue than when the runaway success of CryptoKitties caused large-scale congestion across the entire Ethereum network in 2017. That one innocuous DApp could cause so much disruption was a crisis for Ethereum. But CryptoKitties and similar events proved that changes needed to be made if Ethereum was to meet the demands of a rapidly expanding community.

The Layer 2 concept was created to combat these scalability issues. Alongside Arbitrum One and Boba Network, Optimism was at the vanguard of Layer 2. By 2021, these applications became a core component of the Ethereum ecosystem.

As of 9 Jun, there was $4.91bn of total value locked across all Layer 2 protocols, according to Ethereum’s own calculations. Data supplied by l2beat.com shows $825m TVL locked on Optimism, against Arbitum One’s $2.48bn TVL. Arbitrum One holds more than 50% of Layer 2 market share.

The Merge: Will Optimism become obsolete?

Layer 2 solutions including Optimism, Arbitrum One and Boba Network are useful because they solve a critical problem for Ethereum: Scalability. But with Ethereum’s impending switch to proof of stake (PoS), do these platforms risk becoming obsolete? 

Ethereum estimates that PoS will allow for up to 100,000 TPS and gas fees more than 99% cheaper than today’s, outsripping those made available by current Layer 2 solutions. The planned introduction of shard chains in 2023 will optimise Ethereum even further.

But some stakeholders see a healthy future for Layer 2 despite the Merge. Speaking with Cryptoslate.com, Ahmed Al-Balaghi, co-founder of the multi-chain relayer protocol Biconomy, said: “Even after the Merge, to really get to mainstream adoption, we will need as many scaling solutions as possible.” Alan Chiu, founder of the Boba Network, had a similar sentiment, stating: “As Ethereum L1 becomes more efficient, L2s will simply become that much more efficient right alongside, all while maintaining their current added benefits.”

How does Optimism scale?

What is Optimism (OP)’s secret sauce? It all comes down to a technology called optimistic rollups. In Optimism’s words, optimistic rollups are “basically just a fancy way of describing a blockchain that piggy-backs off of the security of another ‘parent’ blockchain.”

In Optimism’s case, it takes advantage of Ethereum’s global network of consensus nodes (currently proof-of-work, soon to be proof-of-stake). By removing the burdensome computational processes that go into consensus, optimistic rollups can focus on simply bundling transactions and sending them to Ethereum’s Layer 1 for processing.

These bundles of transactions are called optimistic rollups because they are assumed to be accurate. Only when inaccuracies are detected does the consensus layer enter the dispute resolution mode. If an optimistic rollup is proved to be faulty, the sender is penalised.

Screenshot showing average gas savings on Optimism, recently exceeding 100x – Source: Dune Analytics
Average gas savings recently exceeded 100x on Optimism – Source: Dune Analytics

While the scalability benefits are evident in Optimism’s optimistic rollups method, it comes with a trade-off. In its current iteration, Optimism is the sole party responsible (called the sequencer) for sending transaction data to Ethereum’s Layer 1. Although Optimism states that it cannot alter these transactions, it still represents an element of centralisation. Decentralisation of the sequencer is a key step in Optimism’s roadmap.

The OP airdrop

Optimism’s native OP cryptocurrency is a core element of the ecosystem. Having executed the OP token airdrop to existing Optimism users on 31 May 2022, the Optimism cryptocurrency became the governance token for the Optimism Collective decentralised autonomous organisation (DAO).

The airdrop did not go smoothly. By its own admission, Optimism “dramatically underestimated the amount of traffic that the airdrop would create,” leaving many eligible token holders without tokens. At the time of writing, Optimism continues to remedy the situation.

But Optimism was hit with more bad press on 8 June, when an exploit led to the theft of 20 million OP tokens intended for the liquidity provisioner Wintermute. According to Optimism, the exploit occurred when Wintermute provided an Ethereum L1 address which was yet to be deployed on Optimism. Before the issue could be fixed, an attacker managed to take control of the funds.

Wintermute took full responsibility. Since the hacker only liquidated one million OP tokens, Wintermute theorised that the attack was executed by a whitehat (ethical) hacker. Addressing the hacker, Wintermute stated: “You have one week to consider being a whitehat. In case the above doesn’t happen, we are 100% committed to returning all the funds, tracking the person(s) responsible for the exploit, fully doxxing them and delivering them to the corresponding juridical system.” Regardless of blame, Optimism copped a lot on flak on Twitter.

Controversies aside, what is Optimism coin used for? Apart from a possible store of value, the token is used to fund third-party development proposals and integrations on the Optimism L2 chain. Any OP coin holder can partake in the governance procedures that determine these proposals, although the Optimism Collective suggests delegating your tokens to a predetermined set of delegates, who will use your voting power accordingly. When delegating your tokens, you retain full ownership. Delegates can be swapped at will.

OP token: Key figures

As of 9 June 13:10 BST (+1 UTC), OP coin was valued at $0.85. The initial OP token supply at genesis was just under 4.3 billion, set to inflate at a rate of 2% yearly. With a circulating volume of just under 215 million, OP’s market capitalisation at the time of writing was $193.3m.

A 24-hour trading volume of $292.62m constituted 160% of market capitalisation. For the latest Optimism price targets, be sure to head over to our Optimism price prediction.

FAQs

Optimism cryptocurrency has a circulating volume of  214,748,364 against a maximum supply of 4.3 billion tokens.

For the most part, Optimism is as safe as Ethereum, since it uses the same network of proof-of-work (soon to be proof-of-stake) consensus nodes. Since Optimism uses a singular sequencer to relay transactions to Ethereum for processing, there is an element of centralisation baked into the data flow. Optimism’s roadmap lists decentralisation of this sequencer as a primary goal.

Optimism was co-founded in 2019 by chief scientist Benjamin Jones, chief executive officer Jinlan Wang, and protocol product manager Kevin Ho.

Further reading

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