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Rollup

Rollup (OP) is a solution that extends Rollup Layer 2 to increase the throughput of by doing some computation off the mainnet mainchain (L1). In technical terms, is an optimistic protocol rollup.
This article provides an overview of the protocol and looks at project performance using data from Token Terminal.

Purpose

Optimism was born with the aim of making the network better through increased transaction speed and transaction throughput (TPS). Faster finality (complete termination of transactions) with lower transaction costs will greatly improve user experience.

Existing problems

When the popularity of the network Ethereum increasingly, it is difficult to scale up This has become a sore point for users who have to pay very high transaction fees to complete their tasks. The reason is because of the blocks of Ethereum has a rather limited maximum computation capacity (about 35,000,000gas) and new blocks are generated at a near-constant rate. As the number of users and decentralized applications (dapps) grows, increased demand has pushed gas prices to absurd levels.

Solution

Optimism is a is designed to help Ethereum scale and belongs to the group of Layer 2 (L2) scaling solutions. L2 adds another layer of computation on (L1), i.e. Ethereum Mainnet, but at the same time still take advantage of the security features of L1. Optimism executes transactions on L2 and sends them in batches to L1 for data retention. This results in about 5-20 times lower gas fees depending on the type of transaction.

The name Optimism also indicates that the project chose the optimistic rollup method. Optimistic rollup assumes that every transaction is packaged and sent to that right. This rollup method is the opposite of Zero Knowledge (ZK) rollup.

Time

In recent years, interest in blockchain technology has grown exponentially, and Ethereum has become the leading blockchain for deploying dapps. Decentralized Finance (), and other blockchain applications have grown from spontaneous movements into multi-billion dollar industries. Demand for blockchains (block space) and Scalable is higher than ever, and investors are willing to fund teams building solutions that scale.

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Market

Ethereum Circulating Cap

Optimism is part of the growing Ethereum ecosystem. Ethereum is the current leading blockchain for dapps and . Demand about hit an all-time high in late 2021 as the circulating market cap of (i.e. the number of ETH multiplied by its price) reached more than 500 billion USD.

An upcoming major Ethereum upgrade expected to happen in 2023 will introduce sharding (i.e. parallel processing of transactions on separate blockchains) to dramatically increase Ethereum's throughput. Until this point, demand for L2 scaling solutions is expected to remain high. Furthermore, if blockchain technology is mass-adopted, global demand will be enough for multiple scaling solutions and parallel blockchains that develop concurrently and co-exist.

Competitor

Optimism competes with other Ethereum scaling solutions and other L1 blockchains like , , Chain…

In short, Optimism's closest competitor is . Like Optimism, is an optimistic rollup designed to scale Ethereum. Currently, Arbitrum is significantly larger than Optimism based on total locked capital value (), i.e. the value of the asset on the blockchain.

Several other zero-knowledge rollups, i.e., L2 scaling solutions based on complex algorithms for validating transactions are also expected in 2022 and beyond.

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Ultimately, the success of Optimism will depend on the success of the entire Ethereum ecosystem, and therefore other scaling solutions need not be considered direct competitors. Other L1 blockchains like compete more directly with the Ethereum ecosystem.

Product

Optimism is an independent blockchain but relies on the security of Ethereum. OP is fully compatible with the Ethereum Virtual Machine (EVM), making it very familiar to existing users and developers of Ethereum. The implementation of smart contracts on Optimism is akin to Ethereum, and users can transfer assets between blockchains using bridges.

Optimism blocks are stored on Ethereum. New block production is coordinated by a program called a sequencer, which allows instant transaction confirmations and state updates, generation and execution of L2 blocks, and sending transactions to L1 in batches. ). Since interactions with the sequencer have near-instant latency, the user experience will be significantly faster than on Ethereum. Currently, the sequencer is centralized and operated by the company behind Optimism. The project has stated that their aim is to decentralize control over and decentralize this sequencer in the near future.

Team

Optimism is developed by the US-based company Optimism PBC. Optimism PBC has raised nearly $180 million in two funding rounds led by well-known investment funds Andreessen Horowitz and leader. The Optimism Foundation is a non-profit organization dedicated to developing the Optimism ecosystem. Optimism Collective is a decentralized autonomous organization () is designed to help with project management in the long term.

Business model

Users pay transaction fees including L1 security fee and L2 execution fee. L1 security fees are paid to miners on Ethereum and L2 execution fees are paid for running the sequencer.

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Finance

This section provides an overview of Optimism's historical performance using data Token Terminal.

Note that even though Optimism launched earlier, data is only visible from November 11, 2021. This is when Optimism was significantly redesigned to make it more EVM-like, resulting in a reboot. entire blockchain.

The figures below show the value of fees paid by Optimism users and how revenue is split between the protocol (sequencer) and supply-side participants (Ethereum miners). Protocol revenue typically represents only a few percent of total revenue.

Fees paid by Optimism users
Revenue split between protocol and mainnet

The success of Optimism depends on the success of the run on it. The figure below shows the total value locked () of the largest on Optimism. Although TVL hasn't increased recently due to the fact that we are in a downtrend, the DeFi ecosystem has diversified considerably as more dapps have been launched.

TVL of projects on Optimism

Optimism launched the OP governance token in early June 2022. OP's initial supply is 4.3 billion with an inflation rate of ~2% per year. The figure below shows the given market capitalization OP's complete dilution since debut. The market currently values OP at around $5 billion.

Total capitalization dilution of OP (FDV)

Conclude

Optimism is one of the leading Ethereum scaling solutions. It has been proven to reduce gas fees and efficiently store Ethereum-based dapps. OP's DeFi ecosystem is growing and OP will be able to fund a lot of new dapps using their own tokens. However, OP will face significant competition from current and future projects.

Original post: Research series - by Oskari - Token Terminal (substack.com)

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