banner

Advertisement

What Is Optimism?

A Step-by-Step Guide to the Layer 2 Blockchain

What Is Optimism?

The breakthrough in blockchain technology stems from its peer-to-peer model. By decentralizing governance and maintenance,  blockchain design has enabled permissionless access without central server control. On the other hand, all nodes on the network must sync up with all other nodes to execute every single transaction.

This is time-consuming and expensive, making it difficult for blockchains to reach the mass market. Ethereum’s blockchain tackles this scalability problem with Layer 2 networks. One of them is Optimism.

Scalability Approaches Explained

Blockchains such as Avalanche, Solana, Algorand, Tron, and others rely on the main chain’s architecture to deal with the scalability problem. This main chain is commonly known as Layer 1, the core network, like Bitcoin or Ethereum, without any extras involved in facilitating transactions.

This creates confusion because people start to call some blockchains Layer 1, using the phrase as a distinction tool. However, things are not that simple. Case in point, Avalanche (AVAX) uses a tri-part network architecture. It spreads the traffic load across three chains — C-Chain, P-Chain, and X-Chain — on its Layer 1 main chain to make its network inherently scalable.

whatispolygon

What Is Polygon?

A Step-by-Step Guide to One of DeFi Most Popular Blockchains

The Defiant The Defiant

Because Avalanche doesn’t have to rely on Layer 2 networks, we can then say it is layer 1. Other blockchains, like Ethereum or Cardano, adopt a two-tiered approach to scalability:

  • Upgrading the network itself. For example, in the Surge stage expected to follow The Merge upgrade, Ethereum will introduce sharding to spread out traffic load. 
  • Attaching Layer 2 networks to the Layer 1 chain. This is akin to attaching roads to a highway to relieve it of congestion. 

In other words, all blockchains are Layer 1 networks, which may at one point adopt the Layer 2 solution to improve scalability. 

This already happened with Cardano when it introduced Hydra L2 in March 2022. Yet some blockchains have scalability as its core design and it would be more precise to refer to them as Layer 1s.

As the dominant smart contract network with 59% DeFi market share, Ethereum has the widest variety of Layer 2 scalability solutions. As of August 2022, they comprise $6B in total value locked (TVL) across its dApps (decentralized applications). 

Top 10 Ethereum scalability solutions. Source: l2beat.com

This is significant because Ethereum’s competitive dApp ecosystems tend to have lower TVLs. This tells us that even if some blockchains are not inherently scaled, their first-mover advantage makes up for it in the form of L2 networks.

Optimism is the first such Layer 2 scaling for Ethereum that lowers its gas fees, conducted through Optimistic rollups. As its name implies, rollups bundle mountains of transaction data to be processed off Ethereum’s Layer 1, after which they are returned in a highly-compressed form.  

Some networks use Optimistic Rollups scalability technology, while Optimism itself has its own TVL ecosystem of dApps, at $2.17 billion TVL. That’s because Optimism pioneered scalability for Ethereum, becoming its first Layer 2 network.

Optimism (OP) Explained

Source: Optimism

What does it mean to scale up Layer 1 networks? Optimism does this by rolling up transaction data from the main chain, bundling it into single batches, and then settling them. This data is sent back to Ethereum’s mainnet to be validated as another added data block.

That last part is critical because it means Layer 2 solutions don’t erode a blockchain’s key feature — security through decentralization. 

After all, Ethereum’s 5,000 nodes make a great redundancy layer against network shutdowns or attacks. The same cannot be said of centralized networks, where only a couple of servers need to go down for the entire network to collapse.

When Optimism bundles hundreds of transactions into single batches, the fees required to settle them drastically fall compared to if they had been executed on Ethereum itself. Optimism bundles transaction data with Optimistic Rollups. This cryptographic technique uses smart contracts to serve as bridges between L1 and L2, using a process dubbed “fraud proof”.

Simplified illustration of Optimistic Rollups. Source: Ethereum Foundation’s Kyle Charbonnet

Fraud proofing in Optimistic Rollups is a way to ensure that transactions are valid. During this validation time period, every transaction can be challenged. Optimistic Rollups assume that all transactions are valid until proven otherwise. This is why the term “optimism” defines this scalability solution.

When challenged with fraud proof, Optimistic Rollups run additional computations, which have their own fee expenditure. Thankfully, Optimism reimburses those gas fees. 

Speaking of fees, Optimism gas fees are 10x cheaper than on Ethereum because of its bundling work. In fact, the network boasts it has saved users more than $1B in ETH gas fees since it launched two years ago.

Optimism’s dApp Ecosystem

There are hundreds of dApps available on Optimism and they were imported from Ethereum. They range from lending services and NFT marketplaces to wallets, DAOs, and blockchain tools. You can view Optimism’s ecosystem here

Because Optimism lowers gas fees, most popular dApps are financial. Aave is the king of lending, while Synthetix tokenizes underlying assets into derivatives for more streamlined trading. These two dApps make up the bulk of Optimism’s TVL share.

Top 5 Optimism dApps by TVL, as of August 2022. Source: DeFi Llama.com

Decentralized exchanges (DEXs) Velodrome and Uniswap are similarly popular, just like on every other blockchain. Stablecoins make up the majority of crypto funds on Optimism, at 26.53%, in contrast to OP’s share of 19%. This is to be expected, given the volatility introduced throughout the bear market in the spring/summer of 2022, following the collapse of Terra (LUNA)..this spring/summer.

How Is Optimism Funded and Monetized?

The entire Ethereum ecosystem relies on open-source community contributions. That doesn’t mean that developers are working for free. The Optimism Collective coordinates devs the same way the Ethereum Foundation does.

When it comes to funding, Optimism’s main contributors are IDEO Colab, based in Cambridge, Mass., Paradigm, based in San Francisco, and the venture capital firm Andreessen Horowitz. Optimism has raised  $178.5 million so far. Optimismtokens, which use the ticker OP, are not supply-limited, and the inflation rate is 2% on an annualized basis. 

There is 234.7 million OP in circulating supply. Over the next four years, they will be unlocked to the Optimism Collective, the public, and investors.

OP token allocation.  Source: Optimism

On May 31, the Collective airdropped OP tokens to introduce the token to the public. . Interest inthe token ran so high it jammed up the Optimism network. 

More airdrops are planned and usually posted on Optimism’s social media channels. 

How To Access Optimism for Cheap Trading?

High ETH gas fees are the bane of DeFi. If you are using the most popular Web3 non-custodial wallet for dApps, MetaMask, you already know what to do.

Otherwise, download and install MetaMask. After creating a seed phrase to recover your private key, click on the dropdown menu next to your account icon. Then, click on “Add Network”.

After a new tab pops up in your browser for “Settings”, enter this network data for Optimism in the offered text boxes:

Click on “Save” and the Optimism network is added. Now, whenever you want to access Optimism dApps, simply switch your MetaMask’s network from the dropdown menu. When you go to a dApp site, every one will have a “Connect” button in the upper-right corner.

The same applies to Optimism Bridge as well. This is a bridge to transfer funds from Optimism to Ethereum and vice-versa, by clicking on the “Connect Wallet” button in the upper-right corner. In fact, you can use this bridge to transfer crypto assets from a wide range of blockchains and L2 networks, from Polygon and Avalanche to Arbitrum and BNB Chain.

Series Disclaimer:

This series article is intended for general guidance and information purposes only for beginners participating in cryptocurrencies and DeFi. The contents of this article are not to be construed as legal, business, investment, or tax advice. You should consult with your advisors for all legal, business, investment, and tax implications and advice. The Defiant is not responsible for any lost funds. Please use your best judgment and practice due diligence before interacting with smart contracts.

Get Smarter on DeFi and Web3

Get the 5-minute newsletter keeping 80K+ crypto innovators in the loop.