Nansen Research: On Optimism and the future of Ethereum

Optimism will play a key role in Ethereum’s scalability (ETH/USD) in the future. Developers have set high standards by aiming for EVM equivalence. Despite some delays, they have continued to deliver. They are not only developing software, but also actively supporting and growing high impact projects in the Ethereum ecosystem by supplying funding, wrote Nansen Research in a report.

Ethereum is already scaling without 2.0

You must have been living under a rock if you haven’t heard of Ethereum 2.0. What you may not know is that Ethereum is scaling with or without it and shifting from a Proof-of-Work (PoW) to Proof-of-Stake (PoS) consensus model is only the beginning.

The ultimate goal is to move from monolithic to modular blockchains, creating a whole new framework for blockchain scalability in the process. A monolithic blockchain is a blockchain that computes and processes everything on a single chain. The majority of Layer 1 blockchains are monolithic.

On the other hand, modular blockchains split chains up into data availability, execution, and security layers. In the case of Ethereum, the L1 becomes the security and data availability layer while the Layer 2s on top serve the purpose of execution.

The goal of L2s is to be able to do anything that a monolithic L1 can do, but better, and to be fully compatible with other L2s. Optimism is an example of an Ethereum L2 aiming to do just that.

What is Optimism?

Optimism is the first L2 to build an Optimistic Rollup compatible with Ethereum Virtual Machine (EVM). Optimism can process transactions at scale and inherits the security of Ethereum at the same time. Rollup was named from the nature of transaction processing.

It is assumed by default that transactions are accurate and no computation is performed. Their legitimacy is ensured by a fraud proof mechanism. Verifiers can challenge the validity of transaction proposals that sequencers submit. Then, the rollup executes verification by doing transaction computation on Ethereum.

Verifiers get a reward if they prove a proposal is fraudulent. The sequencer gets penalized. The reward is taken from a pool of bonded ERC-20 tokens that sequencers are required to bond. The token necessary is ether in the case of Optimism. In this way, verifiers are encouraged to catch bad actors, while sequencers are encouraged to submit accurate transaction proposals only.

Benefits of Optimism

The L2 blockchain has four main benefits: low cost, high speed, high data security, and full EVM compatibility. Transactions on Optimism cost a fraction of those on Ethereum. At the moment, the basic transfer fee on Optimism is $1.66 vs $8.77 on Ethereum. It is estimated that Optimism has saved more than $335 million in gas fees from transactions.

Optimism is possibly the best EVM-compatible chain that exists. It focuses on becoming EVM equivalent. It gets its security from the Ethereum mainnet unlike sidechains which have their own security because they operate independently, like Ronin.

Transaction data is stored on the Ethereum Mainnet although processing is on Optimism. This allows the latter to remain scalable while inheriting the security of Ethereum.

Disadvantages of Optimism

Optimism is not without its downsides. These include potential incentive misalignment between network participants and the underlying L1 censoring transactions and slow, expensive withdrawals.

As mentioned, verifiers on the network have an incentive to challenge fraudulent proposals and sequencers have one to submit correct proposals. Verifiers are discouraged from node operation because they receive a smaller or no reward at all in the absence of fraudulent proposals.

Optimism vs. Arbitrum

Optimism and Arbitrum are both Optimistic Rollups, but there is one key difference between them: the fraud proof logic. Optimism uses non-interactive fraud proofs, which carry out the whole transaction again and perform the computing required on the L1 to identify the truth.

Arbitrum uses interactive fraud proofs, which only execute the specific measure that is being disputed on the L1.

Fraud proof models

Non-interactive fraud proofs are much simpler to design. What’s more, they do away with the need for coordination between the parties involved. This makes fraud proofs instant. Interactive fraud proofs take longer to resolve because all parties involved must work together to address the challenge.

On the other hand, it costs much more to execute the entire transaction on the L1 than it does to perform a single measure or step. Presently, Optimism is working on moving to an interactive fraud proof model that is equivalent to EVM, consistent with their overarching vision.

Optimism had 45,200 unique active addresses in the past month while Arbitrum had slightly more: 66,800. Both blockchains process around 2-3% of the total number of transactions on Ethereum. The respective numbers are 21,000 and 34,000.  

Deployments on Optimism

Uniswap (UNI/USD) and other large Ethereum-based dApps have deployed on Optimism and are fully operational. With DeFi projects such as Rubicon Finance, Optimism boasts a growing native ecosystem. It has a fully functioning NFT marketplace, Quixotic. Among the top NFT collections on Optimism are OptiPunk (CryptoPunks derivative), Optimistic Bunnies, and OldEnglish.

Optimism in the future

There is neither a native token for Optimism nor plans to release one in the near future. Still, this is something to look out for moving forward. Centralized exchanges might introduce direct on-ramps onto Optimism like Binance and Huobi have done for Arbitrum.

This will allow users to circumvent the bridging process and deposit assets directly on to Optimism, reducing the cost associated with bridging. Smart money has yet to explore Optimism. With 8.6%, Smart NFT Minter is the largest overlap with Ethereum. This indicates great potential and room for the Optimism ecosystem to not only survive, but grow and thrive.

Addressing interoperability

Current L2 solutions exist in silos and aren’t interoperable with each other. Interoperability must be addressed if one wants Ethereum to become truly scalable. It’s probably something that the blockchain will work towards after rolling out key upgrades and improving decentralization of the blockchain.

Final thoughts

When Ethereum 2.0 launches, Optimism’s capabilities will improve a great deal. Having a faster and more efficient Ethereum L1 blockchain will make everything built on top of Ethereum and relying on it more efficient too. By itself, Ethereum 2.0 probably wouldn’t be able to meet the consistently rising demands for block space. L2 blockchains would be necessary to fulfill that need.

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