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Jun 20, 2022

What Is Optimism (OP): The Simple Layer 2 ETH Scaling Solution

If you're looking for an intuitive crypto technology to invest in, consider Optimism. This article explains why Optimism crypto stands out in a saturated market, the technology behind it, and what the future holds for investors of OP tokens.

What Is Optimism?

Optimism is a Layer 2 scaling solution for Ethereum. It helps reduce the transaction fee and transaction time on the Ethereum blockchain.

Broadly speaking, Optimism helps solve Ethereum’s scalability dilemma. Scalability refers to the rate of transactions per second (TPS) on a blockchain network.

How Optimism Solves Scalability Issues on the Ethereum Network

It's understood that Ethereum is one of the most secure and decentralized blockchains in existence. To keep everything running smoothly, the network is built around three properties: Decentralization, security and scalability. However, because of the limitations due to the blockchain trilemma, Ethereum can only deploy two out of these three properties effectively.

To keep the network functional, the governing body behind Ethereum decided to sacrifice scalability for the sake of security and decentralization. As of this writing, Ethereum has reached its capacity to handle more than one million transactions per day. When this occurs, the Ethereum network cannot scale anymore and will become congested as a result.

Once the blockspace becomes scarce, users on the Ethereum network enter a bidding war in an attempt to get their transactions on the next block. As a result, the gas price rises, making it significantly less affordable for an average user to benefit from a transaction. Besides paying a high gas fee, users on the Ethereum network must also endure long wait times for their transactions to clear.

Optimism to the Rescue

This is where Optimism comes into play. Optimism offers a scalable solution to the Ethereum network, which helps increase the speed of transactions on Ethereum without sacrificing decentralization and security.

Optimism handles transactions off the Ethereum blockchain, while taking advantage of Ethereum's infrastructure. During a transaction, Optimism continues to communicate with Ethereum’s Layer 1 ensuring that it still offers similar security and decentralization guarantees. Layer 1 handles security, decentralization and data availability, while Optimism’s Layer 2 handles scaling.

During the process, no changes are made to Layer 1. In a way, Optimism takes away the burden of financial transactions from Ethereum. The removal of this load from Ethereum’s blockchain removes network congestion.

Here are just a few of the benefits that Optimism crypto offers:

  • Scalability: Optimism can achieve a 10–100x improvement in scalability, depending on the nature of the transaction.

  • Reduced Fee: Optimism can greatly reduce the overall cost of the transaction. Its rolling technology (discussed in the next section) combines multiple transaction into a single transaction, which helps reduce the transaction cost.

  • Security: As Optimism’s Layer 2 builds up on top of Ethereum, transactions are settled on the Ethereum Mainnet, allowing users to benefit from the security and decentralized environment of the Ethereum blockchain.
  • Enhanced User Experience: New projects using Optimism Layer 2 scaling solutions benefit from lower fee, faster transactions — and better overall user experience.

How Does Optimism Work?

Optimism uses rollups to process transactions in batches, which helps reduce gas fees and network congestion. Rollups can help users save up to 100 times the gas fee, compared to the Layer 1 protocol.

The rollup technology used by Optimism crypto bundles up hundreds of transactions on Ethereum’s Layer 1 into a single transaction. Since there are multiple transactions in a bundle, the gas fee is distributed among all the users. While the rollup is executed on Optimism’s Layer 2, the transaction data is posted to Ethereum’s Layer 1 for processing.

Optimistic rollups are "optimistic" in the sense that every transaction is assumed to be valid on Optimism’s Layer 2, and no computations are performed. If the system suspects fraud, it runs fraud-proofing to verify the transaction.

Optimistic Rollups vs. ZK-Rollups

There are mainly two types of rollup solutions on Ethereum: Optimistic rollups and ZK-Rollups. While both rollups move the transactions off-chain to process the data, the method used to verify the transactions makes them different.

Optimistic rollups assume that all transactions are valid, so it doesn’t perform heavy calculations on Layer 2. Instead, the rollup moves the batch to Layer 1 without verifying the validity of a transaction, which leads to a significant improvement in scalability.

If anyone suspects a fraudulent transaction, they can challenge the validity of the batch within a week. Optimistic rollups then run a fraud-proof, which verifies information using the data on Layer 1.

On the other end of the spectrum are ZK-Rollups, which are slightly different as they generate a validity proof for every bundle after moving them to Layer 2. The validity proof is then transferred back to Layer 1 serving as a proxy for the corresponding bundle. Since validation occurs on Optimism’s Layer 2, it helps reduce gas prices and validation times at Layer 1.

Each of these technologies has certain benefits and drawbacks. For instance, an Optimistic rollup is preferred for executing smart contracts. In contrast, a ZK-Rollup is an evolving technology that’s mainly relegated to performing simple transactions.

On the downside, the withdrawal period for Optimistic technology is longer than for ZK-Rollups because Optimistic rollups have a "challenge period" to deal with. In contrast, ZK-Rollups have very fast withdrawal times, which makes them an ideal solution for apps which require simple payments.

Optimism vs. Other ETH Layer 2 Scaling Solutions

Irrespective of their size, computer networks can only manage a limited amount of traffic. Once a network becomes popular, it's bound to get congested.

Various Layer 2 networks help Ethereum deal with its scalability issue. These Layer 2 networks attach themselves to Ethereum's core, the Layer 1 chain. Optimism is one such scaling solution, but it's not the only one. 

Some of these solutions are called sidechains, because they act like roads connecting to the main Ethereum network.

Following is an overview of the three most popular ETH Layer 2 scaling solutions.

Optimism vs. Arbitrum

Arbitrum is an Optimistic rollup technology similar to that of Optimism. It's often said that Arbitrum tweaked the source code of Optimism crypto to develop a distinct Layer 2 scalability solution.

The major difference between Optimism and Arbitrum is how they manage fraud-proofs. Whereas Optimism crypto uses a single-round fraud-proof, Arbitrum utilizes multiple rounds. 

Using a single-round proof, Optimism provides instant verification, as it relies on Ethereum’s Layer 1 to complete the transaction. The transaction is almost instantaneous, but the approach suffers from a higher gas cost. In contrast, Arbitrum offers a fine-combing approach to carrying out transactions mainly on Layer 2. Due to a multi-round fraud-proof, the validation takes time, but this helps reduce the gas fee.

Optimism vs. Polygon

Polygon is a DeFi scaling solution. Unlike Optimism, it's a sidechain, not a Layer 2 solution. Sidechains run parallel to Layer 1, and they have a built-in security framework that doesn’t rely on Ethereum. This is quite different from Optimism, which relies on Layer 1 of Ethereum for the security of transactions.

Polygon uses the same virtual machine used by Ethereum, so it's easy to outsource smart contracts to Polygon. The Polygon model relies on MATIC tokens to secure the Polygon Network and pay the transaction fee. Therefore, users need to swap Ether for the protocol's native MATIC token.

While the Polygon model has gained significant attention from the crypto community, some users complain about long transfer times, and the reliance on blockchain security in the hands of few actors.

Optimism vs. zkSync

zkSync is a type of ZK-Rollup. The letters “zk” stand for zero knowledge, which means that one party can prove to another party that they possess certain information (i.e., transaction details) without revealing what that information is. To prove the validity, each batch of transactions is sent to an off-chain prover generating a cryptographic proof, known as a SNARK (which stands for Zero-Knowledge Succinct Non-Interactive Argument of Knowledge). The proof is subsequently posted on Layer 1.

Although zkSync and Optimism are somewhat similar, zkSync uses a somewhat complex methodology to validate a batch of transactions. The model is not conducive to building DApps, and different ZK-Rollup applications can't interact with each other on Layer 2. On a positive note, zkSync ensures both a much higher throughput and lower cost without sacrificing security.

Optimism Airdrop

An airdrop is a marketing technique used by a project’s management team to raise awareness about a relatively new cryptocurrency. As a result, token holders and potential contributors get free tokens “dropped” to their wallets. While the number of tokens distributed to wallets may differ depending on various contributing factors, these airdrop events remain very popular among crypto enthusiasts who wait patiently to receive such rewards.

In April 2002, Optimism announced that it would drop 215 million OP tokens to different wallets. According to Dune Analytics, 248,699 wallets were eligible for freebies, which translates to approximately 865 free OP tokens per wallet. Early adopters of the token were given priority over others. Regular Ethereum users also benefited from the airdrop. These users included DAO voters, multi-sig signers and bridge users.

The first airdrop resulted in a frenzy, leading to overwhelming demand and degraded performance for more than three and a half hours. As users raced to collect their rewards, many complained about delayed settlements, failed transactions and inaccessible tokens.

Controversies continued to cripple the first phase of Optimism’s crypto airdrop, as the moderator of the project's Discord channel claimed that some users had managed to access OP tokens before the official launch. These users directly interacted with the smart contract to claim their OP tokens. Presumably, many of these users dumped the OP token at the launch, resulting in the price plummeting by more than 50%.

Two months after the first airdrop, community users presented a proposal to exclude anyone who dumped their OP tokens for profit from the next airdrop. The argument is based on the assumption that dumping OP tokens is a profit-taking strategy that runs counter to the philosophy of both the Optimism Collective and its public image.

As of now, the management has acknowledged the problems faced by the community. While there is no official announcement about the next phase of the Optimism crypto airdrop, users are already anticipating the next event. If you're interested, here’s a breakdown of how OP tokens will be distributed over the next five years.

OP Tokenomics

The first airdrop represented only 5% of the overall 4.29 billion OP tokens.

According to the official website, OP token allocations are divided into five categories. The lion's share of OP tokens is allocated to the Ecosystem Fund, which represents one-fourth of the entire share.

Below is a brief summation of the overall circulating supply:

  • 25% — Ecosystem Fund: Reserved for funding various community projects within the Optimism ecosystem. Of these funds, the governance, partner and seed funds will receive a 5.4% share. The remaining 8.8% is unallocated and will be decided by community members.

  • 20% — Retroactive Public Goods Funding: This fund will be used to reward projects based upon their impact for the public good. This impact is calculated by a mechanism which tries to adequately and reliably reward public goods. Since there’s no fixed payout for a given period, the Optimism Foundation can tap into these funds anytime.

  • 19% — User Airdrops: Airdrops are used to reward active contributors, token holders and other stakeholders. The first airdrop rewarded the public with a 5% share of the overall token supply. The amount of OP tokens distributed to a wallet is based upon strict distribution criteria. The remaining 14% of tokens are reserved for future airdrops.

  • 19% — Core Contributors: A hefty amount of tokens will be distributed to core team members. These people are the force behind the Optimism Collective initiative. The fund will acknowledge their efforts by gradually allocating a specific amount to each team member. It's worth noting that each allocation comes with a lockup period.

  • 17% — Sugar Xaddies (Project Investors): Investors continue to play a big role in supporting the project. Accordingly, 17% of the total allocation is reserved for such investors. Any funding to investors will also include a lockup period.

Of the 4.29 billion OP tokens already distributed, the token supply will inflate at a rate of 2% per year. This mainly includes all tokens except those which are reserved for core contributions and Sugar Xaddies. After the first year, token holders will vote to determine the Foundation’s annual OP distribution budget.

The Optimism Foundation seeks to utilize all the tokens by the end of Year Four. However, the actual unlocked amount depends on various contributing factors.

Is OP a Good Investment?

Optimism is a relatively new Layer 2 solution for Ethereum. However, it has the potential to play a critical role in the development of the Ethereum blockchain going forward. The Optimism crypto project stands out because it remedies the scalability issue, which has hindered the progress of the world's most popular blockchain.

Using innovative rollup technology, Optimism helps “optimize” the speed of transactions, and lowers transaction costs. Unlike other rollup technologies and sidechains, it also offers a desirable solution for developers to deploy their apps using the Optimism Virtual Machine (OVM). Using OVM, developers will only need to make slight tweaks to the code of smart contracts before their apps can be easily deployed.

The philosophy behind the project is as unique as its technology: Upholding Ethereum’s values by producing infrastructure that promotes the growth and sustainability of public goods. The initiative also boasts an experienced team, a large community of followers, well-known investors and a clear road map.

OP Price Prediction

If you're an avid crypto investor, OP is a good long-term asset to consider. While the market is saturated with similar technologies, Layer 2 solutions, and sidechains, Optimism crypto offers an innovative solution that's already been embraced by large companies.

Both experts and technical systems predict an upward trajectory for OP in the future. Conservative estimates suggest that the price of OP will reach $1 by the year 2023. Based on 30% of Bitcoin's previous average growth pattern, the price is likely to quadruple within three years. If we are to see another cryptocurrency surge, the price of OP tokens can even touch $77 by 2025.

How to Invest in OP

For Bybit users, you’ll be glad to know our platform offers the opportunity to buy and trade OP tokens.

To buy OP tokens, click on Buy Crypto at the top of the Bybit official website. Select Express from the drop-down menu. Subsequently, you can purchase BTC, ETH, USDT or another stablecoin from the menu. Once the desired cryptocurrency is in your wallet, just go to the trading platform to swap it for an OP token at the existing exchange rate.

The Bottom Line

Optimism Collective is a unique project that’s creating the rails for highly impactful projects that don’t have a business model to succeed. It has the backing of a good team, a large community, and a pool of dedicated investors. There's little doubt that another bull run will see OP reach its target of becoming the dominant Layer 2 scaling solution for Ethereum much sooner than expected.