The Optimistic View

Recently there has been a lot of talk on L2 solutions on Ethereum, a lot of which has been around Optimism. This article will explain Optimism’s concepts and address some of the benefits and challenges associated with these ideas.

What is a L2?

Layer 2 scaling is used to help off-load the transaction volume occurring on the blockchain and allow for more transactions off the Ethereum Mainnet (layer 1). Using layer 2 scaling solutions allows for faster transaction time and improved user experience as it allows for less network congestion and increased transactions per second. Transaction data from outside of the Ethereum Mainnet can then be sent back to the Mainnet which is performed by rollups.

There are many benefits that come from using rollup based layer 2 solutions. As mentioned previously, it dramatically increases the number of transactions per second. On the current Ethereum blockchain, it can handle 15–45 tps, but Layer 2 scaling solutions increase this number to 1000–4000 tps. Increased tps also allow for less network congestion which reduces the transaction fees on the network due to increased availability. Another benefit involves faster transaction confirmation. Since there is less traffic in the main blockchain, transactions can be verified at a fast rate. Smart contracts are implemented in layer 1, which are responsible for deposits, withdrawals, and verifying transactions. Rollups are also considered more secure since they rely on the security of the Ethereum blockchain as well.

It’s important to note that some challenges also exist with rollups. The largest ones are:

  • Composability: difficulties arise when composing a transaction that uses multiple protocols within the same rollup
  • Fractured liquidity: lower liquidity, higher slippage, results in worse trade execution
  • Threat to sidechains: higher fees compared to some other networks and sidechains

Despite these challenges, rollups and layer 2 scaling solutions are still seen as excellent solutions for improving scalability, security, and decentralization of the blockchain.

Optimistic Rollups

One type of rollup is Optimistic rollups which assume that transactions are valid by default (optimistically) and will run fraud-proof computation in the event of a challenge. It allows for minimum data to be sent to layer one, assuming that it is correct. As long as the transaction is valid, the blockchain must take no additional action. However, if the transaction is invalid, it has to identify the transaction, roll back the state, and penalize the sender. To achieve this, a “dispute resolution system” is used to detect fraudulent transactions and prevent the fraudulent user from continuing. The user will have to provide a bond (usually in the form of ETH) to prevent them from spamming the network. This bond will be taken as a penalty should the fraud be detected in layer 1.

There are many pros to using Optimistic Rollups. Anything you can do on layer 1, you can do with optimistic rollups because they are compatible with current Ethereum tech stacks. Also, all transaction data is stored on the later 1 chain, which allows it to be secure and decentralized. The problem with using this form of rollup is that there are longer wait times and withdrawal periods for on-chain transactions due to potential fraud challenges. There is a time window where verifiers run fraud proofs to check on sequencers, so users must wait before withdrawing their funds back to Ethereum. All network participants must send the proof before finalizing a transaction in layer 1.

Sequencers and Verifiers

To better understand how optimism works, we can look at the parties involved, referred to as “Sequencers” and “Verifiers.”

Sequencers are in charge of running the transactions in layer 2 and submitting the transaction data back to layer 1. They execute computation off-chain and publish the transaction data onto a smart contract in layer 1. When the sequencer publishes transactions, there is a period of time when anyone can determine if the transaction is fraudulent.

Verifiers are responsible for fraud proofing by comparing the new transaction data to the one initially submitted by the sequencer. If they determine that the data was indeed fraudulent, they run the computation on-chain, and the smart contract will verify the data. The sequencer who submitted the transaction will then lose their deposit, part of which will be used to reward the verifier. This system incentivizes sequencers to act honestly and verifiers to check on sequencers to ensure that the transactions remain fraud-free.

Overall, this allows sequencers and verifiers to take charge of handling transactions, which places less stress on the main Ethereum blockchain. Gas fees will be dropped due to less competition among the main blockchain. To improve upon the current project, work is being done to decentralize the project to make it more stable and secure, as there is currently worry about there only being one sequencer node being managed internally.

Optimism vs Arbitrum

Many people may have also heard about Arbitrum. Optimism and Arbitrum are both L2s. Ultimately, the key difference is the way these two chains handle proofs and fraud validations. Optimism uses single-round proofs whereas arbitrum uses multi-round fraud proofs. Optimism’s model relies on Eth mainnet to execute the L2 transaction and therefore the FP verification is instant. Further, concerns of a regenesis event and restarting the chain if modifications to consensus are needed are possible on optimism. A little differently, Arbitrum uses a fine-combing approach to FP verification, by focusing on a single point of transaction disagreement. In turn, this can lead to higher network performance, but more gas costs.

It is important to note how both of these chains have yet to launch tokens. With Arbitrum, there are heavy rumors that an Arbitrum airdrop is coming, but nothing is confirmed yet. With Optimism, however, an initial airdrop has already been announced with many more to come. The dynamics around farming these airdrops have been quite interesting, and has spurred many millions of dollars to be bridged over to the ecosystem.

Ultimately, as L2s get more and more popular, Optimism is definitely a chain to keep track of. Their sequential airdrop mechanisms for the OP token was one of the most highly applauded airdrops of this year. As more and more TVL enters, and more and more projects build, we expect Optimism to attract more and more popularity.

Thanks for your time — Juanbug.

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