The Optimistic Rollups

In our last blog post, we covered what Ethereum rollups are, why they are important, and the two major types of rollup that are currently being developed: optimistic and zero-knowledge rollups.

In this blog post, we are going to explore the three most important optimistic rollups and some of the differences between them. These are:

  • Arbitrum
  • Optimism
  • Base

Arbitrum

When one hears “Arbitrum”, what is almost always being referred to is “Arbitrum One”, the first rollup launched into production by Offchain Labs. This numerical nomenclature is used because “Arbitrum Two”, “Arbitrum Three”, and so on will be launched in the future to absorb overflow demand for blockspace once Arbitrum One is saturated.

Arbitrum One is the most popular optimistic rollup (OR) by total-value-locked (TVL) and user count, despite launching later than its main competitor, Optimism. This lead can be explained by several factors:

1.) Unlike Optimism, Arbitrum only very recently released a governance token, $ARB. Like moths to a flame, rumors of a future airdrop attracted a constant stream of speculative users, developers, and capital to Arbitrum One in the runup to it actually happening

2.) Transaction fees on Arbitrum One are usually considerably lower than those on Optimism

3.) Before becoming a DAO, Arbitrum was run by a corporate entity with a proficient business development team that attracted more developers and dApps than Optimism did

4.) Arbitrum One stopped gatekeeping developers with a whitelisting process roughly six months before Optimism, creating initial momentum that it has managed to maintain over Optimism to this day

Looking at the charts below, we can see that Arbitrum has managed to consistently outperform its main competitor, Optimism, in revenue, transaction count, active users, and TVL even before issuing the $ARB governance token. After the $ARB token airdrop on March 23rd, Arbitrum increased its lead on all of these metrics dramatically. In fact, Arbitrum’s daily transaction count has recently begun surpassing that of Ethereum L1!

Source: https://dune.com/blockworks_research/l2-comparison-dashboard, as of 20.04.2023

Source: https://dune.com/blockworks_research/l2-comparison-dashboard, as of 20.04.2023

Source: https://dune.com/blockworks_research/l2-comparison-dashboard, as of 20.04.2023


Source: https://defillama.com/chain/Arbitrum, as of 26.03.2023


Source: https://defillama.com/chain/Optimism, as of 26.03.2023

 

Arbitrum Nova

Arbitrum Nova is the second rollup launched into production by Offchain Labs, upon which Reddit’s Community Point system is built. Reddit is one of the largest communities on the Internet; the magnitude of this business development victory for Arbitrum is hard to overstate. Nova’s focus is mostly on games and social projects, but more generally dApps with high throughput requirements.

Whereas Arbitrum One puts all transaction data on Ethereum all the time, Nova makes use of a data availability committee (DAC), an invitation-only group of institutions running servers, that promises to store transaction data off-chain and deliver it on demand. This model obviates the need to record all L2 transaction data on the L1 chain; it suffices to simply record the hash of a transaction batch on the L1, saving the largest cost of running a rollup. This also means that withdrawals to L1 can be executed immediately, as soon as the committee vouches for them.

The DAC is currently comprised of these members:

  • Consensys
  • Google Cloud
  • Offchain Labs
  • P2P
  • Quicknode
  • Reddit
  • Opensea

Arbitrum Nova’s TVL is still tiny, but its growth is accelerating.


Source: https://defillama.com/chain/Arbitrum%20Nova, as of 26.03.2023

 

Arbitrum Orbit

Arbitrum Orbit is a development framework for creating layer 3 (L3) rollups that settle transactions to Arbitrum L2 rollups. Unlike additional Arbitrum L2s, these L3 rollups do not require permission from $ARB token holders to be launched. Each L3 theoretically scales the transaction throughput of the hosting L2 tenfold and any Arbitrum L2 can host an unlimited number of L3s, meaning that Arbitrum Orbit enables limitless scalability for Arbitrum rollups. It remains to be seen how this pans out in practice.

 

Optimism

Optimism is the second major OR in production and has some key differences to Arbitrum. Most of these differences are rather technical details that revolve around how fraud proofs are handled and how their virtual machines are configured; they will not be covered in this blog post.

$OP is Optimism’s governance token and is used to incentivize development and growth of Optimism, which is governed by a DAO with an unusual bicameral system. The DAO consists of a “Citizens’ House” and a “Token House”. Instead of providing grants upfront to initiatives with uncertain outcomes, operational revenue from the transaction sequencer and a portion of the $OP token supply are retroactively allocated to reward groups and individuals who are deemed to have done the most to promote the growth of Optimism; this concept is called Retroactive Public Goods funding (RetroPGF). Currently, RetroPGF allocation decisions are the sole remit of the Citizens’ House; the Token House votes on all other DAO decisions.

Source: http://community.optimism.io

Optimism is also much more focused on positive-sum cooperation with other teams and encourages others to fork their codebase. They push a vision of an Ethereum L2 “Superchain”, a group of interoperable, modular rollups built on the same Optimism codebase which share security and cooperate with each other to jointly scale Ethereum as a single “Superchain”, instead of directly competing with each other. This model is a form of horizontal scaling, akin to a cluster of computers dividing up tasks to process in parallel for efficiency.

The Superchain vision scored a big win recently with the announcement that Coinbase would leverage the Optimism codebase to create its own rollup, named “Base”, that will kick a portion of its revenue back to the Optimism Collective to support further development. Their close cooperation is evidenced by things like the creation of a shared token list that standardizes the properties of bridged tokens to be uniform across all Superchain rollups.

It is hard to say whether Optimism or Arbitrum have the better growth philosophy, but the eventual success of Base will make it much easier to predict whether Optimism can catch up to Arbitrum in the long run.

 

Base

On February 23rd, Coinbase announced that it would be launching its own optimistic rollup, named “Base”. Despite the blog post stating that they have “no plans” to issue a token, it did not explicitly rule out the possibility and the idea of “progressive decentralization” is mentioned, which is usually taken to mean that a governance token will eventually be introduced. Choosing to name the rollup “Base” further indicates that a $BASE governance token is planned to accompany the $COIN traditional equity. $COIN$BASE, get it?

Even if they do not plan to launch a $BASE token, it would be foolish of Coinbase to explicitly rule out a potential airdrop and deter the speculative TVL and users from their chain that would boost their financial metrics and equity valuation.

According to their announcement, it will be possible to on-ramp capital to Base directly from the Coinbase exchange, Ethereum mainnet, and other compatible chains. The stated philosophy of Base is to be a bridge across ecosystems, not an island. They want users to start on Base and then bridge to other L2s and L1s (interestingly, Solana is specifically mentioned in the blog post).

Base’s stated aim is to be decentralized, permissionless, and open to anyone, not just Coinbase developers. In practice, we should expect to see Coinbase curate which apps are allowed to deploy on Base until they deem it sufficiently decentralized to allow anyone to deploy apps without fearing regulatory scrutiny.

Coinbase also worked with Optimism and the Ethereum Foundation on Ethereum Improvement Proposal (EIP) 4844, which will result in reduced fees and more transaction throughput for rollups. Supposedly, it reduces the L2 transaction fees by 10-100x and lays the groundwork for full sharding, which will bring another 10-100x decrease in cost for Ethereum transactions

There will also be a Base Ecosystem Fund that will invest in and provide support for pre-seed to seed stage projects that agree to launch on Base, meaning that there will be several investment opportunities exclusive to the Base ecosystem to keep an eye on.

Base is still in testnet but should be launched on mainnet soon after the Optimism Bedrock upgrade occurs, which is currently tentatively planned to occur in the beginning of June 2023.

 

Conclusion

Hopefully you now have a good understanding of the three most important optimistic rollups and the differences between them. In the next blog post, we will cover the three most important zero knowledge rollups in similar detail before concluding this series. If you have any comments or questions, feel free to e-mail w.bailey@nyala.de.

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