Arbitrum vs. Optimism: Who Is Winning?
Everything You Need To Know about the ETH Layer 2 War in 15-pages
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With the largest public crypto company Coinbase partnering with Layer 2 project, Optimism, does competitor Arbitrum - which launched later and to date has no token - stand a chance?
This week on Blockcrunch VIP, we will break down:
Technical comparison of Optimism and Arbitrum
Key growth drivers in both ecosystems
Quantitative view of current traction
Upcoming catalysts for both Optimism and Arbitrum
Let’s dive in.
Overview
The quest to scale Ethereum continues with a rollup-centric roadmap first laid out in late 2020 and further solidified post-Merge by Vitalik. With full-scale zk-rollups still some ways off, the two leading Layer 2s today are Optimistic rollups: Arbitrum and Optimism.
The data speaks for itself: together, Arbitrum and Optimism have captured over 80% of the total Layer 2 TVL (L2BEAT includes staked TVL), with Arbitrum alone commanding more than 51% of the market share. Not only that, in the last six months, both Arbitrum and Optimism have achieved a meteoric rise in user growth, experiencing 218% and 316% increases in daily active users (DAU) respectively. In terms of daily transactions, Arbitrum had an impressive growth of 865%, while daily transactions on Optimism grew by 139%. While Arbitrum does not yet have a token, Optimism’s token OP has performed remarkably well this year and as of the time of writing is up ~180% since the turn of the year.
This report aims to answer some burning questions: Is this growth sustainable? Which L2 will have an edge over the other in the long term? To begin, we will first assess the fundamental difference in designs between the two protocols.
Optimistic Rollups In a Nutshell
First, some background. Rollups refer to an L2 scaling solution in which transactions are processed off-chain before being aggregated into batches to be “rolled up” into a single transaction on the L1 network.
There are two main types of rollups in existence today – optimistic rollups (ORUs) and zero-knowledge rollups (zkRUs). The main difference between ORUs and zkRUs lies in their verification method. ORUs take an optimistic view and assume all transactions are valid, limiting on-chain computation by eliminating the need to verify batched transactions. If a fraudulent transaction is suspected, a verifier can initiate a challenge by submitting a fraud proof. On the other hand, zkRUs generate validity proofs to immediately prove if transactions are valid or not.
We’ll leave zkRUs for another day (or you can refer to our layman-friendly Aztec memo here) – let’s continue down the ORU lane.
Sequencers
ORUs utilize a sequencer to process transactions. Sequencers aggregate a number of sequential transactions on L2 and combine them into a single batch, before posting it onto the L1 network. At the time of writing, the sequencers on both Arbitrum and Optimism are operated by their respective teams, thus are centralized. This means that users have to trust the centralized sequencers to not frontrun transactions. However, both teams have indicated that they will eventually decentralize sequencer operations.
Fraud Proofs
Because ORUs allow transactions to be published without verification, there needs to be a safety mechanism in place. This is where fraud proofs come into play. ORUs specify a challenge window of one week in which anyone can dispute a state transition. If a verifier disputes a block, a fraud proof computation is initiated.
By using this mechanism, ORUs can achieve trustless finality, ensuring that any transactions on the ORU are guaranteed and, if valid, will be confirmed eventually.It is important to note that both Arbitrum and Optimism do not yet have a fully deployed AND permissionless fraud proof system yet.
Arbitrum has a fully deployed fraud proof system, but the validator (verifier) set is still permissioned as it requires validators to be whitelisted. On the other hand, Optimism still has no fraud proof system launched, meaning that users currently have to trust the sequencer to post correct data to L1.
Summary of Key Differences
If you take home anything from the above, it should be this: rollups provide users and developers with scalability, quicker transactions, and cheaper fees, while retaining the same security that Ethereum provides, leading to an overall improvement in user experience (UX). Next, let’s move on to assessing the current development in both ecosystems.
Ecosystem Analysis
Protocols on both Arbitrum and Optimism can broadly be categorized into two main groups: native protocols and non-native protocols.
Native protocols are those that were launched on Arbitrum or Optimism
Non-native protocols are those that existed on Ethereum before being ported over, such as Uniswap, Sushiswap, and Aave
TVL Breakdown
To better understand the distribution of Total Value Locked (TVL) between the two chains, let's examine the TVL breakdown of the different sectors.
Arbitrum's TVL is largely dominated by the DEX and derivatives sectors, with around $923 million (51.8%) of the chain's TVL in these two sectors alone. This is followed by Lending (8.9%), Cross Chain, or bridging protocols (8,5%), Yield (4.2%), and Options (4%), among others. The distribution of TVL between native and non-native protocols is relatively balanced, with native protocols taking the majority and accounting for 53.7% of chain TVL.
On the other hand, Optimism's TVL is starkly different in both sector dominance and the distribution of TVL between native and non-native protocols. DEXs have the most significant share, with 41.7% of TVL, followed by Derivatives (16.8%) and Lending (13.9%).
Unlike on Arbitrum, non-native protocols on Optimism account for an overwhelming majority with 70.7% of TVL.
GMX
The main reason for the difference in sector dominance between the two chains is GMX, so much so that DefiLlama’s Arbitrum dashboard tracks GMX’s dominance. For the unfamiliar, GMX is a decentralized perpetual exchange that has taken DeFi by storm since its inception.
At the time of writing, GMX has over $490 million in TVL, facilitated more than $83 billion in trading volume, and collected over $120 million in fees on Arbitrum. In comparison, the leading derivatives DEX on Optimism, Synthetix (SNX), has around $135 million in TVL, facilitated $4.5 billion of trading volume, and collected around $21 million in fees (Data: GMX, SNX).
What could be the reason that GMX has gained so much more traction and usage compared to its competitors? A big factor has been the novel GLP mechanism employed by GMX. GLP is a pool of assets that act as liquidity for leveraged trading on GMX. Users pool together whitelisted assets into the pool and receive the GLP token to represent their share of the pool.
In return, GLP holders earn escrowed GMX (esGMX) rewards and 70% of protocol fees denominated in ETH. GMX token stakers also receive esGMX rewards and 30% of protocol fees.
This revenue-sharing mechanism generates a flywheel of real yield for token holders and stakers, increasing protocol liquidity and facilitating zero-price impact trading, which itself has been a draw for large traders who wish to execute with zero slippage. At the time of writing, GLP holders earn rewards at 53.6% APR (pure yield, no incentives) while GMX staking is at 15.8% APR.
The success of GMX is also compounded by the fact that multiple protocols on Arbitrum adopting its liquidity and staking mechanisms have been successful in gaining traction, such as Gains Trade (GNS), Buffer Finance (BFR), and Vela Exchange (VELA), among others.
For context, GNS is the second largest derivatives protocol behind GMX, with $30 million in TVL, while Buffer Finance is an exotic options trading platform with $2 million in TVL, which grew by 300% overnight when they increased the cap for BLP deposits, showing significant demand. Vela Exchange is one of the latest derivatives trading platforms on Arbitrum, and at the time of writing have recently launched their beta app and is already the top protocol by contract activity.
Yield tokens from these protocols open the door to other DeFi products, such as yield compounders, delta-neutral strategies, etc. Protocols have begun building yield vaults and lending markets on top of GLP and other similar yield tokens, as they have shown to be sustainable. Together, GMX and Co. are beginning to form an ecosystem of sustainable yield protocols on Arbitrum and are one of the main drivers of Arbitrum’s success so far.
Native Protocols
On the DEX front, Arbitrum’s leading DEX protocols are Zyberswap and Camelot, with $103.8 million and $62.7 million TVL respectively, while Optimism’s Velodrome has a TVL of $213.4 million. In terms of the derivatives and lending sectors, Arbitrum-native protocols have the edge here with GMX and Radiant commanding impressive TVLs of $494.5 million and $76.2 million respectively.
GMX’s impressive TVL in comparison to its counterpart on Optimism and even that of protocols in other sectors on Arbitrum itself points to how successful it has been, as we discussed above. While some readers may speculate that GMX activity is spurred on by users’ expectations of future airdrops from Arbitrum’s yet unlaunched token, it is also unlikely that users would trade more than $80 billion on GMX and incur over $120 million in fees purely airdrops.
Arbitrum: Native vs Non-Native Protocols
On Arbitrum, familiar names from Ethereum – Uniswap, Sushiswap, Curve, and Balancer launched in September 2021. Camelot and Zyberswap are two new native DEXs that launched in November 2022 and January 2023 respectively. Despite being the new kids on the block, they have both quickly grown in TVL. However, Uniswap and Sushiswap remain the dominant DEXs in terms of trading volume over the last 30 days, with $3.4 billion and $1.09 billion respectively.
Camelot (GRAIL) in particular is interesting because it has positioned itself as the main launchpad of Arbitrum and is facilitating liquidity for new protocols. Their launchpad raise mechanics allow for fair launch and make use of social marketing by incentivizing users via referral links. At the time of writing, Camelot TVL has grown by 246% in the last month and has already raised more than $10 million on its launchpad.
In the lending sector we compare Radiant (RDNT), an Arbitrum-native protocol that launched in July 2022, with Aave, a household name in DeFi from Ethereum that launched on Arbitrum in March 2022. Although a new entrant, Radiant has 1.22x the TVL and an impressive 6.22x the borrowed volume of Aave. Radiant’s edge over Aave seems to be the result of two key differentiating factors: tokenomics model and cross-chain composability. The protocol incentivizes user participation by allowing them to earn sustainable yield through lending and liquidity provision. At the time of writing, the protocol has already paid out more than $5 million in fees to RDNT lockers.
Furthermore, Radiant’s cross-chain protocol will utilize Layer Zero to allow users to be able to deposit collateral on one network, and borrow on another seamlessly. This is unlike Aave v3, which in its present form only allows lending and borrowing within the same chain, despite the protocol being deployed on multiple chains.
Optimism: Native vs Non-Native Protocols
On Optimism, DEX TVL is dominated by Velodrome, an Optimism-native DEX. At $213.4 million TVL at the time of writing, Velodrome has nearly 1.5x the TVL of both Uniswap and Curve combined, who have $56.3 million and $90.2 million TVL respectively. However, as was the case on Arbitrum, Uniswap is still the dominant DEX in terms of trading volume despite its lower TVL. This could be due to the fact that most users prefer the familiarity of trading on Uniswap.
When it comes to TVL in the lending sector, Aave outperforms Optimism-native Sonne, with a TVL of $90.2 million compared to Sonne's $20.9 million. However, Sonne takes the lead in terms of borrowed value or loans originated, with $29 million compared to Aave's $24.8 million.
Quantitative Look at Ecosystem Traction
While TVL is often used to compare protocols and ecosystems, user metrics like daily active users (DAU) and daily transactions are fairer and more important metrics to gauge a protocol or ecosystem’s growth.
Over the last six months, both Arbitrum and Optimism have achieved a meteoric rise in user growth, experiencing 218% and 316% increases in daily active users (DAU) respectively. In terms of daily transactions, Arbitrum had an impressive growth of 865%, while daily transactions on Optimism grew by 139%.
While these numbers show that both Arbitrum and Optimism are growing ecosystems, it would be helpful to have some additional context. By overlaying key events onto a historical chart of both DAU and daily transactions of both chains, we can determine the effectiveness of the business development and marketing strategies of both teams.
Key Growth Drivers
Arbitrum
21/06/2022 – Odyssey Started
29/06/2022 – Odyssey Paused (due to heavy load on network)
31/08/2022 – Nitro Upgrade
We can observe here that the Odyssey resulted in an explosion of user (wallet) growth and network activity – such that Offchain Labs was forced to pause the Odyssey due to the as the resulting activity was essentially DDoS-ing the network.
With the Nitro upgrade, the team successfully upgraded the network to increase throughput as well as reduce fees by up to 70%. While the Odyssey is yet to be restarted, this upgrade sets the stage for the possibility of it returning. The network has since continued to grow and is sustaining activity much higher than that generated by the Odyssey. Despite a drop in activity early this year, Arbitrum saw an uptick on the back of rumors of a token airdrop coming this month. It will be interesting to see if user growth and network activity continues its upward trajectory once the airdrop has been claimed.
Optimism
31/05/2022 – OP Airdrop 1
20/09/2022 – OP Quests Season 1 Start
17/01/2023 – OP Quests Season 1 End
09/02/2023 – OP Airdrop 2
The first airdrop of the OP token resulted in a jump in DAU and daily transactions as users rushed to claim the airdrop. Network activity after that began to range before Season 1 of the OP Quests began, which resulted in a growth of 253% and 166% in DAU and daily transactions respectively. Interestingly, network activity saw a sharp drop of around 50% immediately after the quests ended, nearing pre-quest levels. This indicates that while the quests were successful in incentivizing activity growth, they failed to result in significant long-term retention of users or sustained increase in network activity.
Closing Thoughts
Metrics
Arbitrum appears to outperform Optimism in every metric except for fees captured. This may be due to the fact that fees on Arbitrum are cheaper, seeing that Arbitrum has had more transactions than Optimism in the same period. However, this may change with Optimism’s upcoming Bedrock upgrade, as we discuss below. Arbitrum’s TVL lead is partly due to the popularity of GMX, along with protocols that have replicated its yield token (GLP) model, and the subsequent protocols created on top of these yield tokens.
Decentralization Roadmap & Functioning Fraud Proofs
While both networks have shown significant growth, they still carry some centralization and security risks. As we covered above, both chains are still in the midst of fully decentralizing their networks and at the time of writing, Arbitrum is ahead of Optimism in this respect. Arbitrum has a fully functional fraud proof system, albeit a permissioned one with nine whitelisted validators. Optimism on the other hand is still working on its interactive fraud proof mechanism. Neither Arbitrum nor Optimism have decentralized sequencers, which means that users must rely on the good faith of both teams.
Upcoming Catalysts
Arbitrum
ARBI Token & Odyssey Restart
While Optimism has already undergone two airdrops for its token, Arbitrum has neither released nor announced its token yet. Additionally, Odyssey quests have been on hold since August of last year, which makes Arbitrum's growth quite impressive. In the weeks leading up to this article, rumors about the Arbitrum token began to circulate, and they may have contributed to the notable increases in total value locked (TVL) and user activity, as well as the price discovery for many protocols native to Arbitrum. Thus, a potential token airdrop and the restart of the Arbitrum Odyssey may be huge catalysts for the network’s growth to continue.
Arbitrum Nova
Whereas Arbitrum One (of which this article has referred to as Arbitrum) is a rollup that posts calldata to Ethereum, Arbitrum Nova is a sidechain that posts calldata to a Data Availability Committee (DAC). Since fees on rollups are determined by calldata fees on Ethereum, this brings down costs on Nova by up to 90%. However, the trade-off is lower security, as protocols posting calldata to the Committee have to assume that the member holding their data is acting in good faith. Nevertheless, Nova has a fallback mechanism in which the chain can default back to an Arbitrum rollup (that posts calldata to Ethereum) should the Committee lose consensus. This makes Nova a good fit for gaming, social, and other verticals with high-bandwidth requirements. While still nascent, recent developments such as Opensea and TreasureDAO marketplaces launching on Nova provide some key infrastructure for future projects to launch, thus adding to the growth of the Arbitrum ecosystem.
Stylus Upgrade
The Nitro upgrade in August 2022 made Arbitrum EVM-equivalent, closing the gap between the L1 and L2 chains in terms of developer experience. With the upcoming Stylus upgrade, Arbitrum seeks to introduce “EVM+”, in which contracts written in Rust, C, and C++ will be supported and be able to synchronously interact with existing Solidity-based contracts – all while maintaining EVM-equivalency! Not only that, but Rust-based dApps perform over an order of a magnitude faster than their Solidity and Vyper counterparts.
This is a huge achievement, and opens the door to a very large pool of developers. A report by SlashData shows that C/C++ has over 12 million developers and is the 4th largest developer community behind JavaScript, Python, and Java. Rust on the other hand is the fastest-growing developer community, having more than doubled in size in the past two years with over 2.8 million developers as of Q3 2022.
Among other technical improvements, the Stylus upgrade also improves network performance by 10x (again) and reduces network fees. While there is no specific date for the upgrade yet, the team has indicated that Stylus will go live in 2023.
Optimism
OP Stack
The OP Stack is the next phase of Optimism’s scalability architecture. It aims to be a modular, scalable, and interoperable blueprint for blockchains of all kinds, not just ORUs. This makes the OP stack highly flexible and does not limit it to just ORUs, placing it in a great position to play a part in the future of blockchain scalability, which looks to be increasingly modular.
Optimism Bedrock
The next upgrade in the Optimism roadmap, Bedrock is the first ever official release of the OP stack. As mentioned previously, this will introduce modularity, allowing Optimism and other protocols utilizing Bedrock to separate the consensus, execution, and data availability layers as necessary. This future-proofs the chain as it also means that Optimsm could even be a zk-rollup in the future, should the need arise!
Bedrock also comes with a number of performance improvements, such as significantly reduced transaction fees, optimized deposits and withdrawals, and up to 50x faster synching between nodes. With these improvements, Optimsm aims to be the cheapest and fastest rollup in the space.
Superchain
Coinbase’s announcement of Base, its new L2 chain built using the OP Stack came with the announcement of the Superchain, which will be a network of rollups built using the OP Stack. This new ecosystem of interoperable chains will be modular and have shared sequencing, proving, and bridging infrastructure.
While there will be no direct value accrual to OP, Base will contribute 20% of its sequencer fees to the OP Collective for public goods funding. Furthermore, Base will launch with Coinbase’s 110 million users easily integrated and on boarded onto Base, which will in turn form a bridge to the wider Ethereum ecosystem.
Other Catalysts
EIP-4844
One of the highly-anticipated protocol upgrades is EIP-4844, which many refer to as proto-danksharding. This upgrade introduces a new transaction type called blob transactions, which are essentially “blob” carrying transactions. Blobs are persisted in beacon nodes instead of the execution layer, enabling the execution layer to run in parallel. Compared to data on the execution level that lasts forever, data in the “blobspace” persists only for around 2 weeks, which is available long enough for L2 actors to retrieve and store off-chain (not on the Ethereum L1).
At a high-level, this is a critical upgrade that provides a separate fee market for blobs posted on L1 by L2 chains, significantly reducing transaction costs for L2 users by orders of magnitude.
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