What is Optimism – Optimistic rollups, tokenomics and problems with the airdrop

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Ethereum has been the second largest cryptocurrency for quite some time. Without any doubt it is also the most recognised and used cryptocurrency that has a huge amount of community supporting it, right after Bitcoin. Moreover, it also has huge amounts of tokens, networks or projects that are built on it. And while this might seem like a positive, it also comes with a cost and that is transaction fees.

Transaction fees on Ethereum are one of the highest there are in the crypto world. This is especially due to the huge amounts of transactions and lack of scalability solutions. Yet, one of those solutions has seen a pretty decent rise in popularity in the recent months and that is Optimism.

What is Optimism?

Optimism is one of the new layer-2 scaling solutions that is supposed to help Ethereum to lower its transaction fees and thus the overall pressure on the network. It uses a technology called Optimistic rollups, which bundles large amounts of transaction data into smaller batches that are easier to “digest.” This should deliver not only much lower cost of transactions, but also much higher speed of them.

Total Value Locked in Optimism (USD), Source: defillama.com

Optimism is one of many layer-2 solutions that is currently trying to help Ethereum with its gas fees, scalability and congestion. In fact, after Arbitrum, which is the biggest layer-2 solution built on Ethereum and currently has a total locked value of around 1.3 billion dollars,  Optimism is currently the second biggest layer-2 solution with a locked value of about 355 million dollars.

Optimism was created in June 2019, with the first testnet being released in October 2019. Yet, the alpha mainnet was launched in January 2021. By October 2021 the version that was compatible with Ethereum Virtual Machine was released, with the open mainnet launching only 2 months after that in December 2021.

Interesting metrics of Optimism connected to its usecase, Source: optimism.io

What are Optimistic rollups?  

The technology used (Optimistic rollups) was cleverly named due to the way it works. It rolls up or bundles the data of vast numbers of transactions all together and posts it as one transaction on layer-1, the Ethereum mainnet. These bundled transactions can be anything from payments, to token swaps or even NFT mints.

The logic of this bundling is pretty simple: to lower the transaction costs. The fees are split to all the users whose transactions were rolled up together. Thus, instead of all the users having to pay high transaction fees for hundreds of transactions, they essentially pay one fee that is distributed across those who were involved. That is a pretty neat and convenient way of not only lowering the costs, but also the pressure on the network.

But why is it called an Optimistic rollup? They are called optimistic because all the transactions are assumed to be valid until they are proven false, something very similar to innocent until proven guilty. While all the transactions are initially taken as valid, there is a time window during which the potentially invalid transactions can be challenged.

This would be done through something called “fraud proof.” Optimism reimburses the gas that is needed to run the computations connected to the fraud proofs, hence, incentivising the users to protect the network from invalid or malicious transactions.  

How to use Optimism

First of all, it needs to be mentioned that Ethereum and Optimism are technologically fairly similar, which means that any ERC-20 token that is compliant with the Ethereum token standards can be used on Optimism.

Using Optimism is similar to other layer-2 solutions or platform projects built on Ethereum. While it can be complex for some, for others, more experienced cryptocurrency users, Optimism can hardly be seen as somewhat difficult to use. For starters, the user will have to deposit their ETH or any other ERC-20 token (as Optimism can process both), to the Optimism token bridge, to allow for transactions of ETH on Optimism.

Depositing ETH or ERC-20 token to Optimism, Source: beincrypto.com

The deposit of tokens would need to come through Optimism Gateway, which should be connected to a Web3 wallet such as MetaMask and should not take longer than half hour. Yet, there is still the need to check for the Optimistic rollup, which is a week-long time window, during which the funds can be challenged.

But once they are deposited to Optimism, they can be easily used within all the supported decentralised applications. These can be all the dapps that support Ethereum. For instance, Uniswap will allow users to trade via Optimism to cut the price of the fees, once the users select Optimism as a preferred network to use.

Tokenomics of Optimism

While the mainnet of Optimism was released in December 2021, the Optimism token, OP, was not released until very recently. The OP token was only released on the 31st of May as an airdrop. About 231,000 addresses were eligible to claim more than 214 million OP tokens for free solely based on a history snapshot. During this first airdrop, only 5% of the total supply was released. The total supply is about 4.25 billion tokens, which means that more than 95% of the tokens have yet to hit the market.

This airdrop was only introduced in April 2022 in this blog post. Yet, Optimism has revealed that it is only the first of many. But the team decided not to disclose any other terms and days of when the following airdrops should happen. This is commonly known practice in the cryptoworld, since it incentivises the users to start using the network as soon as possible.

Distribution of the total supply of Optimism token, Source: optimism.mirror.xyz

It is expected that Optimism will release the next airdrop date with eligibility criteria for those who want to participate. Yet, it can be expected that this will be based on snapshots from the past, meaning that at the time of the announcement of the airdrop the users will not be able to participate.

For instance, imagine that at the end of June, Optimism releases a statement that new airdrops will happen at the beginning of July. Yet, they will specify that the participants in this airdrop will be only those, who had their wallets, addresses or made transactions before 15th of June. 

Thus, the snapshot will be back dated to 15th of June, giving no chance for anyone new to participate and take advantage of the recent announcement. This clearly incentivizes the users to join the network as soon as possible, so that they are eligible for the next airdrop, should they be interested.

Problems with the first airdrop

While it may look very interesting and encouraging to receive “free money” in the form of the airdrop just for using some network, it needs to be clearly stated that these tokens are of a high risk. And this was very visible during the first airdrop of Optimism, which did not go according to plans at all.

During the initial airdrop, some of the users were able to claim tokens earlier than others. This gave them a chance to dump those tokens into the market with lower supply, thus selling at the best possible prices. Those who were then late and received the tokens after the price was falling due to the selling pressure from the side of “early-receivers” decided to cut their losses and sell. This created even more selling pressure and congested the network, bringing another weakness of Optimism to the light.

The Optimism team admitted that they made mistakes and in retrospect showed where they happened and what they will do in the future to minimise those mistakes. They for instance showed that they were not ready to face such a volume, a mistake that would push the price of the token to its all time lows on May 31st.

Nevertheless, the team behind the token is dedicated to erase this mistake by improving their airdropping protocol with the next iterations of airdrops.

Conclusion

Adjusting for all the possible information connected to Optimism that are publicly available, one must clearly see that this token is very similar to others in that it tries to solve scalability problems connected to Ethereum. So far, it seems that Optimism is doing a pretty decent job with solving those problems, but it comes with its costs. Thus, as always, investors in this industry need to be very careful about where they put their money and how they adjust for the risks connected to their investments.

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