Rollups will be the centerpiece of 2023.
Why? Scalability has been a bone in the throat for Ethereum. It is trying to remove these bones without hurting itself by creating a rollup-centric roadmap. How so?
With the rise of layer 2 solution, Ethereum has no choice but to ship the Sharding. The Sharding will enable the Ethereum scale with the help of Layer 2.
Layer 2s come in different forms. However, Ethereum is capitalizing on rollups, as they help reduce gas fees by up to 100x. In this piece, you'll get an in-depth comparison of two rollup protocols—Arbitrum and Optimism.
Before we dive into exploring the interiors of this content, let's start from the foundation.
Rollups are a way to make blockchain technology faster and more efficient.
Rollups take heavy liftings off the main blockchain and move it to a separate layer. They allow more transactions to be processed in less time and with lower fees.
Think of rollups as shortcuts.
The leading blockchain is still there to keep the network secure, but the rollup layer helps to handle all the extra transactions.
There are two types of rollups, and they are:
Optimistic rollups give transactions the benefit of the doubt. It assumes all transactions to be valid unless proven otherwise.
The first time transactions are processed, it is considered to be honest and transparent. But the second time, it is processed on the main chain using fault proofs to detect and validate transactions.
ZK rollups are a way to increase the number of transactions processed on a blockchain while keeping the amount of data stored on the blockchain itself relatively small.
This is done using a technique called "zero-knowledge" to compress the transactions. All these are done without compromising the blockchain's security or privacy.
ZK rollups use validity proofs, while Optimistic rollups use fault proofs
Vitalik Buterin believes optimistic rollups will benefit general EVM computation in the short term hence why we should focus on them.
You may ask, "what role do optimistic rollups play in the Ethereum ecosystem?"
The primary role of Optimistic rollup is to ensure that Ethereum adequately handles the blockchain trilemma—decentralization, security, and scalability. It leverages Ethereum's decentralization and security to offer a more scalable network.
Rollups generally will enable Ethereum to process transactions 1000x faster, ridiculing the future need for Eth 2. Optimistic rollups specifically will be great for Ethereum in the short term. As Buterin has said, it is incredible for general Ethereum Virtual Machine (EVM) computation.
Optimistic roll ups have less complex technology, and developers can easily maneuver their way around it.
They are also compatible with—if not similar to—EVMs. With this, developers save time transferring existing smart contracts without altering the code base.
Also, using optimistic roll ups gives developers easy access to all of Ethereum's infrastructure, such as code libraries, programming languages, testing tools, and many more.
Safe to say, developers will likely build with optimistic rollups in the meantime, bringing massive adoption to the space.
Ethereum recognizes three optimistic rollup protocols, and they include Optimism, Arbitrum, and Boba Network. The first two are famous walls in this space. Hence, in this piece, you'll get a feel of what they taste like.
Now, let's lick these walls dry.
Optimism is a layer-2 optimistic rollup protocol that uses single round fault proofs to validate transactions on the Ethereum blockchain. Optimism has its virtual machine, but it is incompatible with the EVM. Hence, it maximizes EVM.
On the other corner, Arbitrum.
Arbitrum is currently dominating the market. Unlike Optimism, it uses multiple round fault proofs and runs its virtual machine—Arbitrum Virtual Machine—without EVM.
Optimism and Arbitrum are optimistic rollups, so they share certain similarities, including:
Fault Proofs
Fault proofs are only deployed when invalid blocks are discovered. Hence, they help reduce the computational resources needed by the Ethereum network.
Interoperability
These protocols enable cross-chain bridges as tokens can move quickly from Layer 1 to Layer 2
Immediate Completion
No need for multiple confirmations, as transactions are verified upon block creation. This immediate completion can lead to high throughput and low latency.
If these optimistic rollups Layer 2 protocols share certain features, why is there a need for two protocols?
It's simple. Optimism is built differently from Arbitrum, and viz-a-viz.
Let's explore some of those differences.
Without differences, there will be no competition.
Some visible differences between these two optimistic rollups protocols include:
Even though Optimism and Arbitrum use fault proofs for validating transactions, they work differently. Optimism uses single round fault proofs, while its competitor uses multiple round fault proofs. This implies that Optimism relies on layer 1 to process transactions. It results in faster transaction processing time but at the expense of cost—Layer 1 has high gas fees.
Arbitrum's multiple round fault proofs imply that it uses an interactive game-like process between a prover and a sequencer to verify the information. This Layer 2 relies less on layer 1 computations leading to slower transactions but cheaper fees.
Overall, multiple round fault proof is more advanced and effective than single round fault proof.
Optimism and Arbitrum are compatible with the Ethereum Virtual Machine (EVM). However, Optimism uses the EVM in conjunction with its Optimism Virtual Machine (OVM), while Arbitrum uses its Arbitrum Virtual Machine (AVM).
The OVM has limited compatibility with the EVM and only works with the Solidity coding language. This means that DApps built on other EVM-compatible languages, such as Vyper or LLLL, would need to be rewritten in Solidity to be compatible with Optimism. Therefore, Optimism becomes less attractive to developers.
AVM is better optimized for EVM coding languages and doesn’t face the same compatibility issues as the OVM. This means that Arbitrum is more attractive to developers because applications don’t have to be rewritten to be translated from the EVM to the AVM. Although this requires DApps from EVM to be translated to AVM, the process is automatic.
For example, Vyper contracts can be run on the AVM without additional work. Arbitrum also supports other EVM-compatible languages such as Solidity, Flint, YUL+, LLLL, and others.
The benefit is too significant to ignore, as Arbitrum has seen more contract deployments in recent months, especially in November 2022.
It will also surprise you that Optimism has picked up the pace in the past two months, and both are at a similar level currently. Why is this so? Let's look into other insights!
Optimism, in combination with Arbitrum, has surpassed Ethereum's transaction volume.
Arbitrum generates 71.6% more USD inflow than Optimism. Regardless of the high transaction volume, Latsan's dashboard reveal that fewer people are using Arbitrum compared to Optimism.
Optimism has received more than 2x the transaction count of Arbitrum in the last two months and more new users.
The next question on your mind would be, who is killing it? Optimism with more users? Or Arbitrum with more transaction volume?
Arbitrum users seem to use the blockchain more frequently than Optimism users, as Arbitrum has more users that have completed more than ten transactions. Arbitrum also has fewer failed transactions than optimism.
Hence, it is evident that the rise in OP activity can be attributed to the optimism quests, as the spike in DAU in September coincides with the quest launch, and the activity has also decreased in the past few days after the end of the quest.
Can we then say that Arbitrum is killing it? Not so fast!
Community is a big deal in web3. It helps a protocol grow and scale. How do Optimism and Arbitrum compare on the community fronts?
We mentioned earlier that Optimism has 2x more users than Arbitrum. Before digging into their community sizes, it is easy to presume that Optimism would have a larger community.
Bursting the bubble, Arbitrum wins in terms of sizing. Arbitrum has 463k followers and 282K members on Twitter and Discord. However, Optimism only manages a slightly lesser 396K Twitter followers and 68K discord members.
What worries me is that even though Optimism is like the older brother—as it was developed first—it still struggles to come close to Arbitrum's community. Can we again say that the quests organized by Optimism helped them up their protocol's users? It had a hand. So, my tip for web3 marketers is that quests are an excellent way to grow users and interactions on a protocol.
If Optimism is leveling down on quests, what is Arbitrum doing?
In June 2022, Arbitrum organized the Arbitrum Odyssey, an 8-week-long NFT event to engage community members. Arbitrum collaborated with two NFT artists, Ratwell and Sugoi. The event involves incentivizing participants who complete on-chain tasks.
There was also the Arbitrum Odyssey NFT collection that did over 10X from its entry price. Currently, there have been mixed sentiments over the utilities of NFTs.
Are diamond hands just holding for the sake of it? Is there something to come? Not sure because Arbitrum has not made its roadmap public (more on this later).
Another thing we've noticed is that, even though the Arbitrum Odyssey has ended, transaction volume did not plummet, unlike Optimism's quests.
One core reason for Layer 2 is cheaper gas fees. So far, Arbitrum and Optimism have had significantly lesser gas fees compared to Ethereum.
Arbitrum is also slightly cheaper than Optimism. We can attribute this to the Nitro Upgrade on the Arbitrum network in August 2022. This upgrade has enabled Arbitrum to charge lower gas fees and save more Das Das? than Optimism in the last six months.
Let's talk more about upgrades!
It is agreeable that upgrades are essential to improve a network. In August 2022, Arbitrum upgraded its technology stack with Nitro upgrade. On January 13, 2023, Arbitrum also announced a new Nitro release. The latest release was to enable developers to have a clear understanding of its block finality.
Unlike Arbitrum, Optimism has just announced a network upgrade—Bedrock. Its present technology stack dates back to November 2021. But you can expect a major upgrade soon as Optimism has just completed its bedrock updates to testnet.
These upgrades are designed to improve speed while cutting down transaction costs.
Any other thing to compare? Yes 👇👇👇
Tokenonics and governance are where Arbitrum gets whipped in the a$$ by Optimism. It leads the way as it airdropped its recently launched $OP tokens to active community members in June 2022.
$OP is a governance token that enables holders to make decisions for the community. Optimism will use the token's emissions and revenue generated to fund community projects for the common good.
Alongside the $OP token, the Optimsm Collective and the Optimism Foundation were also created.
The Optimism Collective is a DAO split into the Citizen's house and the Token's house. The Citizen's house distributes retroactive public goods funding, and members hold Soulbound NFTs, while the Tokens house votes on decisions in the DAO while holding the $OP tokens.
The Optimism Foundation is a group of former members of the Optimism PBC team. The foundation members will be the managers of the collective and be in charge of governance experiments.
Unlike Optimism, Arbitrum only has its community members clamoring for a token. Maybe because they expect an airdrop similar to Optimism's. Regardless, even without a token to incentivize community members, there has been a large transaction volume and repeat users on the Arbitrum network.
Even on the governance front, Arbitrum is still centralized, as Offchain Labs leads its activities.
Let's see with NFTs.
Arbitrum and Optimism are killing it in the DeFi space. Even Optimism DeFi transactions alone surpass that of Ethereum. But can we say the same thing for the NFT space?
Sadly, no.
Even though there has been a substantial growth of ERC 721 transactions on these Layer 2 networks, we still can't compare them to other Layer 1 alts.
When comparing Optimism NFTs toe-to-toe with Arbitrums, there is a clear winner.
According to Zonic insights, Optimism has a 6.7 million circulated supply of ERC 721 NFTs against the cumulative 5.9 million on Arbitrum one and 270 thousand on Arbitrum Nova.
However, NFT scan revealed that there are more unique NFT holder addresses on Arbitrum, as it surpasses Optimism with roughly 200 thousand holder addresses. Arbitrum has over 2x more NFT transfers and 6x more volume than Optimism.
Is that all? Wait! Let's look at their developmental roadmap.
Optimism has highlighted its action steps on developing its network. Its plans till 2024 include next gen fault proof, decentralized sequencer, multi proofs, and many more.
Arbitrum, on the other hand, has no publicly visible roadmap. Hence, it is hard to conclude what to expect next from the community.
No doubt, Optimism and Arbitrum have grown tremendously in the past few months. However, they have succeeded in different ways. Plus, even if these projects are optimistic rollups, they differ from one to another.
When looking at these two optimistic rollups, my personal favorite is Arbitrum. However, it is yet to have a token or decentralized governance.
That was it. But not all on Optimistic rollups. Check Nitro.