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Key Takeaways:
- The layer-2 space is highly competitive, with Optimism losing market share to Arbitrum and newer entrants like Base, Blast, and Scroll.
- Optimism has seen notable growth in market cap and Daily Active Users (DAU) in the past year, although it still trails behind its competitors Polygon and Arbitrum.
- Optimism has undergone a rebrand and is now looking beyond its original layer-2 solution, with a mission to build a “superchain” consisting of multiple layer-2 networks.
Optimism was born out of the Plasma Group, a group of researchers who set out to solve one of Ethereum’s greatest challenges: scalability.
Inspired by the brilliant minds of Vitalik Buterin, the co-founder of Ethereum, and Joseph Poon, the mastermind behind Bitcoin’s Lightning Network, the Plasma Group embarked on a journey to build Plasma chains, a promising solution that held the potential to revolutionize transaction speeds on the Ethereum network.
The team soon discovered that Plasma was a powerful force that wasn’t easy to harness. So they regrouped and set their sights on a new horizon: optimistic rollups.
Switching from a non-profit to a for-profit corporation, and raising a fresh $3.5 million in funding, the rebranded Optimism team was, well, optimistic they could make Ethereum faster and cheaper.
Optimism was positioned to become the pioneer of optimistic rollup protocols, and the crypto community waited in anticipation. But in a surprise twist, a delay in Optimism’s release date allowed a competitor, Arbitrum, to steal the spotlight and beat them to market.
Still, the Optimism team forged ahead. Before long, they had secured an impressive $25 million in funding, with the renowned Andreessen Horowitz leading the charge through its a16z crypto venture arm.
Nearly three months after Arbitrum’s dramatic entrance, Optimism finally unveiled its mainnet to the world. The launch ushered in a new era of efficient, low-cost transactions for the Ethereum ecosystem.
It was a hit, as top decentralized applications like Uniswap, Compound, and Aave began to embrace this groundbreaking technology. And so, Optimism’s journey from a research project to a game-changing force in the Ethereum landscape came full circle.
In May 2022, Optimism conducted its first airdrop, distributing OP tokens to early users and contributors. Throughout most of its lifetime, the chain was second only to Arbitrum in terms of TVL, though today it has been surpassed by other L2 solutions like Base, Blast, and Scroll.
Key Fundamental Data
Daily Active Users (DAU): Optimism currently has around 90K DAU, up from approximately 60K a year ago. This represents a significant increase of 50% over that period. However, despite this growth, Optimism’s daily active user numbers are relatively modest compared to its competitors. For instance, Polygon boasts 1.4 million DAU, and Arbitrum has 476K DAU.
Fees and Revenues: Optimism generates revenue primarily through transaction fees paid on the OP Mainnet. These fees are collected by the network's sequencers, who are responsible for ordering transactions and batching them together before submitting them to the Ethereum mainnet. Optimism’s fees are considered reasonable and sustainable as they are significantly lower than those on Ethereum's mainnet.
Market Cap: OP, as of this writing, has a market cap of $1.55 billion. This figure marks a 70% increase from a year ago. However, OP still lags behind its competitors MATIC ($4.15 billion) and ARB ($1.89 billion).
Market Analysis
Problem that it solves: Optimism addresses Ethereum's scalability issues by operating as a layer-2 solution. It uses rollup technology to ease the load on Ethereum by executing transactions off-chain, thereby saving users transaction fees while still benefiting from Ethereum's security.
Customers: Optimism is an Ethereum scaling solution and therefore primarily targets Ethereum users who are looking for cheaper and secure transactions within the ecosystem. General trends in the cryptocurrency market suggest a predominantly male audience, often skewed towards younger, college-educated individuals.
Value creation: Users who adopt Optimism can benefit from having the same experience they would on Ethereum, but faster and at a lower cost.
Market structure: While the layer-2 space is expanding with new projects and technologies emerging, Arbitrum has established itself as the leader in the space, surpassing Optimism significantly in terms of TVL as of the time of this writing.
Market size: The potential market size for layer-2 solutions is significant, with investment firm VanEck projecting a $1 trillion valuation by 2030. The firm believes they are likely to play a big role in Ethereum's widespread adoption, from which they stand to benefit.
Regulatory risks: As one of the leading scaling solutions, Optimism is vulnerable to regulatory scrutiny. Additionally, it operates within the Ethereum ecosystem, which is also susceptible to regulation.
Our analysts rated OP a 3.2 out of 5 for market analysis. Download the complete scorecard here.
Competitive Advantage
Technology/blockchain platform: Optimism is built on Ethereum as a layer-2; its OP token is an ERC-20, which is an industry standard.
Lead time advantage: Optimism does not enjoy a lead time advantage as far as optimistic rollups are concerned, as Arbitrum launched first.
Contacts and networks: Optimism's network seems to be well-developed; in 2023, they appointed Ryan Watts, the experienced former president of Polygon Labs, to be the chief growth lead.
Our analysts rated OP a 3.7 out of 5 for competitive advantage. Download the complete scorecard here.
Management Team
Entrepreneurial team: Optimism has an experienced team featuring members who have been in the industry for years, such as founder Jinglan Wang and Karl Floersch, who have been involved in projects such as Ethereum and ConsenSys.
Industry/technical experience: Optimism's team has been in the industry for over 5 years and has built one of Ethereum's biggest scaling solutions, so it's safe to say they have the required industry experience.
Integrity: Optimism has maintained a clean slate so far, with no major controversies.
Our analysts rated OP a 4 out of 5 for the management team. Download the complete scorecard here.
Token Mechanics
Token required: OP is essential to the project as it was launched to help decentralize the governance of the protocol.
Value added: OP functions like any other governance token and therefore does not add a new type of value.
Decentralized: Optimism is stewarded by the Optimism Foundation; however, it has a structure that facilitates decentralized governance through the project's community, allowing them to propose, discuss, and vote on changes.
Token supply: OP has a total initial supply of 4.2 billion tokens, with a 2% yearly inflation rate.
Public exchange: OP is listed on major exchanges such as Binance, Coinbase, and KuCoin.
MVP: Optimism has been up and running since its mainnet launch in 2021.
Our analysts rated OP a 3.7 out of 5 for token mechanics. Download the complete scorecard here.
User Adoption
Technical Difficulty: Optimism attracts users by offering significantly lower fees compared to Ethereum, allowing them to enjoy the “Ethereum experience” at a reduced cost while still benefiting from Ethereum's security.
Halo Effect: Optimism is backed by heavyweight investors such as Andreessen Horowitz and Paradigm, who have collectively raised over $178M in funding for the project.
Buzz: Optimism generates a good amount of buzz on social media and boasts an above-average following with over 689k followers on Twitter (although it lags behind competitors like Arbitrum) and 164k members on its Discord server.
Our analysts rated OP a 3.6 out of 5 for buzz. Download the complete scorecard here.
Potential Risks
Team: Optimism’s team risk is low; the members have over 5 years of industry experience and have grown the project to be among the top layer-2 solutions for Ethereum. Additionally, we see no significant controversies that could call their integrity into question.
Financial: Optimism has raised over $178 million in funding (with no current visibility into the remaining amount). Additionally, 25% of OP tokens are allocated to maintaining the platform and expanding its ecosystem. There is some risk, if these tokens are not diversified.
Regulatory: While Optimism hasn’t had any encounters with the SEC as of this writing, it is still highly susceptible to regulatory scrutiny primarily due to its size and popularity.
Smart Contract: Optimism's smart contracts have been audited by reputable security firms such as Trail of Bits, ConsenSys Diligence, and OpenZeppelin. The project also maintains an active bug bounty program that offers rewards of up to $2 million for reporting vulnerabilities.
Traction: Optimism has a decent following both off-chain and on-chain, with over 690k followers on Twitter and 82k DAU on its network. However, compared to competitors, Optimism's numbers are relatively low, with Arbitrum and Base significantly ahead.
Behavioral: Some investors may see Optimism as a project with a strong vision and technology, potentially one of the most promising scaling solutions for Ethereum.
Our analysts rated OP a 2.2 out of 5 for risk (Note that for this section lower = better). Download the Risk Scorecard here.
Investor Takeaway
BULL CASE: Optimism has demonstrated a solid growth trajectory and continues to attract users and developers due to its efficient scaling solution for Ethereum. Over the past year, its DAU has increased by 50% and its market cap by 80%, displaying increased engagement and market confidence. Additionally, Optimism has evolved beyond just a layer-2 solution, providing infrastructure used by projects such as Base, indicating its efforts to maintain its position as a key player in Ethereum scaling.
BEAR CASE: However, Optimism still faces some challenges. The layer-2 space is highly competitive, with projects like Arbitrum and newer entrants such as Base and Scroll gaining significant market share and surpassing Optimism in TVL and user engagement. Optimism must adapt to the competitive landscape and bridge the significant gap between itself and these competitors.
Overall, our analysts rated OP 3.7 out of 5 based on its well-positioned potential for future growth and the fierce competition in the space that might hinder its progress. Download the complete scorecard here.
This analysis is to help make you a better-informed investor; it is not financial advice. The future may look different than the past. All investing involves risk; see our investing approach for how we manage risk through diversification. Never invest more than you’re willing to lose, and see losses as learning.
