Year to date up more than 200%, Optimism high valuation is justified?

Title: The State of Optimism

Original article by Ben Giove, Bankless

aididiaojp.eth, Foresight News

The Layer 2 wars are heating up, and Bankless is digging deeper into on-chain metrics to figure out who the winners are. Last week we looked at Arbitrum, and now let's look at one of its closest competitors: Optimism.

Optimism and Arbitrum, both optimistic rollup schemes, have become one of Ethereum's leading scaling solutions.

The Layer 2 concept has been around for a long time, but in recent months it has received renewed attention with the emergence of the first rollup Token OP.

OP has been one of the best performing tokens in early 2023, up as much as 227% and up 135% relative to Ethereum. Optimism has a fully tradable market value of $13bn, about the same as Solana.

Source: TradingView

Which begs the question of whether Optimism is justified by high valuations. Do the fundamentals support OP's outperformance? Where does Optimism sit in the highly competitive L2 circuit?

This article will try to answer these questions in three ways:

Key Performance Indicators  

Optimism of ecology DApps 

Upcoming growth catalysts and risk factors

Key performance indicators

TVL

With DeFi TVL currently at $787 million, it is TVL's second ranked Layer 2 behind Arbitrum ($1.39 billion) and the seventh largest blockchain network tracked by DeFi Llama.

Optimism DAA - Source: Artemis

Optimism TVL's percentage of all optimism optimism by value has continued to rise over the past year, from 0.2% to 1.2%. Its share of Layer 2 has also grown substantially, from 13.5 percent to 35.2 percent over the period.

This growth is likely to be driven by the launch of the Governance Token OP in April 2022. Optimism airdropped OP to platform users and was the first of the "Big Four L2" (Arbitrum, StarkWare and ZkSync) to launch a Token, which helped guide liquidity and TVL growth last summer.

user

Optimism saw a significant increase in active addresses in 2022, with total daily active addresses (DAA) increasing 4% in the fourth quarter compared to the first quarter.

Optimism DAA - Source: Artemis

This growth may be attributed to the use of DApps on the web, such as projects in the Synthetix ecosystem, as well as the incentive programs mentioned above.

Delving deeper, we can see that the DAA surged at the end of the year, growing 152.7 percent quarter-on-quarter from the third quarter to the fourth quarter. The surge in users is due in large part to the release of the Optimism Quests campaign, a program similar to Arbitrum Odyssey where users can claim NFT by interacting with DApps on the network.

Now that Optimism Quests have ended, the number of optimistic users appears to be converging to previous levels, with transactions in Q1 2023 down 7.2% sequentially compared to Q4 last year.

Trading volume

As well as Optimism among its users, the number of optimism deals has soared during 2022, with total volume increasing by 851% in the fourth quarter compared with the first quarter. This growth peaked in the fourth quarter, when transactions increased 144.8 per cent quarter-on-quarter compared to the third quarter.

Optimism Daily Transactions - Source: Artemis

While some of these transaction metrics can be attributed to the use of Dapps, such as active addresses, this number appears to be inflated by Optimism Quests. Trading volumes fell in the first quarter immediately after the completion of Quests on January 18.

Popular DApp

While not as widely used as other L2 ecologies such as Arbitrum, Optimism has an increasing number of Dapps in multiple fields in generic and application-specific rollups built using OP Stack. Let's talk about some of the top delegates:

Velodrome

Velodrome is TVL's largest dApp in the Optimism ecology, valued at $178 million. Velodrome came to the fore in July 2022 after Optimism carried out OP airdrops to pledge veVELO users. VELO holders who pledge veVELO receive NFT as proof of their airdrop interest on the platform.

Velodrome discovered PMFS in protocols such as stablecoin and LSD, hoping to control Token release and incentivize liquidity by rewarding veVELO lockers. Right now, veVEL can offer holders locked in for four years an annualized return of more than 52%.

Although the Solidly AMM architecture is not competitive with Uniswap V3, Velodrome still seems to capture the heart of the community and has carved out a liquidity-centric niche.

Synthetix

Synthetix was not only one of the OG DeFi protocols on Ethereum, but also one of the first major protocols to migrate to L2, deploying on Optimism in July 2021.

There is currently more than $193 million of SNX pledged on Optimism, including $48 million of sUSD supplies. A number of agreements have chosen to build on top of Synthetix to take advantage of sUSD liquidity, including Kwenta, a perpetual contract trading platform, Lyra, an options AMM, and Thales, a Parimutuel market agreement.

Synthetix is facing a number of challenges over the past few months, most notably a sharp decline in fee income, but there are several notable catalysts on the horizon, such as the continued adoption of its V2 perps and the upcoming Synthetix V3.

Lattice

Lattice is a developer building on-chain games based on OP Stack. The OP Stack is a framework for creating custom modular rollups that can be combined with each other if they use the same sequencer.

Lattice has developed two games: OP Craft, a Minecraft-like game that allows users to build in an open world, and the combat game Sky Strife.

OP Craft has only been demonstrated for two weeks at the moment, but both it and Sky Strife, due later in 2023, will run on a custom rollup built entirely using OP Stack. Given the game's appeal in the crypto native world, the Lattice launch can serve as an important entry point to bring users into the Optimism ecosystem.

Future outlook

Growth catalyst

Optimism will have some important catalysts emerging to help sustain its growth in the coming months.

The first of these is an upcoming airdrop of 10 million OP tokens (worth $26.4 million at current prices) in February. The airdrop will be distributed to various stakeholders within the ecosystem through retrospective Public Goods Funds (RPGF), the specifics of which will be decided by a vote of the members of the Optimism Citizen House. Citizen House is one of two governing bodies within Optimism, membership determined through the soulbound NFT.

The OP assigned to the project through RPGF is an important user incentive and helps to channel users and liquidity on the network if the market continues to move higher. In the long run, Optimism using RPGF and experimental governance models can help attract idealistic, long-term oriented developers.

Another catalyst for Optimism on the horizon is Bedrock. Bedrock is a major network upgrade designed to reduce transaction costs and speed up transactions. Bedrock will also help increase Optimism modularity by allowing rollup to more easily transition from optimistic rollup to zk-rollup. A vote to approve Bedrock's operation is currently working its way through the Layer 2 governance process.

A third catalyst for further OP growth is the increasing popularity of OP Stack. Not only are some games built on the OP Craft framework, but other projects are starting to take advantage of the technology. One example is Aevo, a decentralized options trading platform developed by Ribbon. Aevo is an order-book-based options trading platform and will launch its own customised Layer 2 in the next few months.

risk

Optimism has certainly opened up a niche and produced many catalysts for growth. Its ecosystem is growing, but also facing increasing competition.

Optimism of incentives has proven successful in attracting users, liquidity, and application agreements to the Web, but there is reason to be skeptical that they are allocating these incentives in a way that maximizes their long-term ROI.

To date, Optimism has handed out $69.9 million in prizes. Since November 2022, Optimism's TVL share in L2 has decreased from 46.6% to 35.5%.

This loss eventually turned into a gain for Arbitrum, as despite their lack of tokens, their market share increased from 49.8% to 62.1% during that time.

The Optimism vault also contains a large quantity of gunpowder. But Optimism has airdropped a lot of tokens at a time when there are no new users or capital entering the cryptocurrency and the DeFi is not dominating L2.

Competition in the L2 space will intensify as networks such as StarkNet, Fuel, Polygon's zkEVM, Scroll and, of course, Arbitrum go online or launch their own tokens. The strengths of other use cases have yet to be determined, but there are reasons to suspect that Optimism will be challenged.

Competition, however, is not the biggest risk to Optimism today.

As with Arbitrum and other Layer 2, the biggest threat to Optimism's long-term success is the trend toward centralization of the web. According to Layer 2 beat, there are several key centralization trends associated with Optimism, such as not yet supporting proof of fraud, having a centralized collator, scalable contracts, and not proposing blocks in the event of a validator failure.

Most Layer 2 have guardrails in place to minimize the risk of loss of user funds. Although many projects have been in development for years, rollups are still a nascent technology in the grand scheme of things.

However, Optimism about decentralisation as soon as possible, while still safe, is absolutely key, as the loss of funding due to these centralisation trends can have a disastrous impact on the growth prospects of the web.

summary

The Optimism ecosystem is rapidly developing, and there are a number of catalysts on the horizon that could help keep it on a growth trajectory. Although only about 5% of OP supply has been released into circulation and its FDV may swell in the short term, the Optimism optimism usage seems to warrant valuations on par with other non-Ethereum L1 and L2 networks.

The surge in usage can be attributed in large part to incentives that Optimism seeks to use to secure its position as Arbitrum's equivalent of the head L2. However, as competition heats up, it's fair to wonder if Rollup is deploying some ammunition at inopportune times to attract the maximum number of users and liquidity.

Aside from the centralisation problems that exist, the panacea of Optimism may be OP Stack. If OP Stack becomes the standard for developing custom L3, Optimism should benefit greatly from composability between rollups using the framework.

As of today, Optimism does not appear to be the leading Layer 2, but there are still plenty of reasons to be optimistic about its future growth prospects.

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