Optimism vs Arbitrum: The Battle for Ethereum Layer 2 Supremacy
A comparison of: TVL, fundraising, on-chain activity, DeFi ecosystems, and key catalysts for growth.
Optimism and Arbitrum are the most popular rollup solutions that are aiming to make DeFi faster, cheaper, and more accessible.
Both solutions offer unique features, and it will it’s currently one of the most exciting areas of DeFi.
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What are Optimism and Arbitrum?
Optimism and Arbitrum are popular rollup solutions that operate off Ethereum. They batch and process transactions, then publish a compressed version back to Ethereum.
I like to think about it like it’s a big manager receiving thousands of tasks, processing them, and giving back a report to the real big boss - Ethereum.
The modular approach is becoming a prevalent theme in the crypto space, with various innovative solutions emerging to economize transactions compared to traditional Ethereum transactions, ultimately saving time and money for DeFi users
The Battle to Finish First. And Cheaper.
While both Optimism and Arbitrum offer significant advantages over Ethereum, they are still slightly behind Ethereum in terms of daily transactions. However, Arbitrum did surpass ETH for a day, only to fall back lower again.
Optimism's transactions have fallen sharply since Galaxy Quests ended, but received a boost thanks to the partnership with Coinbase’s Base.
This drop could has been attributed to the protocol's permissioned launch, which gave Arbitrum an early lead in transactions and users.
Arbitrum is also leading when it comes to active addresses although the gap is not that wide.
Overall, both L2s are seeing a steady growth in transaction number and very soon L2 solutions will consistently handle more transactions than Ethereum.
Funding and Investors
Optimism and Arbitrum have raised similar funding from top VCs at comparable valuations. Optimism raised $178M at $1.65B, while Arbitrum raised $143M at $1.2B. Notably, Pantera and Coinbase invested in both protocols.
Optimism's token ($OP) trades at a $12.5B fully diluted valuation, which is 7.2x the Series B price.
This valuation is impressive, and OP recently had a good run in price thanks to the partnership with Coinbase’s new Layer 2 solution Base.
Gas Fees and Throughput
Arbitrum is currently leading in terms of cheaper gas fees, despite handling more transactions and having 3x more active wallets.
As you can see, gas fees have fallen by 50% since last year even as transaction number has increased, thanks to technical upgrades to both Layer 2 solutions.
And the fees are set to drop further by 10-100x thanks to EIP-4844 (Proto-Danksharding) upgrade, which is coming sometime in mid-2023.
The low fees was not always the case, as gas fees on Arbitrum exceeded the fees on Ethereum mainnet in May of last year when Arbitrum launched Oddysey campaign and users rushed to farm for a potential airdrop.
However, the Nitro upgrade in August 2022 increased throughput by 7-10 times and reduced gas fees considerably.
Optimism's Major Update: Bedrock
Now is the time for Optimism's major update, scheduled for April.
The Optimism Collective: Bedrock will offer modularity, simplicity, and Ethereum equivalence for L2 solutions. It will enable performance improvements, including transaction costs, throughput boost, and sync speeds.
What's more, Coinbase's new L2 solution, Base, will use Optimism's technology. Additionally, Coinbase is joining Optimism as a core dev to build the open-source OP Stack that powers Optimism.
They both have a shared vision for a superchain - a network of interoperable layer 2 solutions or rollups that gradually increase their interoperability until they form a "mesh" or "superchain" that jointly scales Ethereum.
The idea is that many rollups with significant activity will serve as "hubs" for different ecosystems and create the foundation for a more vibrant developer ecosystem than what would be possible by a single chain alone.
From my understanding, Optimism and Base will share same code-base but their value propositions will be different.
How different? Let’s see~!
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The same vision of 'Hubs' is shared by Arbitrum.
In fact, Arbitrum has 2 networks:
• Arbitrum One for DeFi/NFT
• Arbitrum Nova for gaming/social apps.
In general, and in this blog, ‘Arbitrum’ refers to Arbitrum One as it’s where most of the on-chain activity is concentrated.
Nova enables low fees at the expense of security, thanks to managing data off-chain via an external Data Availability Committee. Te Committee’s members include Offchain Labs, Consenys, Google Cloud, P2P, Quicknode, and Reddit.
What’s more, Reddit chose Arbitrum Nova for it's community points, proving that ‘Hubs’ for specific purposes is already a reality.
"We found Arbitrum optimistic rollups to be the most promising scaling technology for Community Points." - Reddit Post on Scaling Reddit’s Community Points with Arbitrum
Other contenders were Solana, StarkWare and Polygon.
That's a big win for Arbitrum and Ethereum L2s in general.
The DeFi Ecosystem Overview
Below is the most bullish info for Arbitrum and Optimism.
Both L2s has grown considerably faster than any other chain out here. Aribrum’s TVL has grown by 62% to 1.15B in just a month. It overtook Polygon and Avalanche.
Optimism is below the three chains, but has managed to increase TVL by 35% in the same period, reaching $950M USD.
Optimism now has 3.6x more TVL than Solana, while their Fully Diluted Marketcap is same (and OP is 13.5x cheaper than SOL by circulating market cap).
Top dApps Activity on Arbitrum
Arbitrum’s TVL (and transactions) are dominated trading related dApps, with GMX leading the pack. It makes sense, as trading requires fast transactions & cheap fees.
GMX needs no introduction, as it established itself as THE leverage trading place in DeFi.
Oh, if you want, you can get 10% off trading fees on GMX with my referral link :)
ZyberSwap came out of nowhere and overtook Uniswap.
It’s generous farming rewards is the reason with 32% APY for ETH-USDC and 17% for 3pool stablecoin farming.
Yet, it all depends on ZYBER price and, if you learned anything from the DeFi summer times, 1097% APY for a governance token doesn’t last long.
Radiant is a cross-chain lending and borrowing platform on Arbitrum that solves the problem of fragmented liquidity in DeFi. It allows users to deposit any major asset on one chain and borrow against it on another, improving user experience.
Radiant v2 introduces real yield-based incentives, expands to service many chains, and has generated nearly $5.5M USD in fees.
While it has risks, Radiant uses LayerZero to handle cross-chain activities and ensures collaterals are backed by real assets.
Sushi and Vela exchange are the leading dApps in terms of contract activity on Arbitrum, accounting for 14.1% and 13% of the total activity, respectively.
Vela is a derivatives exchange, offering leveraged trading not just for BTC/ETH but also for Euro, Pound Sterling and Japanese Yen.
Top dApps Activity on Optimism
The top 5 dApps on Optimism is different and more diverse with dApps ranging from Dexes to yield aggregator Beefy.
The successful fork of A. Cronje’s Solidly project, Velodrome has seen 132% TVL increase in just a month with VELO token up by 290% in the same period.
Velodrome’s success is part due to taking veTokenomics to a next level.
By staking $VELO for up to 4 years, users get veVELO: an ERC-721 governance token in the form of an NFT, which uses ve(3,3) rebase mechanism.
Holders of veVELO receive 'bribes' for voting on emissions. It proved popular among projects on Optimism, as they can acquire liquidity cheaper than launching their own liquidity mining campaigns.
Synthetix, the OG of Optimism, just launched V3 – a complete rebuild of the protocol from the ground up.
Their mission is to help protocols grow liquidity with "Liquidity as a Service" and launch any derivative asset you want.
The protocol integrates with decentralized oracle networks to create an "API for liquidity," allowing markets to create derivatives collateralized by ERC-20 tokens.
And Synthetix ecosystem itself has been growing with Lyra (options), Kwenta (Perps), Polynomial (structured vaults), and Thales (binary options).
By contract activity, Thirdweb is the leader with 41% share. It offers powerful dev tools and managed infrastructure services that simplify the entire web3 development cycle.
The Future is Fast & Cheap
Both Optimism and Arbitrum are incredibly promising protocols that are already playing a significant role in the future of modular Ethereum. While they are still behind Ethereum in terms of daily transactions, their faster and cheaper transactions make them an attractive option for users.
There are a few bullish developments for both networks:
EIP-4844 will further reduce gas fees
Coinbase's partnership with Optimism will ensure more innovation
Arbitrum's native token launch can boost on-chain activity (depending on how it's launched as many expect an airdrop so transactions are high).
Growth of modular 'Ethereum narrative' will see more development focused on L2s
Ultimately, the competition between them is great for us, users, and all DeFi ecosystem as we get better user experience with each upgrade.
With so much development on Ethereum, I’m less optimistic for other L1s that don’t offer any unique features to their dApps or users.
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I'm on the Arbitrum boat. :P