Leading the market at the beginning of the year, is Optimism overvalued?

Optimism is facing increasingly fierce competition, but maintaining decentralization is the key to its continued growth.
By Ben Giove, Bankless
Compiled by: aididiaojp.eth, Foresight News
The Layer 2 wars are heating up, and Bankless is taking a deep dive into on-chain metrics to determine who is winning. Last week we analyzed Arbitrum, now let’s take a look at its closest competitor: Optimism.
Optimism and Arbitrum are both optimistic rollup solutions, which have become one of Ethereum's leading scaling solutions.
The concept of Layer 2 has existed for a long time, but in recent months, Layer 2 has attracted attention again due to the emergence of the first rollup token OP.
OP has been one of the best performing tokens in early 2023, up 227% and up 135% against Ethereum. Optimism now has a fully liquid market cap of $13 billion, comparable to Solana.
Source: TradingView
This raises some questions, is Optimism’s high valuation justified? Do the fundamentals support OP’s outstanding performance? Where does Optimism stand in the competitive L2 space?
This article will try to answer these questions from three aspects:
Key Performance Indicators
Optimism Ecosystem Main DApps
Upcoming growth catalysts and risk factors
Key Performance Indicators
TVL
Optimism’s DeFi TVL currently stands at $787 million, making it the second-largest Layer 2 by TVL, behind only Arbitrum ($1.39 billion), and the seventh-largest blockchain network tracked by DeFi Llama.
Optimism DAA - Source: Artemis
Optimism’s TVL as a percentage of all public chain locked value has continued to rise over the past year, from 0.2% to 1.2%. Its share of Layer 2 has also grown significantly, from 13.5% to 35.2% during this period.
This growth was likely 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 L2s” (Optimism, Arbitrum, StarkWare, and ZkSync) to launch a token, which helped guide liquidity and TVL growth last summer.
user
Optimism has seen significant growth in active addresses in 2022, with total daily active addresses (DAA) increasing by 4% in Q4 compared to Q1.
Optimism DAA - Source: Artemis
This growth can likely be attributed to the usage of DApps on the network, such as projects in the Synthetix ecosystem, as well as the aforementioned incentive programs.
Digging deeper, we can see that DAA surged towards the end of the year, growing 152.7% quarter-over-quarter from Q3 to Q4. This surge in users was largely due to the launch of the Optimism Quests event, a program similar to Arbitrum Odyssey where users can claim NFTs by interacting with dApps on the network.
Now that Optimism Quests are over, Optimism’s user base appears to be moving closer to previous levels, with transaction volumes down 7.2% quarter-over-quarter in Q1 2023 compared to Q4 last year.
Trading volume
Like its user base, Optimism’s transaction count has skyrocketed during 2022, with total transaction volume in Q4 up 851% compared to Q1. This growth peaked in Q4, with transaction volume up 144.8% quarter-over-quarter compared to Q3.
Optimism Daily Transactions - Source: Artemis
While some of these transaction metrics can be attributed to dApp usage, such as active addresses, this number appears to have been inflated by the Optimism Quests. Transaction volume dropped in the first quarter immediately after the Quests ended on January 18th.
Popular DApps
Although not as widely used as other L2 ecosystems such as Arbitrum, Optimism has a growing number of dApps in multiple fields in general and application-specific rollups built with OP Stack. Let’s talk about some of the popular representatives below:
Velodrome
Velodrome is the dApp with the largest TVL in the Optimism ecosystem, with a value of $178 million. Velodrome began to emerge after Optimism conducted an OP airdrop for users who staked veVELO in July 2022. VELO holders can obtain NFTs after staking veVELO as a certificate to obtain airdrop rights on the platform.
Velodrome discovered PMF from protocols such as stablecoins and LSD, hoping to control token release and incentivize liquidity by rewarding veVELO lockers. Currently, veVEL can provide holders who lock for four years with an annualized return rate of more than 52%.
Although the Solidly AMM architecture is not competitive with Uniswap V3, Velodrome still seems to have captured the heart of the community and carved out a liquidity-centric niche.
Synthetix
Synthetix is ​​not only one of the OG DeFi protocols on Ethereum, but also one of the first major protocols to migrate to L2, deployed on Optimism in July 2021.
There is currently over $193 million of SNX staked on Optimism, including $48 million in sUSD supply. Many protocols have chosen to build projects on Synthetix to take advantage of sUSD liquidity, including perpetual contract exchange Kwenta, options AMM protocol Lyra, and Parimutuel market protocol Thales.
Synthetix has been facing a number of challenges over the past few months, most notably a sharp decline in fee revenue, but there are several notable catalysts on the horizon, such as continued adoption of its V2 perps and the upcoming launch of Synthetix V3.
Lattice
Lattice is a developer building on-chain games based on the OP Stack, 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 where users build in an open world, and Sky Strife, a combat game.
OP Craft is only in demo for two weeks right now, but both it and Sky Strife, which is coming later in 2023, will run on a custom rollup built entirely with the OP Stack. Given the appeal of gaming in the crypto-native world, the launch of Lattice could serve as an important onramp to bring users into the Optimism ecosystem.
Future Outlook
Growth Catalysts
Optimism will have some important catalysts on the horizon that will 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 the Retroactive Public Goods Fund (RPGF), which will be voted on by members of the Optimism Citizen House, one of two governance bodies within Optimism, with membership determined through soulbound NFTs.
OPs allocated to projects through RPGF are an important user incentive and can help to usher in users and liquidity on the network if the market continues to move higher. In the long run, Optimism's use of RPGF and experimental governance models can help attract idealistic and long-term oriented developers to join.
Another catalyst on the horizon for Optimism is Bedrock. Bedrock is a major network upgrade designed to reduce transaction costs and increase transaction speeds. Bedrock will also help improve the modularity of Optimism by allowing rollups to more easily transition from optimistic rollups to zk-rollups. The vote to approve running Bedrock is currently going through the Layer 2 governance process.
The third catalyst that will stimulate further growth of OP is the growing popularity of OP Stack. Not only are some games developed based on the OP Craft framework, other projects are also beginning to leverage the technology, one example being Aevo, a decentralized options exchange developed by Ribbon. Aevo is an order book-based options exchange that will launch its own custom Layer 2 in the coming months.
risk
Optimism has certainly carved out a niche and spawned many growth catalysts. Its ecosystem is growing, but it also faces increasing competition.
Optimism’s incentives have proven successful in attracting users, liquidity, and application protocols to the network, but there is reason to question whether they are allocating these incentives in a way that maximizes their long-term ROI.
To date, Optimism has issued $69.9 million in rewards. Since November 2022, Optimism’s share of TVL in L2 has fallen from 46.6% to 35.5%.
This loss ultimately turned into a gain for Arbitrum, as despite having no tokens, their market share increased from 49.8% to 62.1% during this period.
Optimism still has a lot of gunpowder in its coffers. But Optimism airdropped a lot of tokens when there were no new users or capital entering crypto and when DeFi did not dominate L2.
Competition in the L2 space will intensify as networks like StarkNet, Fuel, Polygon’s zkEVM, Scroll, and of course Arbitrum come online or launch their own tokens. The merits of other use cases have yet to be determined, but there are reasons to suspect that Optimism will face challenges.
However, competition is not the biggest risk facing Optimism today.
Like Arbitrum and other Layer 2s, the biggest threat to Optimism’s long-term success is the centralization trend of the network. According to Layer 2 beat, Optimism has several key centralization trends, such as not yet supporting fraud proofs, having a centralized sequencer, upgradeable contracts, and no mechanism for proposing blocks when validators fail.
Most Layer 2s have guardrails in place to minimize the risk of user funds losing. While many projects have been in development for years, rollups are still an emerging technology in the grand scheme of things.
However, it is absolutely critical that Optimism achieves decentralization as quickly as possible while safely doing so, as the loss of funds caused by these centralization trends could have a catastrophic effect on the network's growth prospects.
summary
The Optimism ecosystem is growing rapidly, with many catalysts on the horizon that could help it stay on its growth trajectory. Although only ~5% of OP supply has been released into circulation, and its FDV may be inflated in the short term, Optimism usage seems to warrant a valuation on par with other non-Ethereum L1 and L2 networks.
The surge in usage can largely be attributed to the incentives that Optimism has managed to leverage to secure its place as a top L2 alongside Arbitrum. However, as competition heats up, it’s reasonable to wonder if Rollups are deploying some ammunition at inopportune times to attract the maximum number of users and liquidity.
Apart from the existing centralization issues, Optimism’s panacea may be OP Stack. If OP Stack becomes the standard for developing custom L3, Optimism should benefit greatly from the composability between rollups using the framework.
As of today, Optimism does not appear to be a leading Layer 2, but there are still many reasons to be optimistic about its future growth prospects.