Base completely binds Optimism with shared income to open up a new paradigm in the industry.

Is it a win-win situation to exchange 1.18 billion OP for a permanent income of 2.5%?

Original author: Azuma

On August 25th, Optimism and Base jointly announced a governance and revenue-sharing agreement, which stipulates different governance cooperation models between Optimism and Base in the short and long term, as well as the economic interaction between the two parties.

If the relationship between Optimism and Base was previously limited to the latter using the technology stack of the former (OP Stack), which was a kind of soft cooperation, then from today onwards, the two parties will be deeply bound in terms of governance and income, and can even be regarded as “one family” under the same ecosystem.

Governance

First, let’s talk about governance. Since Optimism designed a relatively complete governance system when issuing OP, this part mainly concerns Base, which does not have governance tokens (it was previously stated that it will not issue tokens).

In terms of specific governance forms, there will also be different cooperation models between the two parties in the short and long term.

First, let’s talk about the short term. The upgrade of the current Base network depends on a 2/2 multisig contract, and the two signature permissions of the contract are controlled by Optimism and Base respectively. Both parties will take control in case of emergency or after Optimism makes governance decisions regarding the upgrade.

In simple terms, although this form also appears to be a joint decision between the two parties in terms of results, it will depend more on the willingness of cooperation between the two parties. If there is a disagreement between the two parties (although the possibility is very low), the 2/2 multisig cannot be unified, and the upgrade of Base will also be stalled.

In the long run, Base, as one of the “superchains” that adopts the OP Stack, will be more tightly bound to Optimism through the “Law of Chains” governance framework proposed by Optimism recently.

The so-called “Law of Chains” refers to a governance framework that aims to unify the management of all “superchains” (including OP Mainnet, Base, and other OP Stack blockchains). This framework is planned to be implemented in early 2024.

According to the agreement between Optimism and Base, after the “Law of Chains” is implemented, both parties will transfer the multisig governance permissions to a security council composed of independent community members distributed globally. At that time, this council will not only be responsible for the upgrade of Base, but also for the upgrade of OP Mainnet and other OP Stack blockchains.

On the other hand, since the governance of Base will depend entirely on Optimism in the future, it will also have a part of the permissions in the governance of the entire council. In this regard, Optimism will give Base a certain amount of OP shares (the income aspect will be discussed in detail below), allowing Base to participate in the governance of the council. However, considering the restrictions, it is also stipulated that this voting power should not exceed 9% of the total voting power.

Income Aspect

Compared to the abstract governance aspect, the collaboration between the two parties in the income aspect is more intuitive.

According to the agreement, Base will pay Optimism either 2.5% of the revenue (total revenue on Layer 2) or 15% of the profit (total revenue minus the cost of submitting data to Layer 1), whichever is higher; in return, Base can receive up to “118 million OP” (approximately 2.75% of the total supply) in the next six years, enabling it to exercise some of the permissions mentioned in the governance aspect earlier.

In simple terms, there will be a direct economic exchange between the two parties. Optimism needs to pay Base up to 118 million OP over six years, and Base needs to provide ongoing revenue sharing to Optimism.

As for who pays more and who pays less, let’s do some simple calculations here. 118 million OP is currently worth about $183 million; and according to data statistics from Dune, Base has generated approximately $2.6 million in sorter revenue since its launch (including the lead time). Due to the lack of profit data, we can estimate that Base needs to share $780,000 with Optimism annually (2.5% of 260 * 12).

However, it should be noted that due to the early stage of the Base ecosystem and the fact that the network currently only has sorters operated by the team, both of these factors will have a certain impact on Base’s future revenue situation.

From Optimism’s perspective, although the absolute number of OP chips it pays currently far exceeds the revenue sharing feedback from Base, based on the positive expectations that Base will continue to expand in the future, there is still considerable potential for increased returns from this “transaction” in the long run.

I personally tend to recognize the foresight of this “transaction”. As an inappropriate example, before the income sharing agreement was established, the relationship between Optimism and Base was similar to the relationship between Cosmos and Terra. Terra adopted the Cosmos SDK issuance (here it is OP Stack), and by relying on the “magic” of UST, it made a lot of money before 2022, but none of these captured values could be fed back to Cosmos and ATOM.

With the income from Base, Optimism will receive a continuous inflow of revenue, which is obviously beneficial for the project’s fundamentals.

Some OP holders may have concerns about the potential selling pressure of 118 million OP, but this does not seem to be a major concern.

  • First, Base has mentioned that this part of the OP will mainly be used for governance purposes (but there is no mention of a hard constraint);

  • Second, this part of the OP will be paid over six years, not all at once;

  • Third, this part of the OP will be paid by the Optimism Foundation to incentivize the development of the Optimism ecosystem.In other words, these coins are meant to be spent. What OP holders should be concerned about is not whether this money will be spent, but whether it is worth spending. I tend to think that it is worth exchanging the highest 2.75% of OP supply for a permanent strong support.

As for Base, this OP income also helps to solve the financial issues of Base operations (including developer rewards, ecosystem incentives, business expansion, etc.). Previously, Base’s operations relied heavily on Coinbase’s implicit support, but due to compliance considerations (recent voices have claimed that Coinbase’s relationship with Base may involve violations), Coinbase is likely to make a clear separation from Base in terms of operations in the future, and Base will also need to have its own financial resources.

From this perspective, this “transaction” may be a win-win choice that meets the needs of both parties.

“Super Chain” Blueprint, Unveiled

Overall, the cooperation agreement announced today by Optimism and Base signifies that their collaboration has entered a whole new level. The closeness of this partnership is difficult to find a similar case in the industry’s history.

Looking towards the longer-term future, by establishing a deep integration with one of the most important “super chains,” Base, Optimism’s “super chain” blueprint is finally unveiled: “Law of Chains” co-governance – Optimism expands the ecosystem and promotes decentralization through the distribution of OP – ecosystem entities will continuously contribute back to the parent body using the income, benefiting the parent body’s fundamentals – attracting more entities… This positive cycle may become a flywheel to accelerate the expansion of the Optimism ecosystem.

Today’s Base is just the beginning. Zora, Celo, PGN, Debank… in the future, we may see more projects joining this process.

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