Is it worth being “optimistic” about the upgrade of Cancun OP?

I. Introduction

Since its inception, the OP Mainnet (formerly Optimism) has been highly regarded and esteemed. This “phoenix” of Ethereum emerged from Ethereum core developers with the goal of solving the most pressing scalability issues facing the ecosystem. However, subsequent developments have been fraught with setbacks. First, in order to rapidly scale Ethereum, OVM 1.0, which is EVM compatible, was deployed on L2. Protocols and applications deployed on L2 during this phase require a significant amount of time for custom development. Therefore, more time was spent on upgrading Ethereum compatibility. Unfortunately, the upgrade to EVM equivalence sacrificed the “optimistic proof” and Optimistic rollup failed to live up to its name. Arbitrum One, also an optimistic rollup solution, was released 9 months after OP Mainnet, but it is more popular and has more users than OP Mainnet.

However, OP Mainnet is currently engaged in a larger narrative and layout. On June 6, 2023, the Bedrock upgrade was completed, laying the foundation for rapid development in the future. The next upgrade will be for the completion of the next generation Fault Proof-Cannon and the Ethereum developer conference in June confirmed the KanKun upgrade with EIP-4844 at its core, which will be completed in the second half of the year. The macro environment is also changing rapidly. First, the SEC sued Binance and Coinbase, causing market panic. Then, top Wall Street traditional financial institutions invested in new US crypto exchanges. When these changes occur, can OP become “optimistic” again? This paper will explore this issue.

II. The Glory of OP Mainnet

• On-chain research: What did DAOs that received ARB airdrops do with the money?
• Deep Dive into the Staking Track: Working Principles, Pros and Cons, and Potential Projects
• Buying $1.2 billion of US bonds – what is MakerDAO’s intention in introducing RWA real assets?

1. Excellent Core Team and Investors

In 2017, Vitalk and Joseph Poon co-authored the paper “Plasma: Scalable Smart Contracts,” which was the earliest solution proposed to solve the Ethereum scalability problem. After the Plasma proposal was put forward, it resonated with three Ethereum core developers, who established the non-profit research group Plasma Group to study scalability issues. The project eventually abandoned Plasma’s architecture and proposed the Optimistic Rollup solution. At the Devcon conference, they demonstrated a decentralized application demo made in collaboration with Uniswap. Shortly thereafter, top VCs such as Blockingradigm came knocking on their door. With the support of Blockingradigm and IDEO, Plasma Group transformed from a non-profit research organization to a for-profit start-up company, and Optimism was officially born (*On June 24, 2023, OP officially named its blockchain network OP Mainnet to distinguish it from other meanings of Optimism).

The team behind the OP Mainnet consists of developers and researchers from the core of Ethereum. Investors include top VCs such as Blockigradigm and A16z, with three rounds of funding totaling $178.5 million and a valuation of $1.65 billion. Coinbase has also joined OP Labs as a core developer and released the L2 network base based on the OP Stack architecture this year, making it a top-tier resource.

Figure: Core team

Figure: Financing information

2. Leading the issuance of the OP token, with a strong narrative token economy and governance vision

The OP Mainnet has two important organizations: OP Labs and Optimism Collective, one responsible for technology and the other for governance. The Optimism Collective’s philosophy is to create a prosperous and valuable ecosystem through benign development of public goods, whose economics use three steps to create value and flywheels.

Figure: Ecosystem-driven flywheel

There are three types of roles in the ecosystem: token holders, contributors and builders, and users and community members. As an L2 project, the main goal of token economics is to provide an efficient, stable, and cheap network ecosystem for ecosystem roles to use. The funds for the OP economy come from the ownership of the OP mainnet and the value of its block space, generating revenue for the demand for OP block space.

In driving the flywheel, the OP Mainnet first builds the network and provides applications, accumulates revenue through a centralized sequencer, and distributes it to The Optimism Foundation for redistribution. Holders can become citizens of the OP Collective if they meet certain conditions and have the right to vote, with foundation funds supporting public product RetroPGF (*RetroPGF-Many of the projects inside are not just OP ecology, but many are ETH ecology projects, and OP’s positioning is symbiotic with ETH) – Public products will airdrop some tokens, and users and builders will also use token OP – Public product use is based on OP’s blockchain network – Sequencer support for the network is required to complete one cycle.

Image: RetroPGF2 funding status

A good token economy is a “nuclear weapon” for accelerating project development. After publishing its token economy, OP launched on June 1, 2022, with an initial total supply of 4,294,967,296 OP tokens. The total supply of tokens will inflate at a rate of 2% per year. 25% of the tokens will be allocated to the ecological fund, 20% to RetroPGF, 19% for user airdrops, 19% for core contributors, and 17% for investors. During the first year of initial issuance, 64% of the tokens will be distributed to the community (*investor and core contributor tokens will be unlocked after one year). OP’s first airdrop gave 5% of the tokens to users (*248,699 addresses), which created some buzz, but the token’s popularity was not as high as that of ARB due to the lack of strong competitors on the ecological project and the absence of airdrops and event nodes.

Image: OP Token Distribution Framework

Image: OP Token Unlocking Plan

OP hopes to bring the blockchain network into the internet by providing an ecological system mainly based on L2 networks and public products, and to promote the construction of public products through token economics. With a strong narrative vision, OP has been fulfilling its commitment, as shown by RetroPGF’s publicity (*in the second phase, projects such as L2BEAT and EIP-4844 have received funding). On June 22nd, RetroPGF announced the launch of the third phase, which will distribute 30 million OP tokens to ecological builders and projects.

Image: Optimism’s Ecological Vision

3. Effectively saves a large amount of on-chain fees

Since the launch of OP Mainnet, the usage fees of Ethereum have been greatly reduced by compressing them to less than 90%. Compared with Arbitrum One, OP Mainnet saved more transaction fees in the early stage, and subsequent technical upgrades of both sides will shorten or further widen the gap in fees.

Image: Transaction fees

Image: Proportion of fees saved compared to Ethereum L1

Three, Problems with OP Mainnet

1. Sorting is done in a centralized way

OP’s network architecture has four important modules: Sequencer, Verifier, CTC (Transaction Chain), and SCC (State Chain). Among them, Sequencer and Verifier are Layer2 nodes with hardware entities, and they basically constitute the node network of Layer2. CTC and SCC are contracts deployed on Ethereum.

Image: 4 important modules in the architecture

Sequencer is a centralized mining pool node that is responsible for local block generation in Layer2 (similar to mining). It decides which transactions can be packaged. A healthy Sequencer needs to be decentralized and will be punished after being successfully challenged by Verifier. However, the current Sequencer node is run by Optimism, which has serious centralization issues and does not conform to the decentralized nature of blockchain networks (Optimism will achieve decentralization of sorting nodes in the 10th milestone of the roadmap).

2. Optimistic (fraudulent) proofs are ineffective, and the verification process can only be assumed to be credible

In a normal Optimistic Rollup solution, the Layer2 Sequencer will first “optimistically” assume that the transaction is valid. After submitting the Rollup to Layer1, there will be a time window (called the challenge period), during which anyone can challenge the transaction result of the rollup by calculating a fraud proof. If the successful proof is fraudulent, the Rollup protocol will re-execute the transaction and update the rolled-up state accordingly.

However, as a sacrifice for upgrading EVM equivalence, the failure proof mechanism of OP Mainnet is temporarily disabled. This means that users of the OP mainnet network currently need to trust the Sequencer node to publish valid state roots to Ethereum. This makes the Optimistic Rollup solution that relies on fraud proofs run for months in a misleading manner because no one can verify whether it is fraudulent. (This issue needs to be resolved in the next Cannon upgrade of the OP Mainnet network)

3. Lack of native popular projects in the ecosystem, and key operating data has a significant gap with Arbitrum One

Within the entire L2 track, Arbitrum One and OP Mainnet are in an absolute leading position, with their market share accounting for more than 83% of the total track. However, OP Mainnet has a large gap with Arbitrum One, with a TVL of only about 40% of Arbitrum One’s.

Figure: TVL of various ecosystems in L2

Looking at the project situation on the two L2 ecosystems respectively, the TVL of projects on Arbitrum One is generally higher than that on OP Mainnet, and there are many highly popular native projects, such as GMX, Radiant, Camelot, Arbdoge AI, and so on. OP Mainnet is slightly inferior in this regard, with fewer popular projects, and the highly ranked Velodrome and Synthetix have a TVL of 50% or even lower than that of the corresponding ranked projects on Arbitrum One.

(*Note: L2BEAT and DefiLlama have different TVL calculation methods. L2BEAT considers all assets locked in Ethereum contracts, including L2 native governance tokens such as ARB and OP, while DefiLlama focuses on assets actively participating in dApps on specific networks. According to the algorithm, the TVL calculation method of the former is larger than that of the latter.)

Figure: TVL of Defi projects on Arbitrum One

Figure: TVL of Defi projects on OP Mainnet

Comparing with other key data, most of the key data on OP Mainnet performs inferior to Arbitrum One. This is because OP lacks high-quality projects that can bring more users and activity, which also makes OP’s market value lower than ARB. From the perspective of the ratio of MC/TVL and FDV/TVL, ARB has more growth advantages than OP. However, in terms of fees, OP Mainnet is relatively lower, thanks to the just completed Bedrock upgrade. In the future, OP Mainnet still has competitive advantages in technical potential and fees, and needs to make efforts in how to attract more and higher-quality projects and users.

Figure: Comparison of ecological key data (*Data cut-off date June 27, 2023, for some data not obtained on the day, the closest day in June is used instead)

Figure: Token data comparison (*Data cut-off date June 27, 2023, TVL calculated using L2BEAT standard)

Regarding token unlocking, tokens for investors and core contributors have already started to unlock, with 0.562% of tokens released regularly, with each release amounting to 24 million OP. This represents a continuous release of OP tokens which may lead to selling pressure.

Figure: Token unlocking schedule

Figure: Next release plan

IV. New Narrative

1. Modular OP Stack Technology Stack

OP Stack is a general-purpose development stack for building L2 blockchain ecosystems. It uses a modular approach to create a series of modules that work together to form coherent and reliable blockchains, providing the code to power the next generation of OP Mainnet architecture. The first official version of OP Stack, Bedrock, was completed in June of this year.

Each layer of OP Stack is built with well-defined APIs, and builders can easily modify existing modules or create their own brand new modules to meet the needs of any application being built, and such an architecture will seamlessly support the OP superchain concept in the future.

Figure: OP Stack architecture

Breaking down the modules from each layer, the bottom layer is the data availability layer, which defines the publishing location of raw inputs based on the OP Stack chain. OP Stack chains can use one or more data availability modules to retrieve their input data. Ethereum DA is currently the most widely used OP Stack data availability module, and it is the foundation of all Layer2 constructions today. When using the Ethereum DA module, source data can be obtained from any information that is accessible from the Ethereum blockchain. This includes Ethereum call data, events, and EIP-4844 data blocks. It is noticeable that EIP-4844 is specifically shown in the architecture diagram, suggesting that OP Stack will have a high adaptability to future releases of EIP-4844.

Above the data availability layer is the sorting layer, which determines how user transactions on the OP stack chain are collected and published to the data availability layer module in use (the Sequencer mentioned above). This layer has high expectations for OP and will play an important role in the future in the super chain, but the current OP Sequencer is still an official operation and a core module that needs urgent optimization.

Derivation Layer:This layer defines how the raw data in the data availability layer is processed to form processed input, mainly responsible for packaging data, such as using the Rollup scheme, giving data to the sorting layer and entering the data availability layer.

Execution layer:Defines the state structure in the OP stack system and defines the state transition function that changes the state. When input is received from the derivation layer through the engine API, a state transition is triggered. Mainly responsible for data conversion between upper and lower layers, such as using the same state representation and conversion as the Ethereum virtual machine.

Settlement layer:Mainly responsible for verification, it is a key link in the consensus mechanism. Once the transaction is published and completed on the corresponding data availability layer, the transaction is also completed on the OP stack chain. Unless the underlying data availability layer is destroyed, it cannot be modified or deleted. Here, the next generation fault proof-Cannon of OP is mentioned, and it also implies that zero-knowledge proofs can be adapted to OP Stack.

Governance Layer:A set of general tools and processes used to manage system configuration, upgrades, and design decisions, such as voting, token governance, etc. This is a relatively abstract layer that includes the management behavior of OP Stack itself, as well as mechanisms and behaviors on third-party chains that may affect other layers of OP Stack.

After this modular technology stack is officially launched, developers can easily abstract various components of the blockchain and modify it by inserting different modules. For example, if an optimistic rollup wants to transform itself into a ZK rollup, just replace its fraudulent proof module with the validity proof module of the settlement layer. This modular architecture provides great imagination space for the development of projects in the OP Mainnet ecosystem at the technical level (* provided that OP completes the critical decentralized sorter and its own Cannon mechanism).

2. Next-generation Fault Proof – Cannon

As a “side effect” of Ethereum’s equivalent upgrade, OP lost its core optimistic proof. According to the roadmap, the next node after Bedrock is completed is to release the next-generation fault-proof Cannon to replace the lost optimistic proof. Now Cannon is still in the construction and testing stage, and there is still a long way to go before it is deployed in the production environment.

According to official documents from Optimism, Cannon will be the world’s first EVM-equivalent fault-proofing method. It does not re-implement EVM on L2, but instead uses the existing EVM and introduces minigeth – the smallest subset of modifications to go-ethereum (*no JSON-RPC, no PoW) – compiled for MIPS. This simple abstraction allows the fault-proofing program to access anything in the L1 or L2 state, with on-chain costs independent of the size of that state. Other L2 implementations, such as the AVM of Arbitrum, would need to implement state management from scratch to achieve this.

Cannon can theoretically achieve the lowest ETH-Calldata gas cost, thanks to OP Mainnet having achieved EVM equivalence, and will further compress L2 transaction costs after Bedrock, an important part of the OP Stack architecture that requires attention as to when the project nodes will land.

Image: OP roadmap

3. Becoming a Platform for All Chains – Superchains

OP expresses a grand narrative of wanting to build superchains based on the architecture of the OP Stack. The concept of a superchain is a horizontally scalable chain network that shares security, communication layers, and open-source development stacks, and can be highly compatible with the explosive growth of L2 and L3.

The superchain relies on a modularized OP Stack technology stack, and other chains can share and feedback into a strengthened, standardized, and modularized code library to become OP-chains without requiring custom adapters for each chain.

Image: OP Superchain Architecture Concept

Multiple op-chains share a sequencer, and a sequencer that generates blocks on multiple chains ensures atomic interactions between these chains. This is feasible because a single entity has the ability to generate blocks on each chain – they do not need to rely on other validators to include these atomic transactions. Joining the Optimism Collective’s shared Sequencer Set as an OP-chain becomes part of the system, and the boundaries between chains disappear.

If OP’s superchain can be pushed forward, the OP token and ecosystem will experience a huge explosion. At that time, the resources of the OP Collective will not only be open to Optimism, but also to many different op-chains that are inserted into the superchain. The superchain ecosystem can collaborate on the infrastructure provided by OP. The concept of a superchain once again demonstrates the resource advantages of OP Mainnet. Coinbase, a leading US crypto exchange, has joined the development of the OP Stack and launched the “OP-chain” base chain. On June 19th, BNB also announced the release of the opBNB testnet based on OP Stack.

Image: opBNB testnet goes live

4. Summary

OP has a grand vision of becoming Ethereum itself at the L2 level, providing standardized, modular, and customizable standards and code to support all chains and protocols in the Ethereum ecosystem, in order to achieve scalability. If OP can complete each node as soon as possible, it will truly become the phoenix of Ethereum. This requires breakthroughs in key technical aspects of the OP Stack, as well as the ability to take a leading position over other competitors to accomplish all of this.

5. Bedrock Upgrade Review

1. What is Bedrock?

Bedrock is the name of the first official version of the OP Stack, and the name of the upgraded official version was completed on June 6th. The Bedrock version mainly includes the core software needed to run the L2 blockchain, and is built to be modular and upgradable, reusing existing Ethereum code as much as possible and coming as close as possible to 100% Ethereum equivalence.

Bedrock mainly brings the following improvements:

(1) Closer to EVM equivalence: Before the Bedrock upgrade, the difference between OP and Ethereum’s client code was about 3,000 lines, which was reduced to within 500 lines after the upgrade.

(2) Further reducing costs: Bedrock implements an optimized data compression strategy to minimize data costs, removes all L1 execution gas, and reduces L1 data costs to the theoretical minimum. This reduces the cost of the protocol by an additional 10% compared to previous versions.

(3) Shorter deposit time: Bedrock introduces support for L1 restructuring in node software, greatly reducing the time users need to wait for deposits. Earlier versions of the protocol could take up to 10 minutes to confirm a deposit. With Bedrock, deposits are theoretically confirmed within 3 minutes.

(4) Improved proof modularization: Bedrock abstracts the proof system from the OP Stack so that rollups can use fault proofs or validity proofs (e.g., zk-SNARKs) to prove correct execution on the rollup. This abstraction lays the foundation for Cannon’s future applications.

(5) Two-step withdrawal: Add a withdrawal step that requires users to publish their withdrawal proof in advance. Users must wait for a valid output root to be proposed so that the withdrawal proof can be verified on the chain. Once the 7-day waiting period is over, users can complete the withdrawal and receive the funds. By pre-publishing proof, it provides enough time for on-chain monitoring tools to detect fraudulent withdrawal proof and attempt to take corrective action. Ordinary users can also perform this monitoring.

Image: Optimized withdrawal visualization process

2. Changes in tokens before and after Bedrock goes live

On the day of Bedrock upgrade, OP ushered in a short-term rise after the large-scale unlocking of tokens, but soon it fell sharply, and it started to rise from 6.20 due to new good news.

Image: Recent price trend of OP

Looking back at the recent price trend: According to OP’s token economics, it is planned to welcome the unlocking of 286 million tokens on May 30, 2023, mainly from core developers and investors. Holders face strong selling pressure, and the token price began to fall after May 29 and lasted for nearly 7 days, with a cumulative decline of nearly 25%; on June 6th, OP Mainnet announced the completion of Bedrock upgrade, and the token price rose by 10% on that day; unfortunately, on the evening of June 6th, SEC sued Coinbase, and then announced a document recognizing 19 tokens as securities on June 8th. Although OP was not included, in these days, many US institutions and investors chose to hedge and sold the tokens they held. The entire market fell for four or five consecutive days. As a close partner of Coinbase, OP naturally had a significant impact, with a decline of nearly 40%. After a week or so of horizontal trading, the market welcomed good news on June 20th, and Wall Street Capital began to launch its own cryptocurrency exchange. The price of OP token was pushed back to the level before SEC sued, along with BTC leading the rally for two days.

Figure: Large amount of OP transferred to Coinbase after SEC regulation

3. What changes has Bedrock brought to the ecosystem?

One of the most noticeable changes after Bedrock is the further reduction of costs. The average L1 fee saved per transaction after the upgrade has increased by 54.5% compared to before the upgrade. In terms of specific items, the savings in NFT minting, ERC20 token transfer, Ethereum transfer, and DEX trade have increased by more than 60% compared to before the upgrade. The impact of the upgrade on fees can be seen more intuitively from the line chart.

Figure: Bedrock upgrade change data 1

Figure: Bedrock upgrade change data 2

VI. Outlook for the Cancun upgrade

1. Latest developments in the Cancun upgrade

Every major Ethereum upgrade is the most important event to watch in Web3. The Shanghai upgrade in the first half of this year kicked off a wave of LSD Summer. The scope of the Cancun upgrade was finally determined at the latest Ethereum developer meeting in June (*2023.6.15-111th ACDC meeting), which includes EIP 4844 (*proto-danksharding) and EIP 4788, EIP 6988, EIP 7044, EIP 7045, and EIP 4788. The most noteworthy proposal is EIP-4844, which focuses on scalability.

2. What is EIP-4844

The biggest problem with Ethereum currently is its scalability issue. The core of the L2 track is to expand Ethereum, mainly through the Rollup solution, compressing and packaging data as much as possible and then transmitting it to the L1 chain. However, as the blockchain network becomes more and more prosperous and the market price of ETH is also high, the current L2 fees cannot meet future demand.

The reason needs to explore the cost composition of L2. L2 gas fee = L1 part + L2 part. Because the current Rollup solution ultimately needs to write transactions into Ethereum’s Calldata, which is processed by Ethereum nodes and permanently stored on the chain, the L1 part fee has always been very expensive. To further reduce the overall cost of L2, it is not enough to rely on L2 projects alone. Optimization is also needed on the L1 Ethereum side.

Ethereum’s long-term solution to scalability issues is data sharding, but this will take considerable time to implement and deploy. Rollup will be Ethereum’s only trustless expansion solution in the short, medium, and possibly long term. There are two main solutions to the current situation. The first is to reduce the gas cost of executing call data, and the second is to use a format similar to that of data sharding that has not yet been actually sharded. Rollups in the past have focused on the first solution, but EIP-4844’s proposal allows L2 projects to use the second solution.

EIP-4844 proposes a new transaction format called blob, which implements the transaction format that will be used in future sharding, rather than actually sharding these transactions. However, this format is fully compatible with the format used across the entire sharded network (avoiding a major upgrade to the Rollup solution in the future). Blob is a temporary extension data packet that stores data without having to write to calldata and verifies that validation nodes have validated the minimum subset of Rollup data through a new method of encryption proof, rather than submitting all data for validation. Blob can store more data than calldata and has a lower cost (priced separately) and is stored for a fixed period of time (1-3 months), which will greatly reduce the cost of the L1 part.

Image: EIP-4844 Blob Proposal

3. Cancun Upgrade and OP

The Cancun upgrade, which is centered on EIP-4844, will optimize Ethereum L1 to improve scalability, which will benefit the entire L2 track by reducing costs.

In June, OP completed the Bedrock upgrade, further reducing fees. Currently, it is the cheapest chain in the entire L2 track. At the same time, it is known from the official documents of Optimism that OP has played a deep role in promoting EIP-4844, which is also reflected in the modular architecture of the OP Stack. As the project closest to ETH core developers, OP should be the first to efficiently adapt after the Cancun upgrade, and costs will be further reduced.

Image: Comparison of fees for various L2 chains

Compared to other L2 projects, ARB has strong positive expectations. As the top TVL project in the L2 space, ARB has many leading application projects, such as GMX, RDNT, and JOE, which have high daily activity, trading volume, and larger price fluctuations. These applications are directly linked to users, and the impact of the Kankan upgrade may be more intuitive.

Seven. Conclusion

Currently, there are issues with centralization of sorters, failure of fraud proof, and the need to further increase the network ecology activity in OP Mainnet. However, the new narrative of OP Mainnet is grand and is being practically implemented. From the plan, it is easy to see that OP Mainnet intends to complete the next generation of fault-proof Cannon in 2023, pave the way for network decentralization in 2024, and expand the influence of the entire OP ecology through retroPGF funding and super chain aggregation. Currently, retroPGF has entered its third phase, and Coinbase and BNB chain have launched their own chains based on the OP Stack.

The just-completed Bedrock has effectively pushed OP Mainnet to achieve the new narrative node and further improve network efficiency and reduce costs, and the market has given a certain response. The Kankan upgrade in the second half of the year will be an important event that cannot be ignored in the entire L2 track, and let us optimistically look forward to OP’s performance in the Kankan upgrade.

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