2023 will be the year of the war between Layer 2 (L2) protocols. Each one will battle it out to figure out which is the best. Besides, Layer 2 (L2) rollups have become an integral part of the Ethereum ecosystem, leading its near- and mid-term scaling strategy since late 2020.
Fortunately, by this time, both of the teams behind Arbitrum and Optimism were already hard at work, readying for the launch of their rollups the following year. Fast-forward to today's bear market, we can still see the continuation of L2 growth, even as some significant alternative L1s decline.
Meaning of Rollups
Rollups are a scaling solution that batches a group of transactions before presenting the rolled-up group to the L1 chain as a single transaction via a smart contract.
This reduces the costs whilst enabling higher throughput and speed of transactions.
Arbitrum and Optimism are both types of optimistic rollups. These achieve higher speeds by processing transactions off-chain before delivering batches back to Ethereum L1.
Optimistic rollups verify the accuracy of their transactions through fraud proofs and derive their security from the consensus layer (Ethereum L1).
Arbitrum Vs. Optimism
Although their base technology is shared, they have several fundamental differences. To validate transactions,
Arbitrum uses multi-round proofs in an interactive verification game between the prover and sequencer. However, Optimism previously used single-round fraud proofs executed on L1. This was until a flagged vulnerability led to the disabling of their proofs. Optimism still operates today without fraud proofs meaning users must trust the Sequencer node (run by Optimism PBC).
This is not currently of concern due to the centralized nature of both L2s (one must also trust the Arbitrum Sequencer node).
Protocol Upgrade
Arbitrum released a significant upgrade to its stack on 31st August 2022. Primarily, aligning the chain much closer with Ethereum through its integration of geth and separating execution code from proving code to optimize security and portability. This led to an increase in execution speeds in the range of 20-50x, cost reduction by a factor of 2 and an overall transaction throughput capacity increase of 7x (equivalent to 7 Ethereums).
On the other hand, Optimism upgraded their bedrock. Following from bedrock will come Cannon, their next-generation fault proof system, aligning them closely with Arbitrum's current solution.
Scalability and Transaction Fees
L2s were pioneered due to Ethereum's slow speed of transaction and rising gas fees. Arbitrum, with their Nitro upgrade, have outmatched Optimism for now.
DeFi and Ecosystem Adoption
Arbitrum has a TVL of $1.3 billion, while Optimism has a TVL of over $700 million. In terms of overall unique addresses, Optimism beat Arbitrum.
However, diving into those stats, we see that most Optimism addresses were created during their airdrop announcement. This probably happened because non-users of Optimism were also airdropped.
Tokenomics and Governance
Tokenomics and governance are where Optimism has the jump on Arbitrum. The Optimism Collective was launched earlier last year alongside the OP token.
The Collective consists of two separate houses:
Token House (OP holders) - votes on Governance fund grants, protocol upgrades, inflation adjustment and more.
Citizens' House (soul-bound NFTs) - distributes retroactive public goods funding.
In contrast, Arbitrum has barely provided clues about the protocol's governance moving forward. However, now their technology has reached a point of maturity, expect the team to begin making strides in this direction.
Final Thoughts
When taking a step back, Arbitrum and Optimism are separated by their philosophies. One with an eternal principle for open-sourced, decentralized and modular blockchains with the community at the core.
The other focuses on technology, product-market fit, and iteration by specialists to perfect a system before handing over the keys.
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