Optimistic On Rollups - The Daily Gwei #82

Don't bet against Ethereum layer 2.

So it finally happened - the first phase of the Optimistic Ethereum Testnet went live today with a partnership between Optimism and Synthetix. This partnership will allow Optimism to test out their technology in real-world scenarios by leveraging Synthetix as a test-case.

This is the Ethereum Scaling War Effort in action.

First, a short recap on who and what Optimism is. The Optimism team was formerly known as Plasma Group and has been working on Ethereum layer 2 scaling solutions for as long as I can remember (since 2017 I think). They, as their original name suggests, started off working on Plasma but then as time progressed Optimistic Rollups became the spiritual successor to Plasma and it was widely agreed by many in the industry that it was the better technology. The main difference between Plasma and Optimistic Rollups (OR’s) is that OR’s can run virtual machines - so-called Optimistic Virtual Machines (OVMs) - which allows for the execution of smart contracts on layer 2. I don’t think I need to explain why this is such a big deal!

Now we come to the exciting news announced today - Optimism is working with Synthetix to address a real pain-point for their user-base - that is, the pain that small SNX holders face when trying to stake and claim rewards each week. For those that don’t know, Synthetix currently runs a program where you can stake your SNX by minting sUSD and then earn some SNX-denominated rewards each week based on your collateralization ratio (you earn some sUSD-denominated fee revenue as well).

The problem with the current system is that at gas prices of around 100 gwei (the new normal), both staking and claiming incur significant fees (a total of about $100 for both transactions). The reward APY is about 43% at the moment so even if you have 2000 SNX ($9000), your rewards will be ~16 SNX a week or ~$72 which obviously isn’t even worth staking/claiming for due to the gas fees (unless you believe the SNX price will go way higher in the future). The solution to this is to use Optimism’s layer 2 tech to allow smaller stakers (those with <2500 SNX) to partake in the rewards program.

Synthetix isn’t the only one that will be getting the Optimism treatment - as the team continues their rollout plan, they have plans to work with Uniswap and Chainlink to bring their services to layer 2. Obviously having these 2 projects adopt this technology in addition to Synthetix is a huge deal and speaks to what I wrote about in my ‘Adopting Layer 2’ piece - that is, once a few big projects adopt a specific technology and it’s shown to be working well in the wild, the rest will most likely adopt it as the “standard” scaling tech on Ethereum.

How awesome is this? More and more of the large and most widely used Ethereum-based apps are adopting layer 2 technology instead of the other options (such as migrating to another blockchain) - this is extremely bullish for the Ethereum ecosystem. There are of course many open questions and issues to work through when it comes to layer 2 - the biggest being what does composability look like in a layer 2 world - but I’m optimistic that these issues will be ironed out over time.

Have a great weekend everyone,
Anthony Sassano

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All information presented above is for educational purposes only and should not be taken as investment advice.

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