Arbitrum and Optimism

Arbitrum, developed by Offchain Labs, and Optimism, developed by the Optimism Collective, are the two leading Layer 2 solutions that utilize Optimistic rollups to scale Ethereum. While Optimism gained popularity as the first Optimistic rollup after its permissioned launch in January 2021, Arbitrum quickly entered the spotlight after its open launch in August 2021. Since then, these two Optimistic rollups have composed substantial parts of Ethereum’s dynamic, multi-chain ecosystem.

While both Arbitrum and Optimism share a common goal of enhancing the usability and affordability of Ethereum, each solution offers unique features that set them apart. In this blog post, we’ll conduct an in-depth comparison of the two Optimistic rollups using Covalent’s historical data, covering a range of onchain metrics, including transactions, active addresses, gas fees, developer activity, total value locked, and top dapps. We’ll also delve into their tech stacks, ecosystem developments such as Arbitrum Nova and Base, and growth outlook for 2023 and beyond.

Without further ado, let’s jump into the world of Arbitrum and Optimism!

What are Optimistic Rollups?

At present, Ethereum’s limited throughput and high gas fees severely limits its scalability. As a solution to this problem, there exist Layer 2 rollups that work by batching and processing hundreds of transactions and then publishing a compressed version back to Ethereum’s Layer 1 in a single mainnet block. This approach enables higher throughput and reduces gas fees by compressing many transactions into one. It’s like an employee receiving multiple tasks, processing them, and submitting a single report to their boss, Ethereum. Rollups play a crucial role in Ethereum’s roadmap, as they offer significant scaling benefits while preserving Ethereum’s core security guarantees.

Rollups come in two forms – Zero-knowledge (ZK) rollups and Optimistic rollups, which differ in their security models. Arbitrum and Optimism are Optimistic rollups that assume the published transaction batches to Ethereum’s Layer 1 are valid by default, hence the name Optimistic rollups. Optimistic rollups are efficient because they do not expend energy resources to prove the validity of every single transaction as ZK rollups do through validity proofs. Instead, Optimistic rollups only generate fraud proofs if a transaction is disputed during a 7-day challenge window. Once the challenge window closes, transactions are finalized onchain.

Currently, Arbitrum and Optimism offer over 3x the throughput of Ethereum while charging only a fraction of the baseline Ethereum gas fee. However, it is worth noting that we are still in the early days of Optimistic rollups and there are tradeoffs with both solutions, such as a degree of centralization, which is a necessary phase as the two teams refine the technology before gradually decentralizing it.

Transactions

Over the past year, Arbitrum and Optimism have been neck and neck for daily transactions, both averaging 150 thousand per day.

Several key events have propelled the growth of the two Layer 2 networks, including:

• Optimism’s launch of its governance token, OP, in May 2022, which resulted in a big spike in daily transactions.

• Arbitrum’s NFT incentive program, The Arbitrum Odyssey, which began on June 21, 2022, and drove transactions higher.

• On September 20, 2022, Optimism adopted a similar strategy to Arbitrum and launched its own NFT incentive program, Optimism Quests, which accelerated daily transactions on the network until the program’s conclusion on January 17, 2023. Optimism experienced a drop in daily transactions following the end of the program but has been growing steadily since due to its new scaling roadmap and partnerships.

• Arbitrum’s daily transactions began to increase on August 31, 2022, following the successful completion of its Nitro stack upgrade, which enhanced its throughput by approximately 7-10x while further reducing gas fees.

• Since the start of 2023, Arbitrum has been on an upwards swing, surpassing Ethereum’s daily transactions on February 21, thanks to the introduction of DEX Zyberswap, lending protocol Radiant, and derivatives protocol Vela Exchange. On March 16, Arbitrum’s daily transactions once again surpassed Ethereum’s after the announcement of their long-awaited governance token, ARB, and have held steady past the 1 million mark since.

Overall, both Optimistic rollups are experiencing healthy growth in their daily transaction volume, with Arbitrum currently handling more daily transactions than Ethereum.

Active Addresses

Throughout 2022, Arbitrum has consistently had more daily active addresses than Optimism, averaging 2.5x more addresses.

The reason behind this difference is primarily because Arbitrum gained an early advantage in terms of user adoption when it launched openly in August 2021, enabling anyone to develop on it. On the other hand, although Optimism launched earlier in January 2021, it maintained a whitelist which limited the projects that could be deployed until December 2021.

Covalent has been supporting Arbitrum and Optimism since early 2022 and offers a Unified API that allows developers to reuse queries across the two networks. Despite the turbulent events of the past year, Covalent data shows that both ecosystems have not only demonstrated remarkable resilience but also experienced incredible growth in activity and usage.

Gas Fees

Even with increased activity and usage, gas fees on both Arbitrum and Optimism have seen a reduction of around 50% thanks to technical upgrades.

At present, Arbitrum has cheaper gas fees despite handling more transactions and supporting more addresses than Optimism. This can be attributed to its Nitro upgrade, which resulted in a massive reduction in gas fees. Furthermore, Arbitrum’s dispute-resolution process utilizes multi-round fraud proofs, which are more cost-effective and efficient than Optimism’s single-round fraud proofs.

Now all eyes are on Optimism’s upcoming Bedrock upgrade, which is scheduled for April 2023. It promises to enhance the network’s performance by offering reductions in gas fees and improvements in throughput and sync speeds. Additionally, Bedrock will introduce modularity and simplicity while ensuring Ethereum equivalence for Layer 2 solutions.

Developer Activity

Based on Electric Capital’s Developer Report, as of December 15, 2022, Arbitrum had a total of 215 developers, which is an increase of 59 developers or 38% compared to the previous year. Optimism had 183 total developers, which is a year-over-year increase of 75 developers or 73%.

The reason why Arbitrum has more developers than Optimism may be attributed to the fact that while both Optimistic rollups are EVM-compatible, Optimism uses Ethereum’s EVM, while Arbitrum runs on its own Arbitrum Virtual Machine (AVM). This means that Optimism only supports the Solidity compiler, while Arbitrum supports all EVM-compiled languages such as Vyper and Yul.

Developers on Arbitrum and Optimism rely on Covalent’s Unified API for their data needs, which is the fastest way to access onchain data for their projects such as wallets, DeFi trading and investment tools, NFT galleries, and analytics dashboards. Covalent currently powers 3000+ dapps including Rainbow Wallet, 0x, NFTX, Raleon and many others on Arbitrum and Optimism.

Total Value Locked

Arbitrum and Optimism are not only Ethereum heavyweights, but they’re some of the largest chains by Total Value Locked (TVL). Arbitrum’s TVL has grown to $2.23 billion, sitting ahead of Optimism’s TVL, which has grown to $920 million. This is a notable contrast to many of the bull market’s favourite alternative Layer 1s that have seen their TVL shrink over the past year.

Arbitrum’s lead in TVL is partly because of its lower gas fees, which attracted several DeFi projects to deploy on the network. While Optimism briefly took the lead in TVL against Arbitrum from August to October 2022 due to its OP Summer incentives, it saw a sharp decline after the FTX collapse. During that period of market turmoil, Arbitrum’s TVL demonstrated greater resilience.

All in all, Arbitrum and Optimism have been consistently gaining market share in TVL compared to most other alternative Layer 1s and Layer 2 rollups. Post-ARB, we can expect a further increase in Arbitrum’s TVL due to significant liquidity inflows into its ecosystem.

Top Dapps

Both Arbitrum and Optimism have a large overlap in dapps, which include popular DEXs like Uniswap and SushiSwap, lending protocols like AAVE and Curve, and bridges like Stargate.

Arbitrum’s transaction volume is primarily driven by trading-related dapps such as Arbitrum Exchange and Camelot, this makes a lot of sense as trading requires low fees and fast transactions. GMX leads the pack on Arbitrum as the go-to decentralized spot and perpetual exchange with an Arbitrum TVL of $514 million.

Optimism’s dapps are more diverse than those on Arbitrum, encompassing a wide range of platforms from derivatives trading protocol Synthetix to yield aggregator Beefy. The leading protocol on Optimism is Velodrome, a liquidity layer and AMM which is a fork of Andre Cronje’s Solidly, with a TVL of $283 million.

Arbitrum Nova

While Arbitrum One serves as the primary network for DeFi and NFT projects, Arbitrum Nova is designed to streamline high-volume transactions for gaming and social dapps. Arbitrum Nova was launched on August 9, 2022, and is a new rollup built on Arbitrum’s AnyTrust technology, which enables ultra low-cost transactions through the management of data offchain via an external Data Availability Committee (DAC). Data is only put onchain if the DAC fails to perform its function.

With significantly reduced costs, Arbitrum Nova is tailor-made for GameFi projects that frequently mint new NFTs or decentralized social networks that require many onchain interactions between users. As both Arbitrum and Optimism have seen limited adoption in gaming and social dapps compared to alternative Layer 1s, it is hoped that the introduction of Arbitrum Nova will enable their development in the Arbitrum ecosystem with greater ease, especially with the help of Covalent which will improve data availability for developers.

The first major success story is the migration of social news aggregator giant Reddit’s Community Points system to Arbitrum Nova, following their selection of Arbitrum as the winner of The Great Reddit Scaling Bake-Off, which also evaluated proposals from other leading blockchains like Solana, StarkWare, and Polygon.

Arbitrum Orbit

Arbitrum recently made a big announcement about its latest offering, Arbitrum Orbit, a permissionless framework that enables developers to build Layer 3 chains on Arbitrum itself while requiring DAO approval for the usage of Arbitrum IP rights to create Layer 2s on Ethereum. With Arbitrum Orbit, developers can utilize the full suite of Arbitrum’s technology and tailor it to their specific requirements.

There are many reasons to launch Layer 3 chains:

• Improved Scalability: by using multiple Layer 3s, scaling bottlenecks can be alleviated as throughput compounds in each layer of the stack.

• Diverse Security Models: Layer 3s can experiment with different security models, such as Arbitrum One’s trust minimization and Arbitrum Nova’s lower fees, allowing for greater flexibility and choice.

• Unique Execution Environments: Layer 3s can explore new execution environments, optimizing performance and enabling new use cases like order-book exchanges and games.

Arbitrum Orbit will likely turn Arbitrum One into a settlement layer like Ethereum, and it will allow its entire ecosystem to scale smoothly over the long run. This exciting development will undoubtedly create new opportunities for growth and innovation within the broader Arbitrum ecosystem while also drawing more attention to it. It will be very interesting to see Layer 3s in action and observe the impact they will have.

Base

On February 23, 2023, Base, Coinbase’s Layer 2 solution that was built using the open-source OP Stack was unveiled. Base deployed on the battle-tested OP Stack to maintain decentralization, permissionless use, and openness for users, and partnered with Covalent to empower developers with rich onchain data.

What’s more, Coinbase has become the second core contributor to the OP Stack codebase and will build towards the decentralization of the OP Stack. The future of the OP Stack aims to allow Layer 2s that share sequencer sets the ability to conduct atomic transactions, and now development speeds will be turbocharged with two Layer 2 teams cooperating on the same stack. Covalent data shows that the Base testnet is already seeing impressive traction in transactions and active addresses.

Coinbase’s partnership with Optimism has given the Optimism ecosystem a shot in the arm. Base acts as a natural extension of Coinbase’s digital asset staking solutions, institutional custody solutions, non-custodial wallet products, and a lot more, and with Coinbase’s 110 million verified users potentially onboarding to the OP Stack and into the world of Web3, Optimism is strongly positioned for future growth.

Optimism Superchain

Optimism and Coinbase are working towards a vision for a Superchain, which aims to achieve maximum interoperability and composability between different Layer 2s that are built using the open-source OP Stack. By uniting otherwise siloed Layer 2s under a single network, Optimism will serve as a platform for the permissionless creation of multiple Layer 2s with shared sequencer sets.

The Superchain has the potential to further strengthen the network effects Optimism has from its current ecosystem. This initiative is expected to draw new contributors and communities to Optimism, as demonstrated by Coinbase’s and Covalent’s participation. Since the way Covalent indexes blockchain data is standardized and truly interoperable, it will benefit developers accessing Superchain data and speed up the development of the Superchain.

This marks an important step towards expanding Optimism beyond just the Optimism Mainnet. In the short term, the Superchain will unify Coinbase’s Base, Metis, Boba, Ribbon Finance’s Aevo, and Lattice’s OPCraft to form an initial Superchain structure, featuring shared bridging and sequencing. In the long term, the Superchain could become a burgeoning ecosystem of networks built with the OP Stack that maximizes interoperability, shares decentralized protocols, and standardizes its core primitives.

An Optimistic Future

Arbitrum and Optimism have both made significant strides as Layer 2 rollups and will continue to play a vital role in Ethereum’s modular future. Arbitrum’s launch of Nova and Orbit demonstrates its commitment to innovation, and separating IP rights between permissioned Layer 2s and permissionless Layer 3s gives it the best of both worlds. Despite introducing ARB later than OP, Arbitrum holds an advantage as the second mover in learning from Optimism’s successes and failures regarding token design, growth initiatives, and governance processes.

In comparison, Base being built on the OP Stack represents an incredible leap forward for Optimism, and if the OP Stack becomes the standard framework for developing Layer 2s, Optimism will benefit immensely from the composability between all the different rollups under its Superchain. Optimism has been cementing its moat by adhering to its unwavering principle of open-source, decentralized, and modular blockchains, with community at its center. Moving forward, both the Arbitrum and Optimism ecosystems are poised to build on their strong foundations, and they will be at the nexus of innovation. As each Optimistc rollup continues on its growth trajectories, it will lead to better user experiences and advances for our entire industry.

If you’re looking to access the data used in this blog post, Covalent’s Unified API allows developers to integrate our API just once and automatically benefit from newly supported chains like Arbitrum Nova and Base, as well as endpoint performance upgrades. Get your Free API Key today and start building!

Quote from Anuja Khatri, Head of Growth at Arbitrum Foundation

“Since our launch in 2021, we’ve experienced extraordinary growth, but we feel we are only beginning to tap into the full capabilities of the Arbitrum ecosystem. With Arbitrum One, Nova, and Orbit, we’ve opened the door to our technology to be leveraged by developers across the globe. Our recent governance system update and Orbit, which opens up the gates for creating best-in-class L2s and L3s on the Arbitrum ecosystem, are major steps towards accomplishing the decentralization of Arbitrum and filling the gaps of industry needs with cutting-edge technology. We are pleased with what we’ve accomplished and look forward to enhancing the leading Layer 2 option on the market.”

Quote from Jesse Pollak, Lead at Base

“We’re thrilled to launch Base to build towards the vision of scaling Ethereum and bringing the next billion people onchain. We will continue to work with the Optimism team to increase the decentralization of the OP Stack and make it available for builders as a public good. We will also continue to work with teams like Covalent to empower developers with reliable onchain data, helping them build robust applications.”

Quote from Ganesh Swami, Co-Founder and CEO at Covalent

“Rollups are set to be the centrepiece of 2023, and Arbitrum and Optimism are two of the most exciting rollups to have emerged on Ethereum. Undoubtedly, both ecosystems have seen significant growth this year. In my opinion, each rollup has its own unique advantages, without one being objectively better than the other. Covalent will continue to collaborate closely with both innovators in the Optimistic rollup space, which will bring immense value for our API users and bring a positive impact on the Ethereum ecosystem.”

Written by David Tso.