Optimism’s OP Stack Crushing Its Rivals & How It Affects OP’s Price

As mentioned in a recent post, there’s a growing trend of Ethereum layer-two (L2) solutions creating their own ecosystems. Below, I explore what this means for the investment prospects of the underlying L2 tokens, focusing on Optimism’s OP token.

Breaking It Down

(As a reminder, Ethereum L2 solutions are blockchains built on top of the Ethereum blockchain. They exist to help Ethereum scale, making it more accessible to more people. When you use an L2, rather than the Ethereum blockchain directly, you typically pay much lower transaction fees while taking on additional risks and trust assumptions.) 

As many of you know, Ethereum L2s have been all the rage. Since this bear market started, we’ve seen:

• the L2 leaders in Optimism (OP) and Arbitrum (ARB) launch native tokens;
• key metrics (e.g. active addresses, value locked, developer resources, venture fundraising) grow considerably;
• the mitigation of some of the many risks associated with L2s; and
• the competitive landscape for L2s grow dramatically.

In recent months, L2s have released frameworks to make it a lot easier for developers to use their technology. For example, Optimism has OP Stack, Arbitrum has Orbit, zkSync has ZK Stack, and Starknet has the Starknet Stack. 

In very simple terms, these L2s are fiercely competing with one another to foster their own ecosystems of apps and application-specific chains (i.e. appchains). The more robust and diverse an L2’s app ecosystem is, the more likely the L2 will be able to attract and retain users. 

More usage leads to more profits for the L2 and, all else being equal, these increased profits can be used to spur additional ecosystem growth through initiatives such as grants and liquidity programmes. 

Optimism’s OP Stack: The Early Leader 

Of the above frameworks, Optimism’s OP Stack has shot out to a commanding lead in terms of developer adoption. This early success has helped Optimism reclaim the lead from Arbitrum as the most widely used L2. (Worth noting, Optimism is much further along in its development than zkSync and Starknet, which were never going to see strong initial adoption of their respective frameworks.) 

In recent months, 11 teams have announced that they are building an OP Stack chain. As per the below image, 5 of these are already live. The additional 6 should be live by year-end. I expect several others to be announced and/or launched in the coming months. 

Unsurprisingly, Coinbase’s Base has been the most popular OP Stack chain so far. Roughly 3 weeks since launch, the 7-day moving average of Base’s transaction count has soared to 597K, sitting above Arbitrum One (561K) and OP Mainnet (367K), as per this Dune board by @msilb7. 

In terms of what people are doing on Base, this Dune board by @jhackworth shows that, in the past 14 days, activity related to NFTs and friend.tech has accounted for 24.1% and 15.6%, respectively, of transactions on Base. 

Implications For OP Token’s Price 

Let’s address the elephant in the room: Does any of this affect the price of the OP token? That is, if OP Stack chains continue to proliferate and are used heavily, what happens to OP’s price? 

For investors, this is an incredibly important question to ask. After all, you don’t need the OP token to use any of these OP Stack chains. On most of them, you can use ETH to pay for gas, just like you would on Ethereum mainnet. Taking Base as an example, someone who is new to crypto could be using the chain for months without knowing that the OP token even exists! 

At first glance, this doesn’t look great with respect to the investment case for OP. But let’s at least try to mount a case for why OP would appreciate as more OP Stack chains go live. 

Argument #1: Greater activity on OP Stack chains equals higher net profit for Optimism 

This profit flows to a treasury address, the spending of which is governed by OP token holders. So, as the economic value of this treasury grows, the OP token should be worth at least something. There will always be certain entities out there who would, at some price, be happy to buy more OP because it will increase the extent to which they can affect decisions related to treasury spending. 

Argument #2: Greater activity on OP Stack chains equals more financial resources for R&D into upgrades that may lead to added token utility

With a larger treasury, the Optimism community could allocate more resources to researching ways to improve Optimism’s architecture. It’s possible that these improvements will require the OP token to gain additional utility—specifically, a staking functionality. 

An example here could be that certain OP Stack chains may allow OP holders to stake their tokens to a shared sequencer layer. The Optimism Foundation recently granted Espresso funds to build a proof-of-concept version of an OP Stack that allows for block creation by multiple leaders. Espresso’s work could help inform future efforts to decentralise Optimism’s sequencer. (Today, Optimism only has one sequencer, which is operated by the Optimism Foundation.) 

Another example of optimising (sorry not sorry) Optimism’s architecture could be that, if it is found that zk-proving capabilities can be added to the OP Stack—a research area the Optimism Foundation recently funded—then it may be possible that OP can be staked to a proving layer. (This is all extremely speculative. So much remains unknown with regard to the optimal architecture for sequencing and proving. Even if implemented, it’s entirely possible that the OP token never gains any staking functionality.) 

Ignore the Power of Narratives At Your Peril

I’ll be the first to admit that I was very much clutching at straws with those 2 arguments above. If those were the only ways that OP’s price could benefit from greater adoption of OP Stack chains, I’d personally be steering well clear of any investment into OP. 

However, there’s another more powerful and simple reason why greater adoption of OP Stack chains is good for the OP token: narrative. 

For many years, the power of narrative and momentum has played an important role in my altcoin investing. While I’d prefer that it didn’t, the reality is that after all these years there are still no widely agreed-upon methodologies for valuing cryptocurrencies. This means that market narratives have much more of an influence on cryptocurrency prices—relative to more mature assets such as bonds, commodities and stocks. 

Don’t believe me? Just look at what happened last week with the price of OP. Following the success of Base’s recent launch—which included a (relatively) breakthrough app called friend.tech—OP was the second-best performing cryptocurrency out of the top 100 by market cap for the week, increasing in price by 7%. 

For the week ending Aug. 25, 2023, OP as the second-best performing cryptocurrency out of the top 100 (Source: CoinGecko) 

For investors looking strictly at OP’s utility, this price action arguably made no sense. As mentioned earlier, you don’t need OP to use Base. And yet, the market drove the price of OP higher last week. 

This is what I mean when I say that momentum and market narratives arguably have far greater influence over prices than more mature assets. As more teams announce they are building OP Stack chains or some other infrastructure to enhance the OP Stack, and as more people use OP Stack chains, the perceived importance of—and, therefore, the demand for— the OP token could continue to increase (but, this is of course speculation). 

Recap

Optimism is leading a new trend whereby ecosystems are forming around individual L2 solutions. In a scenario where adoption of OP Stack chains continues to grow, demand for OP could very well increase despite the relatively weak arguments for why increased adoption of OP Stack chains drives value to the OP token. That’s because the power of market narratives and attention still arguably has a meaningful effect on cryptocurrency prices, in my opinion. 

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