Author: Web3er Liu, CatcherVC

Abstract

After Optimism issued cryptocurrency, it solved the official financial problem, making it more motivated to reduce the handling fee; issuing airdrops is equivalent to handing over governance power, which can promote decentralization. 

In recent days, the news that one of the major Layer 2s - Optimism issued its own currency, has caused a stir in the entire crypto market and attracted widespread attention. It is another shot in the arm for the whole market provided by Optimism after it completed the $150 million financings round led by a16z in March. As Optimism officially released its token economic model and governance plan, the FOMO sentiment of many retail and institutional investors was completely ignited. Almost everyone is speculating: what will happen to Optimism after this cryptocurrency issuance?

I will analyze the event of Optimism's cryptocurrency issuance from critical perspectives, such as handling fees and node incentives and interpret the impact of the issuance on its ecological construction.

1. Optimism can solve financial problems after issuing its cryptocurrency, reduce the handling fee, and start a "price war" with other Layer 2s.

It is well known that the core of Layer2's value capture lies in the handling fee. Different L2 schemes rack their brains and do their best to repair the mechanism, almost all of which aim to reduce Gas fees. Not long ago, Metis reduced the Gas fees to the Polygon level by modifying the storage layer structure, which posed a strong price threat to other L2s.

On the other hand, since the Sequencer block-producing nodes are all run by the official, the Gas fee has been Optimism's most important source of income in the past. Therefore, the Optimism official cannot reduce the Gas fees to a few cents like Metis, which has already issued cryptocurrency. However, after Optimism's cryptocurrency issuance, the official has other sources of income, which can solve the financial problem to a large extent, which makes Optimism have a strong motivation to adjust the proportion of the fee structure and reduce the Gas fees.

Specifically, Optimism's fee structure can be divided into Part L1 + Part L2. Part L1 accounts for 99.6%, which covers the total cost of the block-producer Sequencer publishing data from Layer 2 to Layer 1. Its structure can be expressed as:

L1 Gas Price × dynamic coefficient × (Fixed cost + data storage fee)

Among them, the fixed cost, which covers the cost incurred when Sequencer packs data locally and transmits the data packet to the ETH network node across domains; the data storage fee, which mainly involves the Gas consumption generated when the data packet is stored in the specified contract address on ETH. The dynamic coefficient is used by Optimism to prevent the surge of ETH Gas. It is reserved as buffer funds for Optimism so that Sequencer can store data on ETH smoothly at any time.

According to Optimism's official documents, the fixed cost and dynamic coefficient are completely set autonomously by the Optimism official. If Optimism wants to lower it, Optimism can reduce it, and if Optimism wants to raise it, Optimism can raise it. Before the issuance of the cryptocurrency, the fixed cost and dynamic coefficient were the primary source of official income. However, after the issuance, Optimism official and its Ecosystem Foundation obtained nearly 40% of the token share, and 20% of the token share was used for the construction of Optimism’s public facilities, which basically solved the official's financial problem of Optimism and made it unnecessary to get stuck in the matter of reducing Gas. Then it dares to play the "price war" of Gas like Metis.

 (Reference: The Road to Sub-dollar Transactions Part 1: Slashing Fees by 30% https://medium.com/ethereum-optimism/fancy-numbers-how-we-lowered-fees-for-optimism-users-a3bb80cbc65f）

2. After the issuance, the Verifier node can be highly motivated to improve the reliability of the network

In the blockchain system, the incentive mechanism has always been one of the cores of mechanism design. Since the Verifier verification nodes of Layer 2 are to be run autonomously by private institutions other than the official government, the incentives for node operators are very important.

Optimism's important competitor, Metis, has more than 80 running Verifiers, which relies on the advantage of issuing cryptocurrency in advance, high-intensity incentives for Verifier node operators, and rapid expansion of node size. Adding peers in the Sequencer Pool, Metis has even reached the scale of a small public chain.

Without issuing cryptocurrency, Optimism Cannot directly incentivize Verifier node runners with the same high intensity as Metis and community members were not very interested in running verification nodes. Therefore, the Optimism official even complained in the medium document: "Users will almost never actively run a full node (Verifier node)."

With Optimism formally issuing the cryptocurrency, the official can use OP tokens instead of ETH to encourage Verifier node operators to greatly expand the node scale, just like Metis, thereby improving network reliability. In the meantime, the issuance can also enable Sequencer nodes to obtain higher operating incentives. If OP introduces a Sequencer decentralization solution in the future, the high incentives will encourage more private institutions to run Sequencer, which is conducive to decentralization.   3. Optimism's issuance makes its ecological governance more decentralized   We can imagine the following scenarios: if Optimism does not have its own token, what should OP community members do when they pledge their assets if they want to participate in ecological governance? Obviously, the most preferred way at this time is to pledge ETH. If users want to obtain ETH, they must spend funds to buy, or lend ETH assets through a loan agreement and pay interest, which obviously raises the threshold for OP users to obtain voting rights.   After the issuance of OP tokens, many early users can get a lot of airdrops for free, which is equivalent to providing many people with free voting rights and greatly improving the degree of decentralization of governance. As long as users do not sell their OP tokens, they can permanently participate in the OP ecological governance and obtain certain token holding incentives according to future policies, which is of great significance to the development of Layer2.   On the whole, the issuance enables Optimism to have the right to mint, just like the Federal Reserve, and solve its own financial problems. Then OP can adjust the activity intensity of the ecosystem through the token policy. In this regard, the liquidity mining incentive plan can be launched. On the other hand, various hackathon activities and ecological project subsidy programs can achieve. At the same time, the issuance also enables OP to raise large amount of funds through token financing, thereby gaining stronger vitality, just like Terra, Near, Avalanche, and other star projects refinanced long after the issuance of coins. Such benefits in this regard are self-evident.   4. Potential problems Although Optimism's official statement gave a specific token distribution plan, it did not clearly indicate whether OP tokens will be used as the unit of measurement for Layer2 Gas fees. If the OP token is not used as the gas payment method, it will lose one of the most important consumption scenarios, which is not conducive to gaining the market's bullish expectations.   But in general, since the issuance of OP solves the financial problem, the Optimism official has enough motivation to reduce the Gas fees and can quickly expand the scale of the network node, which will inevitably make it not to be outdone by Metis' recently launched "price war" of Gas fee and make it more competitive with Arbitrum Metis and ZK.