Disclaimer: This is not financial advice. Anything stated in this article is for informational purposes only and should not be relied upon as a basis for investment decisions. Triton may maintain positions in any of the assets or projects discussed on this website.
TL;DR
Introduction
Over the last few posts, we have outlined Ethereum’s economic structure and explored how recent upgrades focused on scaling the network’s throughput have transformed the nature of that structure, shifting much of the top-line value generation to L2s by moving the locus of execution off mainnet. This has been a very effective evolution towards growing the broader Ethereum ecosystem but has come at a significant (short-term?) cost to the L1 itself. We also highlighted how the top L2s are developing substantially different business models as they compete to attract developers and users.
One of these, Optimism, is taking a unique approach in building out what it calls the ‘Superchain’. In essence, Optimism’s approach is to provide a common technology stack and native interoperability between any chain that adopts its codebase (the “OP Stack”). In exchange, member chains contribute a share of the fee revenue they generate back to the Optimism Collective, a common governance body overseeing the OP Stack development and broader ecosystem’s direction. Further, all member chains agree to abide by the “Law of Chains”, a framework establishing core principles around user protection, decentralization and economics.
In this post, we explore the state of the Superchain and double click on the economic reality of the ecosystem as it stands today.
An Optimistic OG
Alongside its early contemporaries, namely Polygon’s PoS sidechain and Arbitrum’s optimistic rollup, Optimism was one of the earliest Ethereum scaling solutions to find success, with its initial alpha release in February 2020 and full public mainnet release in December 2021. When it first launched, Optimism was a standalone optimistic rollup running its own execution environment dubbed the Optimistic Virtual Machine (“OVM”). Though EMV-compatible, it was technically a different environment with a much heavier lift for developers to build on than most EVM L2s that exist today. However, by September 2021 it had migrated to a fully EVM-equivalent environment, enabling essentially copy-and-paste deployment of existing Ethereum applications on the chain, positioning itself as one of the most Ethereum-aligned rollups in the market.
As a standalone L2, Optimism was highly effective in attracting activity, peaking at ~$2B in value locked on the chain, 25,000 daily active addresses (200,000+ monthly) and millions of transactions per month in the midst of the 2021-2022 cycle.
Source: growthepie.xyz
Growth on Optimism’s flagship chain has continued since then, reaching recent all-time highs across almost every metric this past spring, briefly touching over $8B TVL, 2.3M monthly active addresses and almost 20M monthly transactions. Monthly profit also reached an all-time high at the same time, hitting $2M in April alone (in large part thanks to EIP-4844’s implementation). Fees paid to Ethereum to post transaction data and verify state fell from $5.6M in each of February and March to just $140K in April and a negligible $7.7K by August.
Source: growthepie.xyz
Historically, referencing “Optimism” referred to this primary implementation, namely OP Labs’ core L2 chain, Optimism. However, that changed in February 2023 when the freshly formed “OP Collective” announced its new direction, dubbed the “Superchain”. With this announcement, Optimism was now officially a multichain construction and the original Optimism rollup was re-positioned as just another member chain of the broader network, now referred to as OP Mainnet.
Scaling from One to Many
Today, the Superchain is a far more ambitious approach to scaling Ethereum. Rather than focusing development on just a single chain, the OP Collective has instead shifted focus to building out a common-good code base, deemed the OP Stack, that any team can leverage to build their own L2 network. This approach has been successful to date: 31 teams have launched or are currently building their own L2 as part of the Superchain, and 2 others have deployed L3 networks. Several big names are included in that group, such as Base (Coinbase’s own L2), Build on Bitcoin (BOB), Fraxtal, Mode, Zora, Lyra (now Derive), and Worldcoin. These new networks range from general purpose implementations to specific chains optimized for DeFi, gaming, NFTs, social applications and identity. Superchain L2s account for roughly 25% of all L2s currently live in the market, facilitating nearly 40% of L2 transactions (if you include the OP Stack forks, this number nears 50%).
Source: OP Collective
There are another 23 live chains that deployed forks of the open-source OP Stack codebase but are not formally members of the Superchain, including Blast, Bybit’s Mantle, Manta, Zircuit, Karak and Binance’s opBNB. While a net positive to expanding EVM’s footprint and Optimism’s overall presence, projects forking this codebase but not contributing back to the ecosystem’s development runs counter to Optimism’s intentions. Though not illegal by any stretch (code is under open-source MIT license), we can foresee a future where there are some mechanisms put in place meant to better incentivize full participation in the Superchain rather than see this continued proliferation of independent forks.
The Base of the Superchain’s Success
Of these, Coinbase’s Base chain is by far the most successful, having surpassed the flagship OP Mainnet across almost every metric. Activity on Base continues to hit all-time highs, with 1.3M daily active addresses conducting 4.2M transactions, with an overall throughput on the chain nearly 4x that of OP Mainnet. Total value locked in contracts on the chain (highly sensitive to ETH prices) sits at $6.7B. Most importantly, economic activity is considerably higher. Users have consistently been paying transaction fees between $50-$100K per day (at ~$0.001 per transaction), which goes directly to Base’s centralized sequencer, run by Coinbase. Following EIP-4844, the cost for Base to post this data to Ethereum and benefit from its security is just a few hundred dollars per day. The gross margin of Base is an eye-popping 99%. Since going live in March, Base has generated $30M in net profit after L1 fees and its contributions to the Collective. It is no wonder other companies, such as Sony, are starting to deploy their own Superchain L2s as well.
Source: growthepie.xyz
Further, given Base is Coinbase’s own L2, its natural home to stablecoins USDC and EURC (jointly issued by Coinbase with Circle) positions Base as a natural ‘traditional’ payment network as well. Combined stablecoin marketcap on Base is nearing $3.5B, almost 10% of USDC’s total outstanding supply. Value flow to Coinbase and Circle from this is immense – for every dollar of USDC on chain, there is a corresponding dollar held in US government treasuries in a Blackrock-managed money market fund (USDXX), currently yielding 5.06%. Put another way, that $3.5B in stablecoins results in $177M in high-margin cash flows for Coinbase and Circle. The long run direction is clear for Coinbase and Base with USDC and EURC: a stablecoin-based payment network with near-zero fees to transact, 2 second settlement times and negligible take rates on any FX conversion via decentralized exchanges such as Aerodrome, all natively accessible via Coinbase’s own self-custody wallet.
Superchain Economics
The potential economics for standalone member chains are clear, but how does that flow through to the Collective? In exchange for benefitting from the codebase and upgrades, security and native interoperability and composability with other participating networks, all member chains commit to directing the greater of a) 15% of net onchain profit (e.g. fees less L1 costs) or b) 2.5% of top-line chain revenue back to the Optimism Collective. OP Mainnet is unique, contributing 100% of net onchain profits to the Collective.
Source: OP Collective
To date, actual collections surpass 15,000 ETH. These have naturally occurred at wildly different price levels of ETH over time, but at current prices (~$2,500), this would be the equivalent of $38M in total contributions to the Collective. The pace of contributions has dropped off significantly as activity in the broader digital asset market has cooled off since March, but still generally pacing at $1-$1.5M per month. In terms of overall revenue generation of member chains, the Superchain is performing above its relative size. Though accounting for just 25% of L2s in the market, the Superchain is generating over 50% of all revenues across Ethereum L2s.
Source: OP Collective
GGiven the relatively early stage of most Superchain networks, the economic makeup is still very much a two-player game. In March, Base’s dominance led to it contributing 68.6% of total Superchain collections, with the OP Mainnet accounting for 29.8%; the rest of the chains contributed the remaining 1.6%. Since that high point, OP Mainnet’s contribution share has steadily increased over the past several months, flipping positions with Base and contributing 71.4% of all collections vs. Base’s 25.3%. The remaining 15 other live chains contributed just 3.3% so far in September. This change in composition is largely due to Base’s significant drop off in fee generation over the summer.
Given the broad-based industry trend of reducing transaction costs, and thus fees, Superchain constituents will have to see sustained high levels of activity to generate substantial sequencer fees for the Collective. Optimizing on this axis is a key way competitive L2s can differentiate their product and as such presents a sizable headwind towards the long-term growth of member contributions and the ultimate ability of Optimism to sustain its current $2B valuation ($7B FDV).
The OP Token: Work in Progress
Early signs largely point towards the OP Collective and its Superchain implementation being a success in terms of building an interoperable scalability network. However, there remains a sizable elephant in the room regarding the economic design of the ecosystem: beyond providing a large marketing budget via airdrops and funding programs, the OP governance token is, well, borderline useless at the moment: it is not used as a gas token nor as a utility token, has no direct value accrual, and has a limited role in governance. In short, OP Labs and the OP Foundation have jointly controlled the direction and the software of the ecosystem, rather than the collective participation of the token holders. Optimism’s major funding program, called Retroactive Public Goods Funding (“Retro PGF”) and currently in its 5th season, is largely controlled by the OP Foundation and a subset of token delegates. For reference, the OP Retro Fund has over $1B in OP tokens at current prices.
Source: Optimism
Theoretically, Optimism governance is split into a Token House (i.e. governance body consisting of OP tokenholders) and a Citizens’ House (i.e. governance body via representation of the community). At its core, this structure is an innovative approach to governance and should be applauded in its design. Its execution, however, leaves much to be desired. For example, though the Collective has done well in generating 15,000 ETH – it is still unclear how or when those funds will be put to use, and who ultimately gets to direct that use. There is a recent community petition put forth to better decentralize the governance structure and put true value accrual and utility behind the OP token.
This is largely a byproduct of Optimism being a novel and highly iterative project and by no means is it a malicious attempt to act counter to the project’s stated objectives. It is also a prime example of the real difficulties inherent in building out a truly decentralized DAO structure. However, given the number of new networks launching as part of the Superchain, the importance of a fully functioning decentralized governance structure is only building in the eyes of community members. Given that the token currently has a $7.3B FDV, there is a lot of value at stake and the transition here will be highly deliberate and happen only on a protracted (i.e. multiyear) timeline. In the meantime, volatility in the token’s price should be expected as there is limited underlying fundamental support for its current value.
Conclusion
Time will tell whether Optimism’s approach is correct or if rival ecosystems such as Polygon’s AggLayer and Arbitrum’s Orbits will win out. Regardless, Optimism is one of the earliest projects to focus on scaling Ethereum and to date it has carved out a position as one of the market leaders in terms of adoption and thought leadership. Moving from a single chain to an interoperable network of many L2s is a highly ambitious approach to building a blockchain tech stack that can adequately scale to internet-level applications and the Superchain is currently one of the top contenders in making this a reality.
To date, the Superchain has been dominated by Base, and though there are numerous new chains building, economic contributions from the long tail of networks have remained negligible. Continued upgrades to Ethereum mainnet that reduce operating costs (e.g. blobs via EIP-4844) have proven highly beneficial to L2s, but ironically introduce significant downside risks as L2s are likely to increasingly compete on fees and thus heavily suppress the Superchain’s long term outlook around sequencer revenue share. At the same time, continued lack of clarity around governance timelines and a general low level of value accrual to the OP token introduces significant near and intermediate-term risk to token holders.
There are many reasons to be optimistic about the Superchain’s future but there remain many growing pains that need to be addressed before the project can justify its current valuation.
Optimism hit $8B in TVL, but faces competition from L2s like Base
