Arbitrum vs Optimism: Battle of the Best Optimistic Rollup Scaling Solutions

While Ethereum is the undoubted leader when it comes to smart contracts, there are certain ways it could be better. It's definitely not the fastest blockchain, and it's certainly not the cheapest, either. So, while it gets the job done, it could always use some extra help from layer-2 rollup solutions. 

Rollups are blockchain scaling solutions that execute transactions on a layer-2 network and then post them on a layer-1 network—in this case Ethereum. "Rollup" refers to any technique that bundles together several transactions, processes them off the main network, and then validates them using cryptographic proofs before submitting them to the main network.

Optimistic rollups are secured through a cryptographic method called a fraud proof. In an optimistic environment, the state submitted by layer-2 to layer-1 is assumed to be valid. This means that all transactions are initially given the benefit of the doubt, and fraud proofs are used to check the validity of a given transaction only if it's challenged by another party. 

Sequencers

Rather than using validators to confirm transactions, optimistic rollups use sequencers who process transactions, bundle them up, and submit them all together to layer-1. Sequencers allow for instant transaction finality and are kept honest through a requirement to post bond, or lock up some crypto. If a fraud proof finds that a sequencer has acted in bad faith, then a slashing mechanism debits their bond.

Why fraud proofs?

Conducting computation and validation on layer-2 allows transactions to be much faster and cheaper than on layer-1. The caveat is that each transaction can be challenged for up to seven days, which means funds can be locked up during this period if a fraud proof is submitted to determine the legitimacy of a given transaction.

Interoperability

One of the main benefits of optimistic rollups is that they're highly compatible with Ethereum. Firstly, optimistic rollups make it easy to create trustless bridges that can transfer tokens across networks without deploying a dedicated smart contract. Secondly, optimistic rollups are more developer-friendly because they're functionally the same as Ethereum. This means DeFi applications can be easily translated from Ethereum to an optimistic layer-2 without modifying the code.

Optimism is a layer-2 optimistic rollup network created to help scale the Ethereum blockchain. Optimism is the second-most popular optimistic rollup solution on Ethereum and has a 10% share of the entire Ethereum layer-2 market. Optimism introduced its native OP token via a free airdrop to users.

The validation mechanism on Optimism is called a single-round fraud proof. This means that computations for every layer-2 transaction must be executed on layer-1 in order to verify the blockchain state. Single-round fraud proofs allow Optimism transactions to be practically instant, but this comes at some costs.

Drawbacks of Optimism

Some argue that single-round fraud proofs undermine security, but the main issue is that relying on layer-1 for computation causes transaction fees on Optimism to be higher. This is because the state of the blockchain must be validated after each transaction. Heavy reliance on layer-1 for computation also limits how much data Optimism can handle at once, thus limiting the types of transactions that can be executed.

Another drawback is the Optimism Virtual Machine's (OVM) lack of optimization. The OVM has limited compatibility with the Ethereum Virtual Machine (EVM) due to the fact that it only works with the solidity coding language. This means that it's riskier to submit certain types of transactions through Optimism because the OVM may not necessarily be able to compile EVM code properly.

Another layer-2 network that uses optimistic rollups to scale the Ethereum blockchain is Arbitrum. Arbitrum is the most popular Ethereum layer-2 scaling solution with over half the entire market. Arbitrum is natively compatible with all ERC-20 tokens, but its main currency for paying fees and posting bonds is ETH.

What sets Arbitrum apart from Optimism is that it uses multi-round fraud proofs. This means that rather than verifying the state of the entire transaction block on layer-1, Arbitrum only requires a fraud proof to be submitted for the particular transactions that are being challenged. While multi-round fraud proofs make for slower transaction finality, the trade-off is for lower transaction fees since they don't need to rely on layer-1 computations as much.

When comparing Arbitrum and Optimism, it's clear that the former has won over market sentiment. Arbitrum is beating Optimism by a magnitude of five according to all comparable metrics: it has over five times the total value locked and over five times the market share of all layer-2 networks (excluding sidechains like Polygon). Arbitrum also has some advantages over Optimism from a technical perspective.

Firstly, the Arbitrum Virtual Machine (AVM) is better optimized for EVM coding languages and doesn't face the same compatibility issues as the OVM. This means that Arbitrum is more attractive to developers because applications don't have to be rewritten in order to be translated from the EVM to the AVM. Secondly, Arbitrum relies less on layer-1 computations than Optimism does, which means it will face fewer issues in the event of a hard fork—like the upcoming Ethereum proof of stake merge. 

Arbitrum is also more appealing to DeFi investors than optimism for a couple of reasons. One is that only Arbitrum has native Ethereum token support, meaning it natively supports ETH, unlike Optimism which only supports newer token standards. However, the main thing that gives Abitrum its edge is the superior interoperability offered by its unified permissionless bridge. Having an accessible bridge for transferring assets to layer-2 is likely what attributed to Arbitrum's higher level of adoption compared to Optimism, which only deploys dedicated bridges based on demand.