Ok yeah hi we’re back after an extended leave. Some things have changed. I’m no longer running any ASICs at home, though I do still have some Helium miners chugging along at a few cents a day. Are they still paying their electricity costs? Great question that I do not know the answer to. I need to do taxes soon though so hopefully I’ll have some stats on my ‘mining’ return for the last year soon.
Let’s talk about the latest development in the Ethereum space though. I’m feeling pretty skeptical about Ethereum lately, maybe it’s the new Ordinals launch on bitcoin that’s making that whole chain feel even more Ponzi tastic.
Let’s be clear, Ethereum has *always* been extremely self-conscious of its ponzi nature. Extremely Gen Z of them to be leaning hard into jokes about themselves with a semi doomer-istic outlook on maybe it working out for you. But if not at least you knew where you were when you were there. And that’s something right?
Ok so the big news is that Coinbase launched an Eth layer-2. Let’s speculate about what this means: why would Coinbase do this? Why would they use Optimism to do it?
We’ll start with some very basic basics.
What is an Eth layer-2 (L2)?
So the way an eth layer two works is that a 3rd party writes some contracts and deploys them onto ‘main ethereum network’. Then they also set up a bunch of other computers (which may or may not be their own proprietary stack, or maybe it’s a decentralized bunch of computers) which basically run a whole separate network of Ethereum Virtual Machines.
Then they go and find a bunch of contracts that are popular on mainnet Ethereum and deploy them onto their Not-Mainnet computer cluster.
If you’ve got assets on the mainnet, you send them to the special contracts that the Layer-2 maker deployed in the first paragraph. This locks up your funds on mainnet. The Layer-2 contract then re-issues assets of the same or similar value on the second network they set up. You’ve just ‘bridged’ your funds from the mainnet to the layer-2 network. Now what?
Now you can interact with all the copied over contracts from mainnet on this side-net — making the same trades and earning all the same ponzi scheme participation prizes as you got on mainnet. With the exception that you can only interact with assets that people have also locked up and been re-issued onto this chain. Or maybe you interact with assets that *only* exist on this side-net. Whatever.
You can head back to the main-net by sending your side-net assets back to the issuer. After some lockup period (some are as much as 7 days), the contract on the main-net that you sent your assets to originally sends you back your assets.
(Note that this special two-net contract setup is usually called a ‘bridge’, since it acts like a wormhole to get assets from one -net to the next).
Why use a L2?
Great question. Why the fuck would you do this with your Eth assets? Why wouldn’t you just use your money on the main-net on the main-net chain? Why even bother doing this dumb lockup and re-issue wormhole portal business?
The answer is transaction fees. The side-nets charge pennies to execute transactions, where the main-net can charge tens to hundreds of dollars. You move over to side-nets (more often called “L2”s) so you can actually use your assets and do ponzi things without having to burn hundreds of dollars.
Existing L2s
Most L2s in existence are contracts on the main-net that anyone can send assets to and receive funds on the other side-net back at. The organization that runs all the computers that host the side-net are for-profit startups. I don’t know where they make their money from, or what their business model is. Maybe they get to keep a percent of the transaction fees you end up paying in their network. But they’re kind of like public-ish services.
Anyone can deploy a new bridging contract to main-net and deploy a network of computers running their side-net (or maybe it’s one big computer actually running the side-net thing, who knows). You just have to convince people to send their main-net funds to you.
The two most popular L2’s that I know of are “rollups”:
Arbitrum
Arbitrum is the biggest one with the most marketshare. To date they’ve got pretty impressive stats in my opinion: 3.3B locked into their in-bound bridge; 53% of L2 markeshare, 2.9M users.
Arbitrum had a much smoother rollout than Optimism did, they gained ground quickly by not having a closed “whitelist” beta project. A bunch of ponzi-schemers launched tokens on their network really early after launch which propelled lots of people to lock up capital and move over to Arbitrum to try catching the free money.
Arbitrum was built by a bunch of PhD types from Princeton.
They did pretty good in the VC raising game, but nothing super sexy. Not a sexy project. A successful one, but not sexy.
Crunchbase says they’ve raised 123M.
Optimism
Optimism on the other hand is a smaller chain with less of a footprint in terms of integration. According to DeFi Llama they have all of 0.9B locked into their contract.
Optimism took longer to open up their network to anyone than Arbitrum did, and took a while to reach full compatability with the main-net EVM.
Here’s their milestone timeline; seems like they’re on a 2y release cycle.
They had a much splashier launch with the VC investment. Crunchbase reports that they raised 178M and are at a Series B. Unlike Arbitrum, their investors include a16z and Paradigm, which are typically considered high signal VC firms.
Unlike Arbitrum, Optimism’s founders aren’t listed on their website. Instead you can explore the “governance” model for the side-net. Optimism ended up issuing a “governance token” and choosing to operate in a more DAO-centric way. Maybe this is because their VCs wanted a fast exit and tokenization is an extremely fast way to do that. Good for them.
Coinbase re-deploys Optimism as “Base”
Ok so Arbitrum and Optimism exist. Coinbase decided they wanted to make their own side-net also. One where they ran the computers that the side-net lived on.
So they went out and licensed? copied? borrowed? the Optimism code and re-deployed it. There’s now a Coinbase Optimism contract on main-net and an Optimism Optimism contract on main-net. If you send your assets to the Coinbase one, you’ll get them back on the Coinbase side of things. If you send them the Optimism one, you’ll get them back on the Optimism side of things.
Here’s their announcement tweet.
Why would Coinbase launch an L2?
Great question. The stated goal reads like newspeak: “Our goal with Base is to make onchain the next online and onboard 1B+ users into the cryptoeconomy.”
I don’t really understand how yet another L2, a copy of an already existing one’s tech at that, is particularly well positioned to onboard the next 1B crypto users. You kind of already need to be onboarded to crypto to use an L2?
Here’s a few other theories I found compelling:
Running the side-net gives their EVM machines the ability to re-order transactions and extract MEV for themselves from anyone that’s using their L2 to trade. They’re the only party with access to the order-flow and execution of transactions on this side-net, which means that unlike main-net there’s competition with other validators for MEV. Maybe I’m wrong about this? I don’t know how transaction ordering and sandwiching works for side-nets, but it’s definitely there.
It gives them the ability to cross list the liquidity in the DEX onto their centralized exchange UIs. This makes your markets deeper for users of your platform. Again, they can do this because they control what transactions get executed and when. They run the side-net EVM machines, they can decide on transaction ordering.
They can add KYC to any deposits to the bridge. This allows them to make sure that the assets in their L2 are attributed to a real-world entity and they know who’s transacting inside their side-net. Also has the nice side-effect of having you dox any address that wants to deposit funds.
It gives their users access to the liquidity pool contracts and ponzi rewards that they’re used to getting, while still holding them basically in ‘custody’ with Coinbase. Which means that there’s less reason to pull your funds out of the Coinbase ecosystem and lock them up in main-net or a different L2 side-net. You keep them with Coinbase and still can earn liquidity rewards from any contracts that get launched.
I’m not 100% certain about this, but it feels like it gives *Coinbase* the opportunity to earn something from the massive amounts of crypto its users custody with them, or at least open up their internal trade ecosystem to a wider set of players that want to keep their assets on chain and not in Coinbase’s wallet.
I’m probably missing some, leave a comment if you think of one I’m leaving out!
Why Optimism?
I have no idea but this one really seems like a “it’s who you know” not the particular strength of your already existing project that leads to strategic partnerships. I’m sure Arbitrum was considered, maybe Optimism struck a better deal than Arbitrum offered because they’ve got more VC money to pay back (178M vs 123M) and their existing deployed L2 is 27% the size of Arbitrums.
On Twitter I called this the “first big Corp move”, and this is what I’m talking about. A 2nd place rollup partnering with a big player in the exchange business, being motivated to fork and re-deploy their existing tech due to what I can only imagine intense pressure from VCs to get even more return on investment than whatever they managed to unload with their OP tokens. This announcement alone made OP token price pop 6% today. ($COIN seems like it’s up about 2%).
We’ll see how it works out for both of them! Seems fairly optimistic for people who like using Coinbase to trade, plus it gives outside bagholders the opportunity to interact with the vast amounts of Eth assets that Coinbase holds on their balance sheet. Maybe. I think? Someone correct me on this.