*Note: a SWOT analysis is an evaluation of the fundamental, operational, technical, social, economic, and even to some degree administrative elements of a project. This is not a model to be used for trading purposes. (NFA, DYOR)
Composed of four elements, Strengths, Weaknesses, Opportunities, and Threats, a SWOT analysis framework provides excellent insight for establishing a high-level understanding of the state of a project's well-being through the lens of a birds-eye view.
It can help formulate decisions around which areas require more attention, set performance goals, and organize a foundational understanding of where a project is headed.
Rarely (if ever) used in crypto, it is time to apply this timeless method of evaluation to the digital asset space.
Today, Optimism (OP), the Ethereum native Layer 2 scaling solution utilizing fraud-proofs via its optimistic rollups, will get a SWOT.
💪 Strengths (Internal) (Helpful)
1. Fundamentals Trend Strengthening
Using the existing market sentiment and macro landscape as a barometer to measure the performance of any individual project over the course of the last year, Optimism has shown extreme resilience. While metrics such as on-chain TVL and stablecoin reserves have shrunk in proportion with the greater market, the fact that Optimism remains a top 10 chain for liquidity and DEFI development underscores its quality. More developers, more applications, more diversity in the concentrations of liquidity, more users, more integrations, the fundamental performance metrics of Optimism have exceeded those of most other generation 3 blockchain networks.
2. On-Chain Active Address Growth
Optimism mainnet has been exhibiting consistent growth in the amount of addresses that are active on a daily basis since inception. Taking what seems to be the natural approach (not spoofing activity), every quarter has shown growth and retention of address activity. Starting to only gain notable traction now (growing ~47.5k {7.8 q1 + 6 q2 + 16.8 q3 +16.9 q4} accounts over the course of a year) there is tremendous room for growth, and if that stickiness/retention rate remains constant, the reflexive economic value feedback will prove impactful.
3. Retroactive Public Good Funding Model
Public blockchain networks derive their economic value through the velocity generated by the network's participants. The more surface area (in terms of application use case) that a network covers, the more likely it is to ultimately accrue value at the token. It is common practice in the industry to fund product development through a forward-facing model, where money is provided prior to a product's instantiation. Optimism has taken a novel approach to this problem by inverting the logic. Projects building on OP will receive funding retroactively, meaning that after a product is put out into the ecosystem and concrete measurements can be established as to just how truly valuable something is to the entire network, Optimism will provide them with funding for their work. By utilizing such an approach, funds will be allocated more effectively; less money will be wasted, and more money will go towards supporting working products.
4. Bedrock Upgrade
The value proposition of scalability in layer 2 can be defined by the speed, volume, and cost improvements of transactions. Over the last year, we began to see OP mainnet fees climbing as the network's utilization levels grew; in fact, the OP fees were easily comparable to that of more mature networks like Polygon (~$0.50). Not long ago, Optimism released a new software upgrade called "Bedrock" that leverages a multitude of compression techniques to drive down transaction costs and reduce the friction in communication between the DA (data availability {ETH}) layer and Optimism. Once implemented, a slew of benefits, including deposit times that are 3x shorter (from ~600 seconds to ~180 seconds), network fees roughly 50% lower (bringing average tx to ~$0.25), improved node performance (by reducing state growth), among other things arrived in OP. While this did reflect itself in a reduction of network earnings, the long-tail benefits supersede any short-term losses.
5. Adoption by Major DAPPs
Optimism has drawn a wide range of some of the most important decentralized applications in the industry that have integrated OP into their stacks. Uniswap, Synthetix, 1Inch, Velodrome, Perpetual protocol, Hop, PoolTogether, SushiSwap, AAVE, Gelato, KyberSwap, Slingshot, and hundreds of others (including wallets), are exposing their communities to the power of Optimism. The adoption by a new protocol is a vote of confidence in the project's longevity and its role within the industry.
6. Excellent Documentation
At a time when the vast majority of the industry slowed their content communications, Optimism not only increased the amount of information they provided but the quality of it as well. The attention to detail, consistency, and philosophy of Optimism that is transferred to the audience through documentation is truly remarkable. While the crypto industry is certainly not without quality documentation, OP has organized such a vast amount of information in various different formats across a multitude of platforms that only a handful of gigabrain projects could even begin to contend on this front. Their developer documentation, project documentation, and the quality of their blog(s) deserve applause; striking the perfect balance between technical, economic, and political principles in a coherent, stimulating way positions OP to potentially have the best-written content of any project in the space; not to mention the external, independent third parties that have created a monsoon of content on OP's behalf.
7. Substantial improvement in TX Success
Last year (2022), Optimism was handling approximately ~130,000 transactions daily, of which ~12,000 were failing; that is ~9.23% or nearly one of every 10 transactions. As of the most recent data set, floating around ~490,000 daily with ~19,000 failures brings the current rate to ~3.87%. An improvement of almost 2.5x. If this trajectory is kept up, we should be able to enjoy sub 1% failures within a year's time, until eventually, the TX performance turns out to be more successful than competitors. Seeing this metric improve is a direct expression of an improvement in the user experience, which, of course is the most important variable in a network's success.
😞 Weaknesses (Internal) (Harmful)
1. Still Relatively High TX Failure Rate
Optimism mainnet is handling approximately ~490,000 tx per day on average, of which roughly ~19,000 are failing; this means 1 of every 35 transactions fails. This is an extremely high level whenever applied at scale; if a network is to handle hundreds of thousands of transactions per second, having multiple thousands of them failing simply won't cut it. In order to qualify as "worthy/trusted" enough to facilitate tremendous value transference, failures must fall sub 1% (which is still very generous). At the current failure rate, there will be no legacy conglomerate (such as Visa) that would even consider interacting with the main chain.
2. A lot more OP to come into Circulation
There is merely ~20% of the entire OP token supply currently circulating. With a market capitalization of roughly $1.25 Billion USD and an FDV of $6.25 Billion USD that would make Optimism more valuable than Chainlink (highly unlikely). With over 3,500,000,000 more OP tokens coming onto the market over the next few years, this poses a severe drag on potential price action. Regardless of how much "discovery" takes place, the new supply coming into circulation will either suppress the potential upside or result in mind-melting pain to the downside.
3. OPstack does not Translate into Value for OP token
The technology that is being provided (open-source) for people to build their own optimistic rollups based on the OPstack has no obligations for those users to somehow transfer any value back to OP token holders. Quick note here that Coinbase is actually taking the moral high ground by opting to share a portion of the sequencer fees with Optimism; however, this is not a requirement.
🧐 Opportunities (External) (Helpful)
1. Launch Timing
Optimism is easy to consider one of the most exciting events that took place post the 2021/2022 market shift, mostly due to the massive OP token airdrop that took place. While there are sections of the digital economy that are vehemently against airdrops (usually those that missed out on it); by conducting themselves in the way that they did, Optimism set itself up as a "light in the dark." When everything was hard, and the future seemed bleak, when communities were collapsing, and new project launches were predominantly scams, Optimism rose above the noise and distributed millions of dollars throughout thousands of community members. They say that you can only make a first impression once; Locking in the image of an honest actor solidifies the likelihood of permanence for the project.
2. Community Orientation
Optimism is heavily oriented towards its community. Constantly upholding the hero theses of the digital economy with things such as radical governance, decentralization, and technological supremacy, OP is a case study for other projects that want to launch new networks. The brand itself, especially through its communications, embodies strong camaraderie with undertones of cooperation. Optimism's approach is reminiscent of that of Amazon, namely the obsessive focus on customers, and in crypto, the community is the customer. Jeff Bezos has driven Amazon to become one of the most recognized, powerful, and valuable companies on the planet on the back of his famous philosophy of being obsessed with the customers.
3. Industry Support for OPstack
A multitude of the industry's most reputable companies, including the likes of Coinbase (with their Base Network), Binance (with opBNB), and even the contentious Worldcoin (Sam Altman's eye-scanning global ID network), has acknowledged the quality of design behind Optimism's solution and are relying on it for their architecture. Adoption by this caliber of market participants is a tell-tale sign of Optimism's technical quality. Moving forward, it is very likely that other tier-one entities will follow in these footsteps.
😳 Threats (External) (Harmful)
1. Layer 2 Wars
Layer 2, as a sector, has been drawing in the most developer mindshare and venture capital. A multitude of different teams, all leveraging different technological architectures, are in direct competition with one another. Even though it is commonplace for them to all argue that they are increasing the size of the pie for everybody, the simple truth is that even if they make the pie bigger, it doesn't mean that everybody gets that pie. With gigabrains from Arbitrum, ZKsync, Scroll, and others all competing for effectively the same exact use case, unanticipated shifts in the on-chain politics and consumer behavior could render a certain solution set (such as OP's fraud proofs) obsolete.
2. Optimistic Rollups (Fraud Proofs)
The L2 scaling scene has two general categories of technologies underpinning its effectiveness based on the proof type: either fraud proofs or validity proofs. Optimism built its rollups scheme on the principle apparent in its name, that transactions are approved "optimistically". In this model, fraud proofs are what is used to combat malicious/incorrect activity; the problem with fraud proofs is two-fold: first, they do not prevent bad behavior - they can only amend it after the fact (which can give bad actors time to disperse their value away from the source) and second, using a fraud-proof can incur challenge periods that can last weeks (resulting in monstrous delays for users that want to withdraw they funds back to L1). This threat faces absolutely all projects that have opted for the fraud-proof-based system.
Takeaway:
A juggernaut on the layer 2 scene.
Optimism is heavily equipped with the technical and social skills required to make a crypto-economic system flourish.
Potentially, one of the best exercises in branding coupled with top-tier community building is a recipe for sustainable success, and in this regard, OP is second to none.
The only theoretic drawback here also happens to be the very technology that makes OP possible: optimistic rollups. While it definitely seems unlikely (if not impossible) that fraud proofs will be disregarded as a technology solution, it is always prudent to, at the very least, acknowledge the non-zero possibility of something like this transpiring.
Conclusion:
There are so many wins here.
The presence of Optimism is impossible to ignore. While there is a disconnect regarding the value cycle of the mainnet, the technological solution it provides to other builders, and the token holders, there seems to be something cooking in the background that would ultimately align incentives when the time comes.
*Something that was not mentioned here is the progressive approach to governance that Optimism is taking with its dual-house structure and the OP foundation. Few. Very Few projects approach DAOs with this level of acute intellectual prowess and are as articulate as OP on such sensitive philosophical matters.
Thank you so much for reading, I hope this serves you well on your journey.
Live long and prosper 🥂
