Darren Kleine

The law of supply and demand is a fairly simple concept: Increasing supply in relation to demand will usually cause prices to fall.



Anyone who understands this basic economic law shouldn’t be surprised that the unlocking of tokens — roughly equivalent to 114% of <a href="https://blockworks.co/tag/optimism">Optimism</a>&#8216;s previous circulating supply of its <a href="https://blockworks.co/price/op">OP</a> token — correlated with a steady decline of nearly 50% in the token’s value over recent weeks.&nbsp;



Despite this market negativity, the convergence of a number of developments that are building on the OP stack signals a positive outlook for the ambitious Ethereum <a href="https://blockworks.co/tag/layer-2-2">layer-2</a> solution.



The “giant unlock” of supply caused Optimism&#8217;s OP token to “dump roughly 17% over the past few days,” says Ryan West, a <a href="https://www.blockworksresearch.com">Blockworks Research</a> analyst, on the <a href="https://www.youtube.com/watch?v=OPVvYCMXaR8">0xResearch podcast</a>.



And it’s only the beginning, he says, with tokens continuing to unlock half a percent of the total supply every month until some time in 2027.



It was a “pretty bad trading week for OP,” he observes.



The analyst wonders if a number of upcoming events such as the impending Bedrock upgrade, which enables Ethereum to “<a href="https://blockworks.co/news/optimism-bedrock-upgrade-superchain">eventually become a Superchain</a>&#8221; will be enough to maintain positivity.&nbsp;



“Is this enough to cause a bounce after the unlock,” West asks, “or will the overhangs over time also be a little too much, as liquidity is pretty dry at the moment?”



<figure class="wp-block-embed is-type-wp-embed is-provider-flourish wp-block-embed-flourish"><div class="wp-block-embed__wrapper">
<iframe class="wp-embedded-content" sandbox="allow-scripts" security="restricted" title="Interactive or visual content" src="https://flo.uri.sh/visualisation/13984014/embed#?secret=SunMe3hKZA" data-secret="SunMe3hKZA" frameborder="0" scrolling="no" height="575" width="700"></iframe>
</div><figcaption class="wp-element-caption">Optimism’s price detached from its market cap as the unlock hit</figcaption></figure>



<h2 class="wp-block-heading">Building on Optimism</h2>



The Bedrock upgrade enables chains to build on top of the OP stack and create a single unified network that incorporates “bridging, governance, upgrades and cross-chain communication.” The mainnet upgrade is scheduled to take place on June 6.



Other upcoming projects building on the OP stack, such as Worldcoin and Coinbase’s <a href="https://blockworks.co/news/coinbase-base-mainnet-launch-soon">Base</a> testnet, also appear to be nicely timed to maintain positive vibes, despite the scheduled release of tokens.&nbsp;



Worldcoin will provide the ability to <a href="https://blockworks.co/news/proving-humanness-on-internet">verify “humanness”</a> via a “decentralized, open-source and privacy-preserving” protocol, according to co-founder, Alex Blania.&nbsp;



Coinbase, the largest American crypto exchange, is building the layer-2 chain, Base on Optimism. It aims to offer a “secure, low-cost, developer-friendly way for anyone, anywhere, to build decentralized apps or ‘dapps’ onchain,” according to the company <a href="https://www.coinbase.com/blog/introducing-base">website</a>.



<h2 class="wp-block-heading">The market is inefficient</h2>



Blockworks research analyst Ren Yu Kong notes that historically, teams have often deliberately timed protocol upgrades to coincide with token unlocks in order to mitigate suppressive effects on the market.&nbsp;



<iframe loading="lazy" frameborder="0" height="200" scrolling="no" src="https://playlist.megaphone.fm/?e=BWG6523656089" width="100%"></iframe>







“In crypto, these large unlocks,” Kong says, “it means everyone can dump early. But I feel like that&#8217;s mostly a function of the market not being efficient and pricing everything too highly.”



Research analyst Sam Martin adds that he expects that with the growth of projects attached to Optimism, conditions may “shape out” more like the <a href="https://blockworks.co/tag/cosmos">Cosmos ecosystem</a>, where “the hub isn&#8217;t necessarily the central value accrual token.”



Token value could hinge on whether the OP stack chain returns revenue from the sequencer back to public goods funding, Martin says.&nbsp;



“That is a pretty enticing flywheel right there if it becomes a standard.”



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‘Giant Unlock’ Causes Optimism’s OP Token Value to Drop

Macauley Peterson

<div id="highlights-block_626c24657504e" class="highlights">
 <ul>
 <li>Governance will eventually be split between two co-equal branches, according to a constitution</li>
 <li>An initial retroactive airdrop will be the first of many seeking to coordinate network participants</li>
 </ul>
 
</div>



Optimism — an Ethereum layer-2 solution featuring optimistic <a href="https://ethereum.org/en/developers/docs/scaling/layer-2-rollups/" target="_blank" rel="noreferrer noopener">rollups</a> — is planning to decentralize its governance through the release of a token.



The network detailed the token launch, OP, in <a href="https://optimism.mirror.xyz/gQWKlrDqHzdKPsB1iUnI-cVN3v0NvsWnazK7ajlt1fI" target="_blank" rel="noreferrer noopener">a blog post</a> this week. While not the first layer-2 to launch a token, the mechanism of distributing it and the overall governance structure is novel in that it envisions a bicameral system of co-equal “houses”: a “Citizens’ House” and a “Token House.”



“If we just had tokens, then governance rights would be buyable on the open market,” Karl Floersch, chief technology officer, said on the <a href="https://youtu.be/bKVIfJIhS1o" target="_blank" rel="noreferrer noopener">Bankless podcast</a>.



The plan calls for an “Optimism Collective,” which explicitly aims to prevent the centralization of governance power in the hands of moneyed interests. “It’s more equal,” Floersch said.



Rather than follow a one-token-one-vote structure, the system’s architects at Optimism PBC, a public-benefit corporation rebranded as <a href="https://www.linkedin.com/company/oplabs-pbc/" target="_blank" rel="noreferrer noopener">OP Labs</a>, sought to create a “balanced, decentralized, bottom-up governance system by the people for the people.”



<figure class="wp-block-image"><img decoding="async" src="https://lh6.googleusercontent.com/zlPgxN-dVJuNTJVGkWd0KXLuHeXpYPIlIETDCPQxX8MX0rqb2H9VQzrgq0weu_noPb8ZKK_-B5J2Hx5m7rFIe2704-wG50po3a5a0xKkAD4o9kMEdQPKCDea0G2clrf-g_K9R1C8agTq6eZK9w" alt=""/><figcaption>An illustration of the proposed Optimism governance scheme</figcaption></figure>



Layer-2 implementations, built on top of Ethereum’s mainnet, inherit Ethereum’s security but allow transaction throughput to scale, while reducing gas fees — the cost of block space on the network. Optimism is currently the third largest layer-2 by total value locked, at $670 million, behind Arbitrum and dYdX, according to <a href="https://l2beat.com/">L2beat</a>.



Tokens have typically been used to bootstrap liquidity on new protocols, but Optimism received an early boost by being the first layer-2 on which <a href="https://uniswap.org/blog/uniswap-optimism-alpha" target="_blank" rel="noreferrer noopener">Uniswap announced</a> it would deploy its leading dex protocol. Synthetix, another decentralized finance (DeFi) blue chip, <a href="https://blog.synthetix.io/why-optimism/" target="_blank" rel="noreferrer noopener">embraced the network</a> as its rollup solution of choice.



<h3 class="wp-block-heading">A new kind of airdrop</h3>



Jinglan Wang, Optimism’s co-founder and CEO, and Ben Jones, formerly the chief scientist, will move to a new Optimism Foundation, which will fund external teams to build out the OP ecosystem.



The OP token is not yet claimable, let alone tradeable on the secondary market, but the team sought to de-emphasize its role.



<blockquote class="wp-block-quote">“The token is missing the point of this thing. This is about building a new system of governance and funding mechanisms for public goods,” Jones said.</blockquote>



The problem with Web2 is plutocracy, Wang said. The Optimism team are trying to avoid a “sneaky plutocracy,” enabling Optimism network participants to coordinate without falling prey to the “pressures of centralization.”



To do that, governance power will reside with “citizens” — holders of NFTs that will be distributed by projects built on Optimism. But unlike most NFTs (non-fungible tokens) today, these will be “soul bound,” that is, fixed to a specific address — a single person. They will not be able to be transferred or sold.



While the details remain scant, the team envision a grassroots network, seeding a “web of trust” on-chain that will grow over time. Independent projects will decide which of their community members will best represent their community’s interests in Optimism governance.



The idea has been received favorably among the broader Ethereum community, with co-founder Vitalik Buterin calling it “possibly the biggest attempt at non-token-holder-centric DAO governance so far.”



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">Possibly the biggest attempt at non-token-holder-centric DAO governance so far. Excited to see where this goes. 👀 <a href="https://t.co/9vreC7QsXa">https://t.co/9vreC7QsXa</a>&mdash; vitalik.eth (@VitalikButerin) <a href="https://twitter.com/VitalikButerin/status/1519012381581463552?ref_src=twsrc%5Etfw">April 26, 2022</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



The initial airdrop was aimed to be “super fair,” with a wide distribution and built-in <a href="https://en.wikipedia.org/wiki/Sybil_attack" target="_blank" rel="noreferrer noopener">Sybil-resistance</a>, by rewarding a set of behaviors that would be difficult to game. But it will only be the first of a string of airdrops used to incentivize activity that helps Optimism, and Ethereum more broadly, grow, by distributing public goods funding to recipients from across Ethereum development.



The team see its governance experiment as a test bed for the future evolution of the entire internet.



<blockquote class="wp-block-quote">“Right now we sit at an inflection point…this is a moment where the internet is most sorely in need of human representation, identity, and fixing these problems that we have,” Floersch said.</blockquote>



“Humanity is important, we need to capture and fight for our rights as people and individuals to make sure our networks reflect our values.”



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