Dexible Integrates Optimism + the Key to Unlocking Layer 2 Capital Efficiency
Why minimizing price impact & lowering slippage on L2s is so critical
Contents
- What is Optimism?
- Why is Low Liquidity a problem?
- What does it mean to solve for Low Liquidity?
- How does Optimism relate to Ethereum?
- Why use Layer 1s if Layer 2s exist?
The Dexible team is proud to announce its platform integrated the Optimism network into its dex aggregator. This integration brings Dexible’s algo suite to the Layer 2. Dexible’s suite of tools enables non-custodial, conditional, and price-impact-minimizing trading across all major networks. In the past month, the platform experienced more than 15,000 transactions from hundreds of new users on Arbitrum. The Dexible team intends to replicate the success of Arbitrum traders on Optimism.
Compare user activity to TVL — Aave goes from the #1 highest TVL to #11 most used, whereas Synthetix and Velodrome both have significant user interactions and daily traffic.
Why is Low Liquidity a problem?
Low liquidity is a reality given the bear market circumstances and its consequences are especially pernicious on Layer 2s and sidechains. Liquidity is a measure of the available, supplied capital on decentralized exchanges that aggregators can tap into to enable users to transfer between assets. Refer to DeFillama to see the TVLs on various dexes or refer to the info page of a particular dex — like Velodrome, Curve, or Uniswap.
Layer 2 networks focus on scalability — capacity, speed, & cost. Scalability is limited, however, when low liquidity limits the usability of the speed features. A lack of liquidity acts like speed bumps on the road and it’s now the reality given the market maturity of L2s and macro conditions. The lack of sufficient capital support for exchanging, swapping, and moving assets in bulk is inherently a UX barrier. If traders incur significant price impact when trading on Optimism dexes (which support derivatives and lending platforms), the lack of liquidity stops quick movement and large capital movements.
What does it mean to solve for Low Liquidity?
There are several ways to understand what it means to “solve” for low liquidity. Here are a couple of interpretations:
- Wait for macro — conditions to favor bulls, stay in stables or delta-neutral until fear becomes greed (not a solution, independent macro analysis to make smarter investments)
- Design better marketplaces — whereby supplying liquidity for traders is encouraged as many independent potential Liquidity Providers don’t see the benefits for locking liquidity up and cannibalizing their outcomes due to a lack of trading activity and general token price trends (an exchange design solution)
- Harness capital wherever it lives — Mulithop & atomically split transactions across venues (aggregation solution)
- Deploy existing capital smarter — Split orders, deploy/swap only when conditions are favorable (execution solution)
Dexible focuses on both aggregation and execution solutions. First, being able to tap more decentralized exchange sources of liquidity and second, introducing variable price impact minimizing timing into swaps. These two features ultimately make on-chain capital movement more efficient and help users achieve greater liquid efficiency. Setting conditional orders to improve output prices in addition to order splitting is a significant improvement for bear market conditions and for playing on Layer 2s.
Low liquidity problems plague users of Optimism and Arbitrum. The key to order splitting is a difference in paradigm: ad-hoc versus non-ad-hoc trading. Today, most trading is done instantaneously. Dexible uses a hybrid off-chain infrastructure to time when orders should be placed in addition to automatically sizing orders based on current market circumstances, timing out rounds of a total swap.
What is Optimism?
Optimism is a Layer 2 scaling solution for Ethereum. Scaling solutions intend to reduce fees and transaction time on the main Layer 1 blockchain. Layer 2s, like Optimism, rely on the security of Ethereum, whereas sidechains like Polygon, run in parallel with their unique security framework. Even more confusing, alt-Layer 1 chains exist in direct competition to Ethereum’s consensus model, even while replicating its smart contract logic and data structures. Ethereum sacrifices scalability for security and decentralization. Layer 2s serve as offshoots with a focus on speed and usability. Layer 2s like Optimism or Arbitrum step into steward faster finality speeds. To achieve this speed of finality, Optimism relies on rollup tech. Optimism depends on rollups, essentially distributing the network transaction fees across each transaction that would be a single one on the base Layer 1 network.
In comparing Arbitrum with Optimism, Optimism’s TVL has nearly halved in the past month, while Arbitrum’s has stayed fairly consistent. As of mid-December, Arbitrum has 34.2% more transaction volume than Optimism.
Network Details
- Network Name: Optimism
- Token: ETH
- RPC: https://mainnet.optimism.io
- Chain ID: 10
- Block Explorer URL: Optimistic Ethereum Explorer (what is a Block Explorer?)
- Website: https://www.optimism.io/
How does Optimism relate to Ethereum?
Limited blockspace on Ethereum results in auction-bid competitive conditions for transaction priority. These competitive circumstances pass costs down to end users and result in longer transaction clearance times. This created an existential urgency to the usability of Layer 1 alone.
Layer 2s entered the game by tapping into those competitive conditions on the Layer 1 through bundling of multiple transactions that pay for the security of Layer 1 together while benefiting from the reduced fees and improved transaction throughput on the Layer 2.
Essentially, Layer 2 users benefit from the network effect and similarities with Ethereum, while making trade-offs for usability purposes.
On top of making the path toward consensus less costly, the network transaction fees for each transaction are split amongst Optimism users per bundle when they are formally validated on the Layer 1 network. These bundles, known as commitments, get stamped with validity proofs, which are transferred to Layer 1s as a proxy for the corresponding bundle. The process of fraud-proofing begins here.
Optimistic rollups differ from Zk-Rollups. Optimistic rollups assume transactions are valid, skipping the validity of checking each transaction. Fraud proofs can be submitted if there are contradictions in the information passed back. For this reason, Optimism handles transactions much faster. While the Layer 2 processes each transaction through a distributed set of nodes like the Layer 1, the actual math of confirming those transactions is much less computationally expensive as the rules governing consensus are lowered.
One key difference between Optimism and Arbitrum is that Arbitrum submits multi-round fraud proofs which reduce network fees for the users but takes longer to validate. On the other hand, ZK Rollups generate validity and proof for each bundle of transactions after moving them to Layer 1, sacrificing speed for security.
Which Layer 2 is best? Shouldn’t I use the best Layer 2?
“Best” is a bit subjective. Here are some considerations:
- Withdrawal speed
- Speed of transactions
- Cost of transactions
- Underlying network security architecture
- Community Adoption
- Available liquidity
- Developer support
- Effective Decentralization
In their current form, both Arbitrum and Optimism rely on centralized components. Both of these L2s use sequencers and validators to generate fraud proofs. The teams behind these networks operate their sequencers, which ultimately bundle transactions up for processing on the Layer 1.
The tradeoff for this design is increased block time for fulfillment. Arbitrum and Optimism introduce a challenge grace period of 7 days to account for this security weakness in scalability. Any challenges to the accuracy of the information could mean a validator lying about something to have their stake confiscated.
If you go to L2Beat you can click to find the security assumption risks under which L2s are currently operating. While all L2s are centralized to various degrees, some of these tradeoffs may appeal to some use cases over others.
For instance, Arbitrum and Optimism are general-purpose optimistic rollups… they’re fully EVM compatible. That’s why they have hundreds of dapps and currently combine for almost 90% of all TVL on layer 2’s. Zksync, the 3rd largest Layer 2, currently has 29.65k daily transactions to Arbitrum’s 381.9k and Optimism’s 251k.
Optimism’s use cases are a bit different from Arbitrum — in terms of which apps are most significantly capitalized. In Arbitrum’s case, most volume is dominated by GMX. Aave and Synthetix predominately drive Optimism’s TVL. To a lesser extent, dexes like Velodrome (an Optimism-native DEX), Curve, and Uniswap are responsible for liquidity.
Arbitrum is similar to Optimism, as both are Optimistic Rollup chains as opposed to ZK Rollup chains. Arbitrum, like Optimism, validates transactions off-chain via side chains and sends only necessary proof data back to the main network, to prevent computation and state storage from lagging the network. However, Optimism depends on Ethereum’s EVM, whereas Arbitrum solely passes back call data from its own AVM, which enables Arbitrum to have faster cross-chain transfers.
For most DeFi use cases, Arbitrum, Optimism, and zkSync are superior at this stage of maturity of L2s because of their support for EVM (in Optimism’s case they support the Optimistic Virtual Machine AKA OVM). However, Arbitrum NOVA or Immutable X are preferred for on-chain gaming due to increased speed and lower fees over Arbitrum and Optimism. ImmutableX is a specialized zk-rollup built specifically for gaming and NFTs that runs on StarkEx. Transactions are free but have no EVM so no DeFi or general purpose dapps. Loopring is a basic zk-rollup built for value transfers but doesn’t support the EVM making dapp adoption harder.
Why use Layer 1s if Layer 2s exist?
Today this mostly comes down to available liquidity and use cases.
- Not all dapps are available on Layer 2s
- Dapps are unique by their security, logic, and underlying economics
- So not all economics, security, and logic is accessible on other networks
- And fundamentally neither is the community support
- Community support effectively translates to liquidity
People use Layer 1 to access liquidity and functionality not native to Optimism. Even Dexible had to create new infrastructure for understanding and moving with Optimism’s speed. This challenge is a blessing and a curse.
Sources:
- Bybit Learn. “What Is Optimism (OP): The Simple Layer 2 ETH Scaling Solution” (2022.06.19)
- Orbiter Finance layer 2 data (accessed 2022.12.13)
- DeFiLlama TVL data (accessed 2022.12.13)
- L2Beat L2 Risk Analysis data (accessed 2022.12.13)
- Comments here “Ethereum L2 Optimism Sees 500% Growth in Active Users Since July”
- Comments here “L2 scaling solutions Arbitrum and Optimism have both flipped Solana in TVL. One without even a native token. L2s are here and scaling DeFi”
- Metamask. “Network Profile: Optimism” (accessed 2022.12.13)
About Dexible
Dexible maximizes the liquid efficiency of swaps for pro traders.
Please read more articles on the Dexible Blog!
Dexible is the execution platform for savvy traders who care about the best execution, want to minimize slippage and price impact, and ultimately time the market better. Dexible achieves this through dex aggregation and custom algos, routing across 60+ liquidity sources on all major chains and offering 7 algo order types.
Traders can use the Dexible Trade Portal, web app user interface, or the low-code SDK, available in Typescript. Our updated user documentation is here.
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