OFRTalk#8 Review: Exploring the OP Token Model and Its Insights from a Governance Perspective

Written by: OFRTalk

On June 7th, OFRTalk #8 held a series of discussions with guests regarding Optimism's governance token $OP. This article summarizes the highlights of the event.

Recording Replay

OFRTalk is a voice interview series supported by Old Fashion Research. Its vision is to become a community-oriented open interview platform, bringing different perspectives on various sectors, as well as in-depth blockchain content research, discussions on invested projects, and hot topics, to help everyone gain a deeper understanding of the industry.

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Participants of OFRTalk #8

Tu, Co-founder of Trillion.fi // @GaoFlynn

Robin, Founder of 0x0crypto DAO // @zeroonerobin

Sybil Attack, Researcher of Catcher VC // @eternal1997L

Wayne, Founder of TokenInsight // @0xwayne_z

雨中狂睡, BD&Journalist of TechFlow Post // @qiaoyunzi1

Host: Has everyone received the $OP airdrop? Can you share your initial interaction experience with Optimism, including any inconveniences and advantages? The 7-day challenge period of optimistic rollups is currently a key obstacle to their large-scale promotion to users. How should this issue be overcome?

Robin: I am a DeFi developer and have also received airdrops of $UNI and $DYDX. I interacted with many protocols and then noticed the Optimism chain. $OP was my first formal interaction using multiple accounts. At that time, there weren't many large-scale studios and teams doing airdrops, so I used 200 accounts for interaction, and nearly half did not receive $OP, but the process was still quite enjoyable. In the future, if Layer 2s like Arbitrum and zk-Sync want to issue tokens, I personally have doubts about whether they should still adopt the airdrop model. The efficiency of airdrops is not very high, and initially, there will be significant selling pressure and irrational market sentiment. I personally believe that issuing tokens on Optimism right now is not particularly good; both the effect and experience are lacking.

Host: I'm curious, after you received the airdrop, did you sell it?

Robin: Yes, I sold it, but I didn't sell at the peak, and I didn't care too much. I kept 20% for future interactions.

Tu: The airdrop model of Optimism was relatively unsuccessful for two reasons. First, there were simply too many people trying to take advantage of it; what was initially a fair distribution has deteriorated. Second, more and more people are coercing project teams to do similar airdrops, which has led to the degradation of the airdrop model. Personally, I am not very optimistic about Layer 2 models; most scaling efforts have failed, and there is no demand for such scenarios.

Host: Speaking of which, I want to ask the guests about their attitudes towards Ethereum Layer 2 and other Alt Layer 1s, such as BNB Chain and Avalanche.**

Sybil Attack: For Layer 1 scaling, aside from Near, which is specifically designed for sharding, other scaling efforts have little hope. The narrative has reached its end. Solana is a great example of extreme Layer 1 scaling, sacrificing system usability for high efficiency. However, since September last year, Solana has gone down many times. This indicates that when the number of nodes in a public chain is very large, the time spent on consensus between nodes will be long, slowing down block production. As the number of Solana nodes increases, the complexity of consensus communication has also increased. From Solana, we can see that there is little path left for Layer 1 scaling unless sharding is adopted.

Host: The biggest difference between $OP and governance tokens like $ENS and $UNI is that Optimism is a public chain, not a dapp. Recently, Optimism's TVL surged by 108.9% in the last 7 days, jumping to second place in the L2 TVL rankings, accounting for 19.22% of the market share, but it still has a long way to go to catch up with Arbitrum's 48.89%. Currently, Arbitrum's ecosystem is relatively complete, with derivatives trading led by $GMX and NFT/GameFi ecosystems like TreasureDAO (MAGIC). What do the guests think about whether Layer 2, especially optimistic rollups, has reached a definitive conclusion? What changes will occur in the Layer 2 landscape after the Ethereum 2.0 upgrade?**

Robin: I believe the current landscape of Layer 2 has already been established, with little room for change. I think issuing tokens on Optimism right now is not a good choice, not because the current market situation is poor, but fundamentally because the narrative of the entire application layer has reached a conclusion. Currently, applications like DeFi, GameFi, NFT, and NFTFi have fully articulated their narratives, and there are no new applications to restart the narrative. Optimism has no more dividends left in the application layer. I can't think of any growth points for Optimism within the old framework; breaking through in that context is very difficult. In the future, if new narratives like DID or privacy computing can rise, the public chain that seizes this opportunity will ultimately break the current pattern. For now, the Layer 2 landscape is established, and the future depends entirely on the explosion of the application layer.

Morty: In the short term, there will still be some opportunities, including LP mining and similar activities. But for long-term development, it still depends on how well Optimism manages its governance, including its stated intention to allocate more treasury funds to hackathons, liquidity mining incentives, and so on. The market is still a zero-sum game, and Optimism may not achieve very dazzling results. However, I agree that the application layer has great potential, including many Alt Layer 1s that are building their own application chains and sidechains.

Host: I have been paying attention to some L2 data since March. Aside from the recent issuance of tokens by Optimism and the Velodrome airdrop, which doubled Optimism's TVL, there hasn't been much change in the data layer. So personally, I also believe that the L2 landscape is established.**

Wayne: My thoughts are a bit different. I don't know if everyone has this feeling, but a few months ago during the bull market, some operations you did now seem hard to understand, like investing in some silly tokens or mining certain coins, where there were definitely many irrational behaviors at that time. Now that the market is calm, you will reassess your investment behaviors, and there have been many regrets. However, everything has its time to rise again; if the bull market returns, people will still engage in some irrational behaviors, which will lead to very different outcomes. For example, regarding some matters of L2, when a new project issues an airdrop, everyone might rush in, and if everyone rushes in, the L2 story will be told again.

Returning to the fundamentals of L2, if we treat L2 as a narrative, a story, it has only been around for a short time, just about a year. Compared to DeFi, which has gone through several ups and downs before having one or two major explosions, NFT has also experienced similar cycles. When we talk about the conclusion, it may be because everyone is in a very calm state. When market sentiment rises, irrational behaviors may appear again, leading to the revival or even re-explosion of many junk projects.

Sybil Attack: I personally believe that the OP Rollup narrative has not changed much. After Optimism issued tokens, the most direct effect was to flood the market with money, which should have stimulated user consumption. However, yesterday I looked at the results on the OP browser. On the night of the token issuance claim, there were 500,000 transactions across the Optimism network within 24 hours, but in the last two days, it has dropped below 100,000, returning to the state before the token issuance, which largely indicates that the stimulation of user consumption has disappeared after the token issuance.

What is the role of Optimism's token issuance? First, it urged project teams to solve financial issues, giving them a stronger incentive to lower gas fees. Previously, Metis did this. In April of this year, Metis made a significant move by changing its storage layer and lowering gas fees to the same level as Polygon. They did this to engage in a price war. In the past, Optimism's sequencer nodes were all run by the official team, and the value of MEV was extracted by the officials, with users' transaction fees becoming the officials' income.

What does this lead to? Gas fees are strongly correlated with the officials' revenue. Optimism's financial reserves largely depend on user transaction fees and the extraction of MEV value. If they rely on this long-term, the Optimism officials will not have a strong incentive to lower gas fees. After issuing tokens, the funds used for public construction no longer need to rely on transaction fee revenue, which largely solves the financial issues of Optimism officials, giving them a significant incentive to lower gas fees in the future. They previously mentioned the concept of fixed costs in their documentation about transaction fees, but they also emphasized that it can be adjusted by themselves; if they want to lower it, they can lower it. So I feel that in the near future, they will lower gas fees. Moreover, in May, Optimism also made a move by releasing a framework whose primary purpose is to lower gas fees.

After Optimism issued tokens, their competitive advantage over Arbitrum lies in the fact that Arbitrum has not issued tokens during this window period. Whether Optimism can quickly build this ecosystem and use the Optimism token to stimulate project teams to deploy protocols or stimulate users is crucial; if they fail to do so, Optimism will have no chance. Once Arbitrum issues tokens, it will completely overshadow Optimism.

Regarding the Ethereum 2.0 upgrade, the four major L2s are essentially competing for a share of the block capacity. They all need to occupy Ethereum's block space. First, they need to store L2 data on L1; second, these four L2s are competing for the same shard resources. This ultimately leads to everyone being unable to lower gas fees because everyone incurs costs, making it difficult for all four L2s. After sharding, these four L2s will no longer need to compete for a single shard; it is possible that Arbitrum will use one, Optimism will use one, and ZK will use one, allowing everyone to lower gas fees. At that time, the user base will definitely grow, which will test the integrity of the ecosystem, so Arbitrum's advantage should be the greatest then.

Ultimately, the situation will depend on whether ZK EVM can be implemented before Ethereum sharding. If ZK EVM cannot be implemented before sharding next year, Arbitrum will largely have a vampiric effect on other L2s.

Tu: My viewpoint is more of a combination of Robin and Wayne. The narrative on applications has certainly ended. However, I am skeptical about the criteria for determining what "the conclusion has been reached" means. Since the bear market began in January, TVL has not been a very stable indicator. In fact, just a new killer app like StepN could easily place L2 or public chains in the top three positions, which is a scenario that can disrupt the market at any time. The ranking of L2s seems stable, but to me, it is just a fragile appearance; the entire L2 narrative is not very stable. If we look back at history, the changes in the top 10 market caps are quite frequent, and significant changes can occur in just a week. I have some doubts about the definition of "conclusion" because the current environment is not stable. Moreover, there is another possibility that the entire Layer 2 narrative could be replaced by something new. The operation teams of public chains are very important; once the operational capabilities change and some hot topics are created, the entire pattern could be overturned.

Host: The topic of token governance has been around for a while. Tokens like $UNI and $ENS have been quite popular over the past year, but they cannot escape criticism as air tokens. Is governance merely an ethereal application? How should we view governance tokens from an investment perspective?**

Wayne: The concept of governance tokens and governance itself is indeed quite vague and not very useful, so from this perspective, it is air. But even if you really participate in voting, it doesn't matter much; most people vote for the more popular options. In other words, your vote does not significantly affect the outcome, except for large holders. Decentralized governance and individual investors' participation in voting are essentially not closely related. Conversely, does the protocol need decentralized governance and user decision-making? This is similar to running a company; a company does not want everyone to participate in decision-making; one or two people are enough.

Sometimes I think from another angle; let's take stocks as an example. Everyone thinks that stocks are backed by companies, which have cash flow that can create value, so stocks have value and meaning. However, for an individual buying stocks, does it matter to the company? Aside from giving them money, it is exactly the same as trading in the crypto secondary market; you do not truly participate in the company's operations. First, it does not give you dividends; second, it does not allow you to participate in real governance. From this perspective, stocks are more like air than crypto, but stocks have more recognition, with institutions and countries backing them, making them seem more reliable. The top of crypto is also unlikely to run away, so compared to the real world, it does not seem so much like air. Therefore, I feel that governance itself has no significance; people just like to associate governance with the utility of tokens. Governance is a pseudo-concept, but it is slightly better than stocks.

Tu: I am quite familiar with Curve. I agree that much of governance is a pseudo-concept, but I think Curve has done something interesting that makes its governance effective in a certain way, which is governance related to fiscal power. By voting on Curve, whether through bribes or voting on pools, I can increase the yield of the tokens I hold through pure contract forms. In my view, this is the only meaningful form of governance through tokens, which must be closely related to the protocol's fiscal power, especially future fiscal power.

The governance model of Curve is a significant improvement compared to stocks; it is not just voting on proposals but directly influencing revenue, including the launch of vesting and gauges, and matters related to fiscal power. Especially in the DeFi field, it can achieve tangible effects where voting on tokens determines changes in fiscal power. As long as the protocol can achieve sufficient decentralization, it can ensure that only token holders can influence contract decisions, even the team cannot dominate the direction.

Wayne: The concept of governance itself is not problematic, but the results of governance are. Should we evaluate the effectiveness of governance based on its results or based on the value it should provide? We see that the results of governance are meaningless because the protocol itself does not have much that requires good governance. For example, if three of us establish a company, and you are the president, I am the vice president, and he is the general manager, it actually does not mean much, right? Curve itself has developed well, with clear demand, transaction fee income, and cash flow that can be combined with tokens. If another project adopts a model similar to Curve's, it may not necessarily succeed.

I think there is another example we may overlook: Ethereum. Ethereum does not require voting, but we cannot say that Ethereum is centralized. Therefore, whether there is this layer of governance structure is independent of the development of tokens. However, if the governance structure and token development can establish a connection, the development of the protocol can feedback to the value of the token.

Tu: From the results perspective, the reason lies in what scenarios we can achieve real governance through contracts and output correct results. In most cases, we do not govern through tokens and output results through contracts or on-chain, so it is difficult to achieve results-oriented governance. Governance tokens, regardless of the outcome, need to have a transparent process; I think this is a significant improvement, including how many votes each option received and who voted for which option, all of which are progress.

Host: The topic of Curve essentially revolves around the chicken-and-egg problem. Curve optimizes governance rights because it carries a significant business volume.

Sybil Attack: Someone just mentioned Ethereum, and I suddenly remembered Nick Szabo, Satoshi's mentor, who had a complete falling out with the Ethereum Foundation in 2016-2017. Perhaps Szabo was dissatisfied with Ethereum's governance. While the introduction of governance tokens may help with true decentralized governance, if Szabo were to evaluate Optimism, he would probably criticize it as well.

Host: Recently, the Optimism team released a document titled "This Governance Will Self Destruct," exploring how to make Optimism a network where everyone is equal among users. Notably, the governance of OP will be divided into two houses (Token House and Citizens House, with Token House leaning towards PoS and Citizens House being more egalitarian). Can you imagine an application scenario for this governance model and its practical significance? Compared to Curve's bribery and whale-friendly mechanisms, are there aspects worth referencing?**

Wayne: A guest mentioned that crypto governance tokens need to be closely related to economic interests, and the source of economic interests is the protocol's revenue. There is a significant issue here, which is why Optimism chose this governance model. Once you are closely related to economic interests, it means that everyone will choose the optimal strategy for their economic interests, especially short-term economic interests, which can harm the protocol's long-term interests. We can separate some functions of tokens, such as those with long-term benefits or external effects. For short-term, internal interests, we can keep them within the token. In crypto, there are many external resources or functions, such as a development tool or a testing tool, data types, etc. When people need to vote and spend money on these, they are generally reluctant. For everyone, doing such things does not benefit their economic interests, but it is beneficial for the overall development of the protocol. For example, if a park needs to be built in front of your house but has no entrance, you have to take a long detour to enter the park. Other families may agree, but you might disagree. For the entire community, this is a good thing, but there will always be someone voting against it. What Optimism is doing is essentially balancing the pursuit of maximizing economic interests through token governance with the long-term development of the protocol. Specifically, whether the Citizens House can achieve long-term healthy development for the protocol is still unknown, but at least their attempt and goal are like that.

Host: This model is just one proposed by Optimism; the actual results are still unknown and will take years to see. Guests can share their thoughts on Optimism's constitution, regarding the Working Constitution and Bedrock Constitution. The Bedrock Constitution is actually derived from the first version of the Working Constitution, which will be trialed for a few years, and when issues arise, it will be actively improved to form this version of the Bedrock Constitution.**

Morty: I translate the Working Constitution as the Progressive Constitution. It allows for practice because practice is the only standard for testing truth, and it can be adjusted based on actual conditions. It may be adjusted according to future developments, such as issues arising from the distribution of treasury wealth, where citizens vote to improve the constitution. It is determined by the Optimism committee based on a series of governance experiments, with a time limit of four years. After four years, it will decide the Bedrock Constitution based on the Progressive Constitution, and then use the Bedrock Constitution to implement more detailed governance. Optimism is considering creating a Layer 2 similar to a country, but its current performance is not good. If there are many participants, its practice is meaningful, but if there are few participants, it may be difficult to align with reality.

Sybil Attack: What Optimism is doing is somewhat similar to El Salvador adopting Bitcoin; it has a similar significance. Optimism is somewhat like a political model in reality, a perfect controlled experiment. However, there are also technical implementation issues, such as how Optimism officials prevent Sybil attacks, for example, if an institution creates many addresses at once and pretends to be many people voting. Regardless, Optimism represents a great experiment in on-chain governance.

Tu: Optimism's governance model is indeed very interesting; it actually combines several concepts, including the "soulbound" concept mentioned by Vitalik, which has been utilized by Optimism. I must mention Vitalik; he still wants to promote his ideal of decentralization. The "soulbound" concept is about advancing a certain degree of KYC to an identity while maintaining sufficient privacy and resisting censorship. The Citizens House is a participant who has undergone KYC. In my view, the Citizens House is like a standing committee, providing a higher level of management. The economic relevance mentioned by Wayne and how bribery can lead a system to destruction is a deeper topic that can be explored. The balance between short-term and long-term interests can be achieved through sufficiently strong contractual rules, limiting it within a range, where participants weigh their maximum interests against the long-term interests of the protocol through game theory. I believe Curve has somewhat achieved this, where voting only affects the fiscal power of mining and does not influence team decision-making. Such a separation of power and the limitation of rules can allow the bribery mechanism to play its game-theoretic effect to promote the progress of the entire protocol.

Robin: The development of corporate law, from the East India Company to now, has only been a couple of hundred years. The mapping of corporate law onto crypto may differ only in the intensity of crypto's development. The development of corporate law has evolved from the distribution of responsibilities and obligations to now needing to adapt to local political environments while also supplementing and patching modern economics. What Optimism is doing with these two houses is a significant advancement. Compared to Curve's ve system, which is entirely bound by interests and LPs, the development of a public chain is not solely about prioritizing the revenue side. The development of public chains carries a lot of technological exploration and future application exploration, as well as much imagination in technological directions, which cannot be bound to interests. Currently, I believe that the structure of all governance tokens in the application layer cannot meet the development needs of public chains because they have other ecological tasks beyond revenue. In light of the development of corporate law, Optimism has gone through the successes and failures of so many L1s, including the cycles and emotional aspects of the application layer, and has summarized the structures of Token House and Citizens House, relying on Token House to decide the governance of Citizens House, achieving structural optimization compared to all previous single-layer application layer decisions. I also believe this is a great experiment.

Host: Have any of you seen interesting viewpoints regarding blockchain political science, or do you have your own thoughts to share? If you were to build a Web3 nation, how would you design your political system?**

Sybil Attack: I might choose to operate like Polkadot's current relay chain nodes. Polkadot does not allow all nodes to participate in the operation of the relay chain; they must first stake a large amount of $DOT tokens. I would like to implement a qualification review like Polkadot. If all addresses and wallets have open voting rights, it would be easy to fall victim to Sybil attacks. If one person acquires many tokens and distributes these credentials across multiple addresses, it is difficult to audit. Therefore, rather than allowing voting rights to be freely open, it would be better to conduct a qualification review. All DAO organizations and community members can elect a few representative figures in advance, and these figures can stake votes through their addresses, which is more reliable than opening governance rights to everyone.

Tu: My biggest thought is about public chains and distribution/POW. In the process of BTC promoting itself to the world, it actually failed because it did not bring a larger audience into the crypto circle. Projects and public chains have invested too much time in building this political system regarding governance, neglecting how to promote the popularity of crypto. We need a broader way to distribute tokens to more people. A new POW needs to be invented to complete what BTC has left unfinished.

Host: Aside from governance, what other values can $OP be assigned? Feel free to use your imagination.**

Sybil Attack: It can refer to Metis and other already issued L2s. Optimism's nodes are divided into two types: sequencers and validators. Sequencers are block producers, akin to miners on Ethereum, while validators are verification nodes. Metis continuously incentivizes these verification nodes with their tokens, reaching nearly 90 verification nodes in April of this year. Optimism has been reluctant to disclose the scale of its verification nodes, and it is speculated that this is likely because they have too few verification nodes to disclose. On April Fool's Day, Optimism published an article on their Medium, stating that users would never want to run a verification node, which is why they are unwilling to lower gas fees. After issuing tokens, Optimism can use its tokens as a means to incentivize validators.

For the verification nodes on Optimism, unless the sequencer publishes false data on the Ethereum mainnet, validators can challenge it, and if successful, they can receive a portion of the token rewards. However, this incentive is not very strong. If the sequencer is credible and never publishes false data, every transaction is correct, then the validator will never receive incentives. If this continues, no one will want to run the validator node. Metis does this; as long as you are a verification node, you can continuously receive incentives in Metis tokens, which Optimism has not done. The biggest effect of Optimism's token issuance is still to solve their financial issues. The Optimism token can serve as a strong incentive for verification nodes, and the mechanism is much stronger than before. Additionally, because Optimism has issued tokens, it also has advantages in financing.