Ethereum networks

My Ethereum Layer-2 Portfolio - Part #1: Optimism

By Cryptofab | Cointune | 23 Jan 2023

To earn passive income trough DeFi, there are two options:

  • To use layer-1 networks like Ethereum (ETH) mainnet, Binance Smart Chain, Avalanche (AVAX), Fantom (FTM) or Solana (SOL).
  • To use layer-2 networks, i.e., networks built on top of Ethereum, like Arbitrum or Optimism.

Today, I will mostly talk about Optimism, because it is one of the first optimistic rollups that have been built on top of Ethereum mainnet. Using Optimism allows to use some of the most well-known DeFi protocols of Ethereum, for instance Aave, without paying the high gas fees of Ethereum.

What is an Ethereum layer-2 network?
An Ethereum layer-2 network is a scaling solution for the Ethereum blockchain that allows for increased transaction throughput by moving some of the processing off of the main Ethereum blockchain (layer-1) and onto a separate, parallel layer (layer-2). This can be achieved through the use of off-chain state channels, such as Plasma or the Lightning Network, or by using sidechains, like xDai. Layer-2 solutions are designed to make the Ethereum network more efficient and cost-effective, while still maintaining the security and decentralization of the main blockchain.

What are the current layer-2 networks?

There are more layer-2 networks than what you can imagine, for instance:

  1. Plasma: A framework for creating scalable decentralized applications.
  2. State Channels: A system for off-chain transactions that allows for faster, cheaper transactions.
  3. Truebit: A platform for scalable, verifiable computation on the Ethereum blockchain.
  4. Raiden Network: A payment network for fast, low-fee, and scalable transactions.
  5. xDai: A stablecoin-based sidechain for fast and inexpensive transactions.
  6. Zk-Rollups: A layer-2 scaling solution that uses zero-knowledge proofs to compress multiple transactions into a single, smaller transaction.
  7. Optimism: A layer-2 scaling solution that uses optimistic rollups to increase the throughput of the Ethereum network.
  8. Arbitrum: Another layer-2 scaling solution that uses optimistic rollups to increase the throughput of the Ethereum network.
  9. Loom Network: A layer-2 scaling solution that uses sidechains to increase the throughput of the Ethereum network.
  10. Loopring: A decentralized exchange protocol that uses zk-Rollups for faster, cheaper trades.
  11. Matic Network: A layer-2 scaling solution that uses sidechains to increase the throughput of the Ethereum network.

How to choose your layer-2 network?

There are several parameters: number of DeFi protocols on the network, TVL (Total Value Locked) on the network, APYs (Annual Percentage Yields) that you can earn on these protocols. Today, I will focus on security, and will therefore talk about Optimism, since it is one of the most experienced layer-2s.

How is Optimism network secured by Ethereum?
Optimism is a layer-2 scaling solution for Ethereum that uses Optimistic Virtual Machine (OVM) and Optimistic Rollup (OR). It is secured by the Ethereum mainnet through a process called "challenges."

In Optimism, all transactions are grouped into "rollups" and then processed and verified in a single transaction on the Ethereum mainnet. Users can challenge any rollup if they suspect that it contains an invalid state transition, such as a double-spend. When a challenge is made, the invalid state transition is revealed on the mainnet and the user can then be compensated by the responsible party. This process ensures that the security of the Optimism network is ultimately tied to the security of the Ethereum mainnet, which is secured by a decentralized network of miners.

Additionally, Optimism also uses a fraud-proof system, which allows users to prove that the state of the rollup is invalid, and by doing so, get their assets back on the mainnet. This feature is used in conjunction with the challenge mechanism, to provide additional security guarantees to users.

However, this is theory, and in reality Optimism is not yet as secure as it should be, since it is still in development. According to a recent article from Coindesk, the risks of layer-2 rollups would be underappreciated:

Meanwhile, Optimism, despite having $2 billion locked in its virtual bank vault, has yet to deploy fraud proofs (which it calls “fault” proofs) at all. The network’s proof system is “currently undergoing major redevelopment,” so is currently not active, according to the Optimism website. However, they are said to be planned for a soon-to-arrive update.

In summary...

Using Optimism is cheaper than using Ethereum mainnet, but it comes with some risks. Therefore, it is crucial to use several layer-2s (and layer-1s too...) in order to mitigate those risks. Next time, I will talk about Arbitrum.

Disclaimer: this article does not contain any financial advice. The information is provided for general informational and educational purposes only.

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