OP explained: decomposing the value-capturing structure of Optimism native token

Introduction

Optimism began as a Layer 2 (L2) chain called OP Mainnet and has evolved into a comprehensive platform for Ethereum scaling.

It uses the Optimistic Rollup technology to increase Ethereum's scalability.

The OP token plays an integral role in governance within the Token House. The philosophy focuses on minimizing governance and iteratively improving.Transaction fees on the OP Mainnet and other OP Chains (together, the Superchain) generate revenue at the protocol level—this revenue is split between operational costs and funding for public goods. Sequencers are a critical part of this ecosystem as they process transactions and ultimately help to generate revenues.

Figure 1

Key Roles and Agent Coordination in Optimism's Ecosystem

There are a few key roles to reinforce Optimism's Layer 2 scaling solution. There are roles from network operation to governance and ecosystem development. The following actors are core to the ecosystem:

1. OP Token Holders: Voting on proposals or delegating their voting power for proposals is part of Token House governance. In addition, voting doesn't require locking OP tokens. OP Token Holders utilize their voting power to steer the development, resource allocation, and direction of the protocol itself.

2. OP Citizens: Governance for Citizens' House, which distributes RetroPGF. Community members are chosen based on their activities in the Optimism ecosystem and participate in a one-person-one-vote mechanism. They evaluate and vet the projects that have added value to the ecosystem and vote on how the rewards should be distributed.

3. Builders: Build apps, tools, or services that improve the Optimism ecosystem. Builders build on the Optimism network, contributing to its growth and utility through the projects that users can interact with via the Optimism platform.

4. Proposers (Sequencers): The crossover point from Optimism (Layer 2) to Ethereum (Layer 1). They post summaries of the state of the Optimism network to Ethereum, which allows the two networks to communicate securely. This step is necessary to allow functionality such as withdrawing assets from Optimism to Ethereum.

5. Verifiers: Survey the network for any false information submitted by Proposers. If they see a mistake, they can challenge it with a fault proof. Their role is vital in ensuring the security and integrity of the Optimism network. These verifiers help to ensure that all data transmitted between Optimism and Ethereum is accurate and reliable.

So to get a better idea of how these agents interact, and how they contribute to an ecosystem, here is a more in-depth view of their responsibilities, incentive structures, and challenges:

Figure 2. Optimism: Dissecting Agent Coordination

The deep dive into roles, responsibilities, and interactions in Optimism's ecosystem provides some high-level insights into its structure and operation:

The governance system features a two-pronged decision-making process, combining token-based voting with a citizenship concept. To balance the interests of token holders and individual contributors, its governing body is split into two houses, the Token House and the Citizens' House.

Mechanisms like Retroactive Public Goods Funding (RetroPGF) generate a unique incentive structure that is different from simple token rewards.

The system includes a nested multisig, with the Optimism Security Council and Foundation holding the keys to critical update functions. Although the platform supports a permissionless mechanism via the DisputeGameFactory, which allows proposers to submit state proposals and verifiers to dispute them via error proofs, the security of the entire platform relies primarily on this multisig governance. Optimism has some key challenges ahead: making its infrastructure more decentralized (including extending its citizenship model), moving away from its instant upgrade capabilities, and decentralizing its sequencer network to more than just a single dedicated sequencer.

In particular, it aims to promote the creation of long-term value through the funding of public goods, infrastructure and development through its design.

The value-capturing structure of $OP

In this section, we analyze the intrinsic value of the $OP token with the new Value Capture Theory (VCT) framework. Understanding $OP in the context of Optimism's value proposition is about understanding the sources of fundamental value, the mechanisms through which value is realized, and the particular implementation pattern of $OP.

OoVs (Origins of Value)

The core sources of value (OoVs) for the $OP token are:

1. Governance (3): The Governance OoV represents a core source of value as it grants holders influence over a rapidly growing Layer 2 ecosystem that processes millions of transactions and manages billions in total value locked. This governance value is amplified by Optimism's unique position as a key player in Ethereum scaling and its commitment to funding public goods. The Governance OoV in Optimism is implemented through its Token House, where $OP holders can influence critical protocol decisions including treasury allocations, protocol upgrades, and ecosystem development.

2. Conditional Action (8): Optimism's Conditional Action OoV manifests through the specific actions required to participate in governance, such as voting on proposals or delegating voting power. The protocol implements voting cycles every three weeks within six-month seasons, requiring token holders to consistently participate to maintain influence. The voting and delegation are both done via the designated frontend.
   Note that usage of OP as a token for grant payouts does not beget an OoV.

These OoVs supplement and complement each other in the following ways:
Governance (3) depends on Conditional Action (8), as the value of governance rights is realized through active participation in voting and proposal creation.
Conditional Action (8) enables the influence over various aspects of the Optimism ecosystem, giving substance to the Governance (3) OoV.

VCMs (Value Capturing Mechanisms)

The primary VCM for the $OP token is:

Equation 1

Contribution Analysis of Each VCM

Figure 3

Generalized Governance VCM (Simplified): Optimism's Generalized Governance VCM combines two core value origins: Governance and Conditional Action, creating a comprehensive value capture mechanism through its token house structure. This VCM enables OP token holders to derive value through active participation in protocol governance, while ensuring meaningful engagement through conditional action. The mechanism works by allowing token holders to either vote directly on proposals or delegate their voting rights to other addresses. Operating on a seasonal schedule with three-week voting cycles, the VCM creates regular opportunities for value capture through participation. Token holders can influence key decisions regarding protocol upgrades, treasury allocations, and ecosystem development.

VCIPs (Value Capturing Implementation Patterns)

The OP token implements a governance VCM through an on-chain voting contract that manages proposal creation, delegation, and voting. Token holders can delegate voting power to themselves or others, with delegates able to participate in multi-week voting cycles. The contract implements proposal-specific quorum and approval thresholds — between 30% and 76% approval requirements, depending on the proposal type. Regarding the proposal lifecycle, there is a three-week proposal process: two weeks for feedback and one for voting. Only approved proposals from the four top 100 delegates can be sent to vote. The implementation consists of both Governance (3) and Conditional Action (8) OoVs, requiring active participation through delegation and voting to realize those rights over the value of what is being governed.
Voting is carried out through the Agora contract (0xcDF27F107725988f2261Ce2256bDfCdE8B382B10); this contract is also used to make proposals (by the manager or an account with a sufficient number of votes) and execute successful proposals.

Delegation is carried out through the OP token contract (0x4200000000000000000000000000000000000042).

Figure 4. Optimism Bi-Cameral Governance Overview

The effectiveness of this VCIP lies in its ability to:

• Facilitate participation in the governance of the Optimism ecosystem.
• Develop a consensus-forming process with token holders.
• Encourage ownership and accountability with $OP holders.

What makes this VCIP special is its role in Optimism's dual-chamber governance structure. Together, it forms a governance framework designed to regulate competing stakeholder interests, placing it parallel with the Citizens' House. This structure enables broader decision-making by relying on token-based voting and merit-based contributions. However, it is essential to note that the Citizens' House does not take part in using the $OP token.

VCM-Derived Health Metrics: $OP

This segment outlines four important health metrics for Optimism, modelled using the Value Capture Theory framework. These indicate the overall performance of the protocol across diverse Origins of Value (OoVs). The four metrics center around Optimism's one Value Capturing Mechanism (VCM), – Generalized Governance - which combines the Governance (3) and Conditional Action (8) OoVs. OoV:

Please Note: "Token House governance operates on a seasonal schedule. Seasons happen roughly every 6 months. During each Season, Token House voting occurs via three-week voting cycles. Voting Cycles begin on Thursday at 19:00p GMT (12p PST) and end on Wednesday at 19:00 GMT (12p PST)" (Optimism Community Hub, 2024).

Total Value Governed (TVG)

• Class (OoV): Governance (3)
• Aspect: OoV-specific
• Tier: Tier 1 (Primary)
• Description: At the end of each season, the sum of the USD value of assets under governance control, including the treasury governance fund balance, foundation budget, protocol revenue allocated, and OP token supply affected by inflation adjustments, is measured.

Rationale:

• Represents the financial scope of Optimism's community-driven decisions
• Acts as a barometer for the protocol's economic footprint in the Layer 2 space
• Underscores the fiscal responsibility vested in the hands of token holders

Governance Fund Flow Ratio (GFFR)

• Class (OoV): Governance (3)
• Aspect: OoV-specific
• Tier: Tier 2 (Secondary)
• Description: (Total inflows to governance fund - Total outflows from governance fund) / Initial governance fund balance for the season, measured per season.

Rationale:

• Measures the ebb and flow of resources within Optimism's governance ecosystem
• Offers insights into the protocol's ability to sustain its governance initiatives
• Functions as an indicator of the community's resource management efficiency

Voting Power Utilization (VPU)

• Class (OoV): Conditional Action (8)
• Aspect: OoV-specific
• Tier: Tier 1 (Primary)
• Description: (Total OP tokens used in voting) / (Total circulating OP tokens) per Voting Cycle.

Rationale:

• Captures the degree of token holder engagement in protocol governance
• Sheds light on the concentration or dispersion of decision-making influence
• Serves as a proxy for the overall health of Optimism's democratic processes

Voter Participation Rate (VPR)

• Class (OoV): Conditional Action (8)
• Aspect: OoV-specific
• Tier: Tier 2 (Secondary)
• Description: (Number of unique addresses that voted) / (Total number of eligible voting addresses) per Voting Cycle.

Rationale:

• Maps the landscape of active participation in Optimism's governance
• Exposes potential gaps in the accessibility of the voting process
• Facilitates the assessment of community inclusivity in decision-making

Voting Power Concentration Index (VPCI)

• Class (OoV): Conditional Action (8)
• Aspect: OoV-specific
• Tier: Tier 2 (Secondary)
• Description: Gini coefficient calculated on (Individual address voting power / Total voting power) across all eligible voting addresses per Voting Cycle, where voting power equals the number of OP tokens delegated to or held by each address.

Rationale:

• Quantifies the degree of voting power centralization within the governance system
• Provides insights into the democratic health of the decision-making process
• Helps identify potential governance capture risks by large token holders

The selected metrics, each tied to a specific Origin of Value (OoV), offer a nuanced view of Optimism's value capture mechanisms. From the scale of governed assets to the efficiency of fund management and community engagement levels to direct value accrual for token holders, these metrics paint a holistic picture of the ecosystem's health.

Concluding Remarks

Upon applying the Value Capturing Theory (VCT) framework, we can derive structured insights on how the tokenomic model of Optimism fits into Ethereum scaling and ecosystem sustainability. From this perspective, we can observe that the value proposition of the $OP token is composed of two key Origins of Value (OoVs): Governance and Conditional action. All these OoVs aggregate into one VCM - the Generalised Governance token (Simplified) - expressed via the Token House of Optimism's particular bicameral system. This design is foundational to Optimism's tokenomics setup, incentivizing users, developers and token holders alike while encouraging network growth.

The Token House system achieves active participation and long-term commitment through several key features:

1. Direct voting power, proportional to $OP token holdings.
2. Flexible delegation, allowing efficient participation for all token holders.
3. Proposal thresholds, ensuring meaningful governance participation.
4. Integration with the Citizens' House, creating a balanced decision-making process.
5. Influence over protocol upgrades and treasury allocations, aligning holder interests with ecosystem development.

These mechanisms create a self-reinforcing ecosystem for sustainable growth and public goods development. One way to measure tokenomics health and drive improvements is with VCT-derived metrics such as Total Value Governed and Voting Power Utilization. Optimism's unique compatibility of governance, and developer-centric ecosystem building through initiatives like RetroPGF, establishes them as a leader in Layer 2 scaling with a strong framework for continued innovation within the Ethereum ecosystem.

Disclaimer: The content of this document is provided for informational, educational, or discussion purposes only and does not purport to be complete or definitive. It should not be considered as financial, investment or legal advice. While every effort has been made to ensure accuracy and completeness, the author does not guarantee that it is free from errors or omissions and may update, revise, or retract information without prior notice. Readers are advised to consult the most recent version for the latest details and to be aware of the inherent risks of cryptocurrency and blockchain technologies. The author does not make guarantees or representations regarding any discussed tokens or projects and shall not be liable for any direct, indirect, or consequential damages arising from the use or reliance on this content. Mention of any project, token, or protocol does not constitute an endorsement. By accessing this document, readers waive all claims against the author.

Acknowledgements

The authors gratefully acknowledge the financial support provided by Optimism during the Gitcoin Grants 21. This support enabled to conduct a research provide a comprehensive token design details for several selected Optimism projects, including Origins of Value (OoVs), Value-Capturing Mechanisms (VCMs), Value Capturing Implementation Patterns (VCIPs), and outline utility token metrics.

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