Omni Layer: Advancing Bitcoin to 2.0

Omni Layer, the initiative to build a protocol layer over the Bitcoin blockchain and other systems, is a pretty intense project. The software allows users to transact with tokens with asset representations. Omni has so many versatile uses that it provides a cryptocurrency asset landscape in this environment. The omni asset, being the first to be introduced in this network, is close to completion. Bitcoin and various cryptocurrencies act as a base layer of usage; the Omni project is a higher layer and a benchmark for asset protocols.

Also read: Bitcoin: the Answer to Financial Infrastructure Bottlenecks

“Omni is a protocol built as a layer over Bitcoin that allows you to generate, send, trade, redeem, pay dividends to and make bets with tokens representing any kind of asset.”

— Patrick Dugan, Omni discussed the many features this 2.0 project has to offer with Patrick Dugan, Board Member — Liquid Ops member of Omni. He believes this system has a lot to offer to the Bitcoin protocol and the crypto-world in general. Dugan wants “everyone have access to the same financial services” and feels this project will help pave the way. To the non-technical savvy users, what is Omni Layer?

Pat234Patrick Dugan: Omni is a protocol built as a layer over Bitcoin that allows you to generate, send, trade, redeem, pay dividends to and make bets with tokens representing any kind of asset. The OMNI asset is the first asset on the layer, it gets the fees from the layer’s trustless exchange, and it can transform into any currency using smart contracts on the layer. Instead of just sending bitcoins around, you can send a very small amount of bitcoin that acts like a stamp, and that transaction forever stands for the transfer of some Omni layer property. Several projects have raised money in crowdsales by issuing tokens or app-coins over the layer, there’s a dollar coin, Tether USDT, backed by the same banks that Bitfinex uses and integrated with the deposit/withdrawal systems of Bitfinex, Cryptsy, and several other exchanges, and that’s just the start.

BC: Can you tell our readers how you are trying to create a method of decentralized banking with escrows and hedging involved?

PD: Back in early 2014 I was looking at short selling some BTC on Bitfinex while buying BTC in the US, as a service to corporations in Argentina looking for an alternative to this bond-swap they have until recently depended on to legally bring in money at a reasonable rate to the capital controlled country. I thought of a hedged BTC as as sort of dynamic “dollar coin”. Then in Q2 2014 I was researching how to do leveraged bets on the Omni layer, primarily motivated by allowing people to trade more aggressively and use the leverage to get around the 10 minute confirmations that a decentralized exchange trade requires. After digging into this I had the epiphany that you could hedge an asset (like BTC or our OMNI token) and issue dollars that were purely protocol based. Then I realized, that’s the repo market, that’s basically how banks create currency on-demand between each other and corporate savings.

I’ve got a basic prototype that isn’t for public consumption that uses OkCoin’s futures contract, checks the API, says “we’ve got N BTC hedged”, uses omnicored (bitcoind plus Omni layer features) calls to say “ok we’ve got N BTC slotted up” and based on the index price used to settle the futures contract in a week times the number of BTC, issues dollar coins.  

The next step is to do this in a fully decentralized futures contract build into the Omni protocol so it becomes currency creation in an algorithm, which I called decentralized banking.

Notice I don’t say “create money”, currency is a receipt, the assets used to back the currency (i.e. BTC or OMNI, or perhaps Tether USDT, gold tokens, real estate shares etc.) have varying degrees of “moneyness” that make them generally accepted as collateral. The current centralized banking system is reaching its end-game as central banks type up currency to buy US T-bonds, JGBs, and Bunds, and these governments just can’t issue enough for the infinite-money printing needs of these central banks. Maybe central banks will hit a wall and start buying more gold in service to Quantitative Easing. For the rest of us, there’s cryptocurrency.  

BC: What make this project different than most 2.0 projects out there?

PD: In mid-2014 having seen the competitive benchmark that counderpartyd provided, the team sought to build something so technically easy to extend bitcoind with, so well-tested in its atomic transactions, that it could be as trusted a piece of software as SQLite is for mobile application databases, but for moving value around the Bitcoin blockchain. Building on that Foundation, my job is to create market liquidity on the DEx (Decentralized Exchange) while managing the Foundation’s capital, and as we ramp up we’re going to solve that problem which 95% of exchanges in this industry don’t quite roll up, and that’s very true for the other decentralized exchanges released in the last year.

AAEAAQAAAAAAAAORAAAAJGIxY2JmMjQzLTMxZjEtNGFmYi05MzJlLTZkZDhhMmQ2NTY2YQFinally, our marketing strategy involves going out and endowing NGOs that live off the income from their dBanked principle endowments, and then go out and trade with merchants and savers in various countries, to foment grassroots adoption. Bitcoin only has a million active users aprox. so if the average cost of acquiring a customer in Africa for example is pretty small, because there isn’t some VC-backed competing bid for ads and word of mouth is king, and that CAC can be rolled into the operating margin of a non-profit organization that is financially sustainable, well I reckon we can get another million customers whose lives are dramatically improved by being able to have dollars, local currency, commodity hedges and cheap global payments in their pocket. We’re very tight with a SIM card based platform about their blockchain-enabled SIM-chip overlay product that enables for maybe $8 FOB, $12 retail a person with a $20 feature phone or now $35 smart phone to have hardware-level custody of their funds.

I want Omni to give millions of people their Nintendo moment with crypto-finance. I see Counterparty as more like the Sega Genesis, and colored coins more like an Atari. I enjoyed playing my neighbor’s Genesis but I was a Super Nintendo kid.

In the open-source land of brilliant engineers, the one-eyed man who gets out of the building is king. He’s one-eyed because the sun is bright and he has to squint to adjust.

BC: How does your system tame the volatility that can be seen in the cryptocurrency environments?

PD: With a futures contract you need a reliable data feed and you need a well-thought system for handling margin calls. We’ll enable parameters for leverage, which data feeds/formulas are used, and what collateral is acceptable, and let the market decide, though I personally have to guess that something like settlement based on 2 hour VWAP averaged by the weighted blend of several data feeds relaying exchange websocket feeds (for BTC/USD) or stuff like Bloomberg feeds for an SP500 contract, with at most 5x leverage for BTC and 10x leverage (to start) for mirroring the eMini is going to fly. I am not impressed with Augur’s model of making it all about voting and game-theory.

Margin calls may initially be handled in a way similar to what OkCoin and BitMex adopted, where you get called on that tick that brings your bet to 0, and that puts up a limit order that waits to be filled. There’s more R&D to be done on indexing algorithms that will chain settlement so you’ve got a hedge on, say bitcoin is falling hard, the long-side person who bet against your hedge gets wiped out, and the index nets that out against other volume coming in and lets your hedge continue to roll profits (perhaps compensating a loss you have elsewhere, that’s why it’s so important for hedges to be reliable) from the remaining long-side guys. There’s interesting math on this issue relating to statistical regressions and graph theory, and we’ve got a bounty open for anyone who can come up with a superior indexing algorithm that enables higher leverage contracts to dynamically settle with lower risk of orphaned margin-called contracts. Basically the odds of a wash out diminish on a square root function as the number of players increase, that’s a starting point for estimating the cost of insurance. Wish I had final theorems laid out for you now, but it’s a hard problem. I may get around to learning some Monte Carlo and Markov Chain libraries to test with, if no one beats me to it. To my knowledge competing efforts in decentralized futures are leaning on no-leverage or no-standardized bets to test out their releases. We could make decentralized insurance funds for contracts.

“Maybe central banks will hit a wall and start buying more gold in service to Quantitative Easing. For the rest of us, there’s cryptocurrency.”

BC: You spoke briefly to me about future markets, can you explain how this will work?

PD: I’m scoping out how to prototype the futures contract, sort of as-a-service, by using ErisDB running Solidity smart contracts (same smart contract language Counterparty and Ethereum use) and writing the app’s console output to Tendermint, we can can rig pre-signed transactions in Omnicore to read a Tendermint chain for instructions. So you’d have a smart property series, say BTC/OMNI Long, and a twin series, BTC/OMNI Short, that lock up some OMNI as collateral, and an ErisDB smart contract parses Omnicore for these balances and whenever one trades on the Dex it writes that trade down on the Tendermint chain. Then on a given block, when settlement or contract expiration occurs, the Tendermint chain gets a block that says “ok here is the series of payments contracts need to make to each other based on their trade prices and the settlement price”. Then Omnicore instances holding these contract balances get their reserve balances fired off to the winners. Also if you have a short contract and you get a long contract, an ErisDB smart contract will calculate the netting and indicate your netted balance on the Tendermint chain, triggering the revoke call in Omnicore to eliminate those units of the smart property from your balance, freeing up your collateral. Visa versa for when you’re trading a contract and have no balance nor does your counterparty, it would trigger the issuance of new tokens to that address provided you have enough collateral.

Cyber SecuritySo that’s my rickity go-kart architecture, the above model of having an app chain triggering actions in Omnicore is really interesting for extensive applications such as an insurance fund, a mature dbanking app, decentralized commerce (OpenBazaar competitive app), drone controller apps, IoT data-feed apps, decentralized labor (like a good oDesk), just let your imagination run wild. Anything any other platform can do can be done to move value over Bitcoin using Omnicore+ErisDB. The aforementioned rig-up would be a good enough prototype to pitch to the Citi Mobile Challenge next month. But we’ve got 4500 OMNI set-up as bounties related to various stages of dFutures development, so either someone will step up from the community or Zathras and Dexx will find the time, and we’ll get that above mentioned Tendermint index chain into the Omnicore database directly, make these contracts a special type of signed smart property, make the settlement happen without external signal, so it’s a more reliable and simple stack to achieve protocol-level consistency.

Spot fees for non-OMNI pairs are .05 taker, futures fees margined in something other than OMNI will have a .02% opening fee, half of that we want to rig as a rebate for contract publishers so existing exchanges have an incentive to make fungibility between their decentralized and centralized contracts.

BC: How does this collaborate with Tether?

PD: I’m manually setting up Dex lvl 1 orders for BTC to buy OMNI, but Tether wil be the easiest way into the Dex, just withdraw from Bitfinex. Adam (Omniwallet lead) and Craig (Omni Chief Technologist) have consulted for and work closely with Omni (and Tether) integrators, particularly Bitfinex, and there is a lot of value in Verified Bitfinex accounts. After the initial liquidity flush, Tether will mature on its own. It will be usable as collateral in futures contracts. Totally decentralized dollars will probably be backed by contracts margined with OMNI. Then the dUSD and Tether USDT can trade spot, people may pay a premium for Tether because of a perceived lower risk, or they may pay a premium for the dUSD because they expect to get larger yield holding it for a week. I think we’ll have 2-5% of the Foundation’s capital market making that with a .1% spread, 5 bip cost of liquidity on each side. If the dUSD gets yield paid out once a week or day as contracts are rolled, that would make a little wave pattern in the price of one for the other. Probably a mature dBanking app would have so much volume that contracts would need to be rolled back to longer-term contracts opportunistically and almost continuously, so the fungibility would be closer to a steady bid: .9995 :: ask: 1.0005. And that would be a signal for traders to track because a sudden imbalance might represent fear in the markets.

decentralization_bannerSo Tether is like the 100% bank reserve-backed Paypal-type money you use for transacting and banking system fungibility, and dBanking is the 100% crypto reserve-backed money market account you use for savings and also payments in more esoteric currencies like the Sierra Leone Leoni, or even controlled currencies like the Argentine peso.  

Tether is also integrated with Poloniex and the volume has been fairly low because of poor liquidity. In March there were $15 arbs in BTC/USD that I picked up for maybe .7 BTC total, in July people were faster about closing those gaps and there were several BTC on the book, but still over a $20 range. There are about 14k Tether USDT on Polo right now, you can see it here. The Foundation’s fund, which I manage as a portfolio of high-frequency trading systems, is going to be active in all manners of profitable arbitrage including triangular arb on Polo as we build up our liquid capital arb’ing BTCCNY prices and the various BTC/USD futures contracts. So if there’s an order for LTC, or XMR, or XYZ in bitcoin, and the equivalent dollar price is X, the BTC/USDT pair will have orders hanging out at a small arb profit after-fees. Likewise the liquidity in BTC/CNY and the futures will be arb-able, in this manner it shouldn’t be hard to thicken up that orderbook and get 6-figures worth of Tether on Poloniex while making it competitive with other BTC/USD spot exchanges in terms of volume.

BC: The word “layer” what does this mean to you and your project? What does this layer refer to when involving the Bitcoin blockchain?

PD: Everyone who has a copy of the blockchain can put it in bitcoind or BitcoinQT, or check one of the many websites, and see bitcoins sent. That’s the base layer. If you know how to parse the data encoded therein, you can see another layer, which has all this other stuff that enables people to really use the blockchain beyond what bitcoins themselves can do.  It’s a higher layer.

BC: What’s your opinion of the overall state of Bitcoin?

PD: We need to increase block sizes modestly, do a good job of keeping data footprints to a minimum which Omni layer now does by supporting pay-to-store-hash transactions that don’t litter unspent transaction outputs with every trade, and this growth in transactions combined with dynamic fee pricing is what will save Bitcoin. Storing metadata in OP_RETURN comes with the next major release.  For block reward = transaction fees, you need not quite Visa levels but perhaps higher tx totals than what the noding economics can reasonable scale to, even for someone technically literate on a modestly priced VPS. Dynamic fees bring that lower, and batching transactions on Tendermint chains or Sidechains™ will balance it out. But the real booster will be decentralized banking with BTC collateral, that’s the rocket fuel that takes us to da moon, and the combination will make mining sustainably viable, at least for another business cycle.

bitcoin_peer_to_peer_network3Personal speculation convinces me that If we have 100 million decentralized dollars backed by OMNIs, then the price of OMNI could be around 100M/580k= $172.41, in practice possibly higher since some fraction if not half would be hoarded or used for leveraged bets. People are going to see that kind of result and start hoarding BTC in anticipation of shorting it into decentralized USD at higher prices, this will grow beyond just Omni layer most likely; fire didn’t stay in just one tribe. Then we may see equilibrium back in the $500-1000 range as it comes down to getting those billions of dollars of value in through user acq. for different consumer apps. At least in that price range, miners aren’t underwater and we don’t have to fear a failure of the underlying ledger. 10 billion in BTC-backed dollars and another few billion in other-backed dollars will probably be enough to cycle for service of the entire global remittance market. But then you need to represent 100s of billions for the savings accumulated by System D merchants as they spearhead the majority of economic growth in the next 10 years.

I do think to the trillions level, gold and legal systems of property and even banks will play a role, they have incumbency in 2 billion users who (coincidence?) have 80% of the world’s money. How the purchasing power of those bank deposits holds up as the population runs to the other side of the boat will be a very trade-able story to tell our grandchildren.

BC: There are a lot of contributors and teams involved with the Omni project. How is it to be able to work with these innovators?

The most interesting thing about this job is how much of a nexus it is for working with players all across the crypto industry and in industries like farming and finance, so I’d like to give props to every exchange that has integrated with us, Bitfinex, Cryptsy, Poloniex, MasterXchange, ExpressCoin,, wallets like Holy Transaction, BitGo & Gem, GoCoin, the Fuzo team, Leverage team behind a mobile app in development, Crowdbucks team trying to do mutual credit, my friends in Sierra Leone Liberty Group, BitUnit Foundation and Bitcoin Dream Foundations in Ghana, Katherine Kat in Uganda, Alah in Botswana, todos mis amigos en la Embajada Bitcoin en Buenos Aires who have invested in or considered integrating with Omnilayer, several BTM and automated kiosk companies, all the true believer sustainable farmers I’ve talked to about bringing farm shares to the blockchain, Charles Evans at Conscious Entrepreneurship Foundation for working with us on issuing impact bonds and integrating their commerce app,and Ben Bernanke for making it all possible.

“How the purchasing power of those bank deposits holds up as the population runs to the other side of the boat will be a very trade-able story to tell our grandchildren.“

BC: Can you explain to our readers the bounty program?

PD: For a limited time only come get some OMNIs for testing the Dex in v. 0.9.99, we’ll pay for every replicable bug and half for every well-explained UI issue, even if it’s somewhat subjective. More info here.

We have bounties for a mobile app, the futures contract, a dBanking app, commerce app, savings addresses, options contracts, and as a non-profit foundation we will eventually give away most of the investment income generated to fund organizations that promote crypto as a social business, and for the development of a kit to make that really simple for more entrepreneurs. We will publish requirement sheets for these over time on our blog and set a page in the repository for them as well (so we can sync up repos with the relevant bounties).

BC: How long till you feel this project is close to 100%? Or do you believe it will always be ongoing?

binary-139838_640The operations will be ongoing but the development is pretty close to 100% for our current feature set. I’d say as of this weekend’s build we’re at 95%, we’ll be at 96% after fixing a few romper-stomper bugs people point out in the coming weeks of testing, and then we launch. We’ll be at 97% when we’ve implemented the wrapper to expose Omnicore remote procedure calls to triggers on app-chains. We’ll be at 98% when we rig up the protocol-level distribution of fees for non-OMNI pairs to OMNI holders and thus open up the Dex to all trading pairs. We’ll be at 99% when we low-level implement a futures contract prototype based on an app-level prototype. We’ll be at 100% when we low-level implement dBanking. From there it’s all apps that are discretely at a higher layer of stack and operations to roll this out to the world.

BC: What’s the team’s overall goal here with the project?

PD: That everyone have access to the same financial services, and none have to trust their masters. will keep a keen eye on this project as it develops and launches. Innovators all around the globe are pushing decentralization to the forefront, the Omni team is in front as well. With all the 2.0 projects out there today, the first 2.0 project is looking pretty good.

What do you think about Omni Layer? Let us know in the comments below!


Images courtesy of Omni, Patrick Dugan, Pixbay and Redmemes