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OmiseGo: The part no one’s talking about

Posted: 21 August 2020 7:38 pm
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OmiseGo is a success for Ethereum as a whole, and not just because of the gas fees.

OmiseGo (OMG) is having a lot of fun right now. Today it's very comfortably among the cryptocurrency market's highest performing assets, more than doubling in price in less than a day. The main driver behind its rise was Tether's decision to move its ERC20 token transfers onto OmiseGo, right as Ethereum gas fees really start to hurt.

In other words, instead of sending payments on Ethereum's layer 1 – the base Ethereum network itself – Tether is running them along the faster, cheaper OmiseGo network, which is a layer 2 network built on top of the main Ethereum network.

Although it's just one scaling solution among many, OmiseGo was designed specifically for fast and cheap payments, and if it continues serving well in this capacity it could become an intractable and vital part of Ethereum's infrastructure.

This is quite interesting in its own way when you consider where OmiseGo came from.

OmiseComing

OmiseGo was dreamed up and created by Omise, an established payment service provider based in Thailand and focused largely on Southeast Asia. It held an ICO in 2017, which was the style at the time, selling OMG tokens to early enthusiasts and becoming one of the most established businesses to ICO.

OMG prices did very well in late 2017, which was the style at the time, to reach about $25 at their peak. Then prices plunged about 99%, sinking into a bearish multi-year lull, which was the style at the time. Now, although token prices are just a fraction of its previous peak, OmiseGo seems to be coming out of hibernation. It's the style at this time.

So far par for course.

Behind this classic crypto story though we find the unusual case of a prescient business spearheading the fundraising and R&D for, and construction of, a public infrastructure project and reaping the commercial benefits of performing this valuable public service.

Importantly, it managed to do it without attracting an inordinate amount of criticism for being yet another commercial entity stomping through the area in search of profits.

Through this lens, OmiseGo's success to date presents a few interesting lessons.

OmiseGoing

One of the best ways to conceptualise public blockchains is as a form of public infrastructure, like roads for Internet data. Everyone's trying to cut themselves a slice of this valuable future infrastructure in different ways.

Layer 1 blockchains like Bitcoin and Ethereum are the main public roads. Hybrid blockchains are about building the driveways between private property and public roads, and layer 2s are about building high speed freeways, bus lanes, bike lanes, tunnels and bridges to help facilitate the smooth movement of certain types of traffic in certain places, easing congestion for everyone.

We've seen many crypto-native startups build new roads, and established businesses eagerly invest in driveways and take stakes in externally-developed main roads, but when established businesses make investments in public infrastructure it's usually seen as purely self-serving.

Omise got a pass on this though. Maybe (probably) it just flew under the radar, or maybe its public fundraising and clear profit distribution helped quell any concerns that it would monopolise the benefits.

After all, the economics of OMG are quite clear. Essentially, nodes hold OMG to process transactions and get paid for doing so. The market decides how much their service is worth. Omise has no say in fees or who is or isn't allowed to process transactions. As a piece of public infrastructure, it is very clear where and how the money goes, how widely distributed the benefits of this network are, and that anyone can start participating. Its success is also tied to the success of the underlying Ethereum network.

The same can rarely be said of other business's forays into public infrastructure development.

This also serves to highlight another difference between blockchains, and a major advantage networks like Ethereum have over networks like Bitcoin. The revenue generated by Ethereum can be much more easily distributed between different stakeholders, applications and layers, and tokens can capture the value of different parts of this public infrastructure in different ways. There are myriad ways for people to align on its development.

With Bitcoin, the value of layer 1 transactions can only be funnelled to miners, who haven't historically been particularly interested in any innovations that don't involve increasing their hashrate. Most of the entire network's seigniorage value is then pumped back into buying more mining machines, so miners can attract more seigniorage revenue, so they can buy more mining machines, so they can extract more seigniorage revenue, and so on until the heat death of the universe.

For everyone else, such as Lightning Network node operators, returns are found by acquiring Bitcoin that would have otherwise been gone to the miners, and hopefully selling it at a higher price than it cost to acquire. So far, this hasn't been particularly profitable for anyone.

While we can still construe the Bitcoin blockchain as a piece of public infrastructure, its profit funnel means the only people who really benefit from its development are miners, and people selling Bitcoin. Its very design means there's very little incentive for most people to invest in Bitcoin as infrastructure, so they don't.

In this way, the success (to date) of OmiseGo, its work developing Plasma and the building of this particular Ethereum bike path is a story of Ethereum's success as a whole, and what can be accomplished by aligning incentives in a permissionless system.



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Disclosure: The author holds cryptocurrencies including LINK at the time of writing

Disclaimer: This information should not be interpreted as an endorsement of cryptocurrency or any specific provider, service or offering. It is not a recommendation to trade. Cryptocurrencies are speculative, complex and involve significant risks – they are highly volatile and sensitive to secondary activity. Performance is unpredictable and past performance is no guarantee of future performance. Consider your own circumstances, and obtain your own advice, before relying on this information. You should also verify the nature of any product or service (including its legal status and relevant regulatory requirements) and consult the relevant Regulators' websites before making any decision. Finder, or the author, may have holdings in the cryptocurrencies discussed.

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