Omega One, Trade Execution, and a Diagnosis
Omega One’s vision is to build a bridge between traditional markets and digital assets, using world-class technology and trading algorithms. By improving liquidity and security in digital asset trading, we are laying the groundwork for a more efficient, decentralized and inclusive financial system.
On June 21, 2017, on one of the world’s largest crypto exchanges, the price of ether fell 99.9% in less than a second, before rebounding just as quickly.
Omega One’s Alex Gordon-Brander explains how this crash happened and how a liquidity solution like Omega One’s could prevent these kinds of crashes in the future.
Omega One, a trade execution system that will use a crypto-economic protocol mediated by the Omega token (OMT), launches this summer. The token will be on sale from June through August, with the goal of $110.5 million. The system and the tokens are part of a project to resolve issues of illiquidity, insecurity, and opacity and thus to advance the mainstream appeal of cryptos.
This report on the Main Bloq looks at a number of the considerations that bear on whether that project will succeed, what the risks are, and what will be the rewards. We will be working in large part from the Omega One’s white paper.
The management team is of impressive pedigree.
The Two CEOs
Alan Keegan was the CEO when the Omega One white paper was drafted. He has since stepped down from that post but remains active with the title of co-founder. Keegan previously worked at the world’s largest hedge fund, Bridgewater Associates, as an expert on currencies and cryptocurrencies. There, his research and observations about historical trends and market conditions were studied by senior central bankers and global policymakers around the world.
Alex Gordon-Brander, of Bridgewater FX Trading and Tech, is the new CEO. When he was at Bridgewater, he managed portfolio construction apps and wrote the specifications for algorithmic trading. The smart order routing of the system he introduced there saved money for clients of that huge hedge fund manager by breaking up their large currency orders.
Smart routing is also, as it happens, an important issue in the cryptocurrency world. Indeed, in a sense, smart routing is critical to the program since if Omega One is not able to fill a trade from orders in its own dark pool, it will route the trade in whole or parts to other exchanges around the globe to complete. The Omega One white paper calls this process “liquidity harvesting.”
Before he went to Bridgewater, Gordon-Brander was with MarketAxess, and while there he acquired a patent on the MarketAxess bond trading platform.
Gordon-Brander’s LinkedIn profile says that he has been “designing alternative currency systems since before the Bitcoin white paper.”
Other Critical Team Members
Omega One’s technology partner is ConsenSys, the world’s largest blockchain company. Gordon-Brander was formerly Chief Business Architect there.
Daniel Flax is Omega One’s Chief Technology Office. He has been the CIO at Cowen and Co.,; the CTO at The Street; Vice President, Engineering, at CAN Capital; and managing director of trading systems at the New York Stock Exchange. At the NYSE he led a transition to digital trade execution and settlement.
Ron Garrett is Omega One’s chief operations officer. He has the additional title “ConsenSys Liaison,” which is itself revealing of the close connection between the two entities.
Joseph Lubin, who is both the founder of ConsenSys and a co-founder of Ethereum, is an advisor to the Omega One team. Back at the turn of the millennium, Lubin was a VP Technology, Private Wealth Management Division, Goldman Sachs. He left there to join a startup, Blacksmith Applications, which was developing trade management and processing solutions for a range of corporate clients. Lubin directed their New York office.
Two Important Advisers on Compliance Issues
Bart Chilton, a former Commodity Futures Trading Commissioner will be advising Omega One on compliance issues. From 2001 to 2005, Chilton was a senior advisor to Senator Tom Daschle (D-SD), before working at the Farm Credit Administration and eventually (2007) receiving George W. Bush’ nomination to the CFTC.
While at the CFTC, Chilton took a special interest in allegations of the illegal cartelization of the precious metals markets and their derivatives. An activist in this field, a board member of the Gold Anti-Trust Action Committee, has described Chilton as “the modern-day equivalent of Eliot Ness.”
Such a concern with the integrity of the gold and silver markets is pertinent to Chilton’s interest in Omega One’s project. After all, many people who are distrustful of the post-Nixon system of “fiat money,” and who fear the failure of that system, tend to look toward the markets in precious metals as a hedge against fiat failure. That fear has also, in recent history, been one motive for interest in alternative or cryptocurrencies.
Juan Llanos is on the advisory board of the Wall Street Blockchain Alliance. He maintains a blog, ContrarianCompliance.com, where he discusses cryptocurrencies, blockchains, and regulators.
In that blog he has emphasized that a rule of “know your customer” (KYC) has morphed into both “Know Your Transaction” (KYT) and “Know Your Funds Flow” (KYFF). In the course of his career, Llanos has helped devise a number of innovative financial products, including Mexico’s first prepaid debit card. More recently, Llanos led Bitreserve strategies on compliance and transparency.
In 2008, Llanos received permanent residency in the United States in recognition of his “extraordinary ability” in anti-money laundering and countering the financing of terrorism.
A final note on compliance: Omega One says that it is working with the law firm of Debevoise & Plimpton as well as with ConsenSys’ lawyers on meeting legal and regulatory mandates.
Debevoise is one of the leading law firms in servicing FinTech. Its part of the Blockchain Legal Industry Working Group created last year by the Enterprise Ethereum Alliance, and it has its own FinTech focused podcast, with the wonderfully apt blockchain-world name, “Appetite for Disruption.”
How is John Mack Involved?
John Mack, a former CEO of Morgan Stanley, though not a member of the management team, is an enthusiastic backer of the Omega One project and an investor. A year ago, he told a Bloomberg reporter that he had been “watching and investing in the cryptocurrency market over the last several years, and … I find Omega One to be an important next step in the emergence of this new economy.”
Mack’s involvement has certainly helped mainstream the Omega One project. But enough about the people involved in the project. What is the project? Specifically, what problems does it hope to solve?
Illiquidity, Security, Opacity
The big problems faced today by cryptocurrency markets and the parties engaged in them are, as the Omega One team sees them, as follows:
- Illiquidity, causing the realized costs of trading to climb at times to multiples of published commissions and fees;
- hacking/security risk, which especially afflicts the most liquid of cryptocurrency markets; and
- A lack of transparency, leaving parties unclear about the actual costs.
Omega One would increase liquidity by offering “a private dark pool and trading algorithms connected to all the world’s crypto exchanges.”
As of the summer of 2017 the estimated value of all crypto hacked from exchanges was above $2 billion. Omega One would improve security by “intermediating between blockchain wallets and on- or -off-chain exchanges with our own balance sheet.”
Further, it would heighten transparency by offering benchmarking and analytics to its members that would “allow them to audit the market impact of their trading.”
Some Trade Execution Particulars
The solution to the above listed problems involves a seven-step trade execution process, understood thus: a member enters a “parent order” trading against funds in the Omega Wallet; the fund availability will be verified; the parent orders will then be turned into “net orders” in the internal matching engine; based on the trading engine’s assessment of available liquidity it will break chunks of these net orders into “child orders”; these will then be broken down further into “street orders” — these are the actual orders that are executed on an exchange; the public exchange will fill the order, thus adding funds to or withdrawing funds from the balance sheet manager; the Omega One Wallet and the Omega Private Exchange will then take care of the settlement (the back office work, as we used to call it when people were involved in it); and finally, the private exchange will confirm the transaction with the member via user interface/API.
The Omega One Wallet is “a decentralized, trust-less and non-custodial portfolio … made up of a set of linked wallets on multiple blockchains” including Ethereum, Bitcoin, and Omni. What’s new and significant about the Omega wallet, versus other wallets, even decentralized ones, is its built-in interface to the remainder of the Omega ecosystem, which will allow for secure automated settlement.
When the Omega Private Exchange receives an order, it will automatically verify and lock the funds in the relevant wallet, thus shielding the Omega One membership from settlement time mismatches across blockchains. In an ETH-BTC transaction, for example, “the member’s BTC will settle to her wallet on the bitcoin blockchain before the ETH leaves her wallet on the ethereum blockchain, enabling truly trustless listing.”
The Omega One website says, “There have not yet been any pre-sales, main sales, or tokens created at this point. Token mechanics and participation requirements (including whitelisting) will be released shortly before the token launch. Any information you may have seen about token details is inaccurate.”
The Diagnosis is a Sound One
Omega One is certainly right in its diagnosis of the difficulties that cryptocurrencies face if they are to become a mainstream investment option. A recent report by Context Capital Partners looked into investment sentiment as of the start of 2018. It said that 70% of institutions surveyed planned to increase their exposure to “alternative investments” in general in 2018, largely because the bull market in many traditional asset classes is looking old and weary.
Despite this hunger for non-traditional investments, there is still a great resistance (says the Context report) to cryptos. Only 11% of the institutions surveyed are looking to add cryptos to their portfolios. That is a sizeable niche, but it is still a niche. By way of contrast, 51% of those surveyed are planning on a greater allocation to ESG strategies this year.
So: why only 11% for cryptos? Some commentators have attributed the resistance to ‘media bias’ and some to non-rational psychological issues. But to a great significant extent the resistance is perfectly rational and it turns on exactly the three problems that Omega One has identified and addressed.
Omega One says in its white paper that it is the institutional asset managers whose buy-in “will take the crypto markets to the next level of maturity.” Its proposed trade execution system is designed to make that buy-in painless.
Omega One’s approach to addressing these problems is right. Predictably, then, it is not entirely unique. Their most direct competition comes from Ox, an exchange protocol on the Ethereum blockchain that boasts many of the same features, though with less formidable infrastructure. They are also in effect competitors with Kyber Networks (KNC). Kyber’s ICO closed on September 17, 2017. Kyber is a decentralized exchange that focuses on crypto-assets conversion.
The Wisdom of Cyber Spatial Crowds
The question of how to compare those three networks, and others with related functions, as platforms or as investments, has been much discussed on social media, inclusive of reddit.
A Reddit Exchange of Views
An exchange of views on Reddit offers a good display of what the relevant public is thinking about when it compares these systems. In that exchange, in September 2017, “self ETH trader” said that these networks are all “essentially trying to solve the same problem” and asked for guidance on “which has the most potential to succeed.”
One of the views expressed on the resulting chain was that Ox has the more realistic business plan because it is going to “deliver something soon, gain market share and then be able to iterate on the product and improve over time.”
But another participant, Voltaire585, said that he likes “the Omega One strategy for liquidity where they would fulfill your order on a non-decentralized exchange if they couldn’t settle on their order book, which will give them the training wheels till their order book is big enough to sustain itself.”
And another view, expressed by “ethfanman” was that Kyber has the inside track, because they “will support cross-chain trading in 2019 according to their roadmap, so it is not ERC-20 only.”
Jackson Palmer’s Analysis
Jackson Palmer, best known as the creator of Dogecoin, and now the proprietor of a YouTube channel on cryptocurrency with more than 25,000 subscribers, has posted a 23 minute video, picked up by CryptoGeeks.com, discussing the issue.
Palmer says that competition is heating up in the market for decentralized exchange in the Etherium space, and in his video he runs through the major players, beginning with exchanges that use old-fashioned order books. It is at about 11:20 in the video that our host comes to the issue of decentralized exchanges that dispense with order books and that trade by identifying “reserve contributors.” He begins this portion of his discussion with Kyber.
Palmer observes that this requires a KYC inquire for any reserve contributor, and he suggests that they inquiry might be scary to some potential parties.
A broader issue with such an arrangement, he adds, is that “as a buyer, you don’t have a lot of control. You basically have to agree to whatever the reserve operators are setting as the price.” The reserve operators may compete in a healthy way, but that needs to be “tested in practice.” Palmer also expresses some concern that the managers of Kyber have not been entirely transparent.
Palmer’s video doesn’t get to Omega One until about 17:30 into the discussion, and once there he begins by saying that it might not be considered a “decentralized exchange” properly speaking at all, though it has many of the same characteristics. Despite the semantic quibble, he is favorably impressed that Omega One draws upon the centralized exchanges to assist its own liquidity needs as necessary.
After making that point, he says that “the really cool thing that I see about Omega One is that you get all the benefits of a decentralized exchange” but the cost, time efficiency, and liquidity of centralized exchanges.
In general, he also says, “it’s going to take awhile to perfect” blockchain technology, cryptocurrencies, and the decentralization that many see as the promise of them both. Near the end, at about 21:30 Palmer says that the features of Omega One will likely allow it to move to cross-chains more smoothly than its competitors.
Cross-chains are key at this point in the development of the industry. One might argue that what the world of cryptocurrencies needs, more even than the mitigation of any or all of the three important problems listed above, is this: to become one financial space, not several. What it needs is the exchange of one cryptocurrency for another, across a very wide range of cryptos, the exchange of a ETH for a Ripple’s XRP, in a seamless and trustless way.
OMT is, as the Omega One white paper says, “ERC20 compliant with the aim of being able to leverage the functionality of the Ethereum blockchain as much as possible and seamlessly interact with other ERC20 tokens.”
The Omega One road map looks forward to a Release 1.1 – 1.x, no sooner than the final quarter of this year when the team will introduce “additional crypto crosses.” They also expect to introduce fiat currencies into the mix. In their words, that will entail bridging “the fiat/crypto membrane.”
Relatedly, the team also looks forward to adding analytic power at 1.x. “A central source recording meaningful data and interacting 24/7 with crypto exchanges will go a long way toward filling the data gap in the crypto markets” so all participants get the data they need to continue innovating.
That membrane is a legal/regulatory one as well as a technical one.
Even beyond that, Omega One looks forward to becoming a utility. Release 2.0 would depend on “technical development in the broader crypto ecosystem including improvement in the efficiency of double-blinding smart contracts, and the movement of liquidity to reliable, fully decentralized exchanges.” If this happens, then completely non-custodial and trustless liquidity will move freely through the Omega One platform, safe from information leakage or front running.
That plus a self-improving artificial intelligence trading logic engine, which could allocate OMT as fees back to member “who had a meaningful impact on improving trading logic,” would make the platform “a community owned and run a public utility.”
Why didn’t Omega One launch last year?
Omega One had planned the launch of its product and the ICO for last year. Why no launch yet?
Management has said it decided to split its capital requirements into two buckets. Rather than fund everything through a token sale, it would fund product build and launch costs through equity capital, and thereafter fund balance sheet and membership incentives through token sales. This meant that it made sense to postpone the token sale until there was a completed product and those membership incentives had immediate significance.
The distinction between these buckets was already implicit in the white paper issued before the decision was made the make the separation between them a chronological one. The white paper discussed product build and launch costs, including staff salaries, office space, equipment, etc. But the paper also said that its “primary need for capital” was “to build a large enough balance sheet that we can provide risk intermediation and settlement facilitation for a meaningful volume of daily trades.” Risk intermediation requires offsetting trades and that in turn means that the trading limit must be proportional to the size of the balance sheet.
A Final Thought
Omega One will be testing whether traders really demand a low-vol market, that is, one where even transactions large by today’s standards will have little impact. Much of their white paper is devoted to working out examples of how big an impact specified transactions can have, in a spirit of: isn’t this awful?
If there are a lot of traders who think that is, in fact, awful, then Omega One is a great play. But if the world of cryptocurrency turns out to be more accepting of volatility than this team believes, if the community has learned to shrug at such examples as just the-way-things-are, then Omega One’s near future could be a very rocky one.