OMG Network 101: Scaling Ethereum — AAX Academy

Scalability is one of the crypto industry’s most obvious issues. Difficulty scaling poses an even bigger problem for Ethereum, which is among the most-used blockchain networks.

According to YCharts, daily transactions on Ethereum reached an all-time high in September 2020 at 1.4 million transfers, surpassing its previous record of 1.278 million from January 2018. With the DeFi space booming, this number is expected to increase further, with Ethereum currently processing over 1.3 million transactions (as of February 10).

To enable further growth, the OMG Network (formerly OmiseGo) has introduced a scalability solution for Ethereum, which we will explore in this article.

What Is the OMG Network (OmiseGo)?

Formerly OmiseGo, the OMG Network is a layer-two scaling solution for transferring value on Ethereum.

Simply put, a layer-two scaling solution is a blockchain (the OMG child chain) based on top of another blockchain (Ethereum).

Moving transactions to a faster chain with a higher throughput frees up valuable block space on the main blockchain while speeding up and lowering costs.

The OMG Network does exactly that while preserving the security and trustlessness of layer-two transactions.

The OMG Network is compatible with both ETH and ERC-20 tokens on the Ethereum blockchain, and the cryptocurrency exchange Bitfinex has already integrated it for its native USDT stablecoin transfers, withdrawals, and deposits.

What Is the Blockchain Scalability Problem and How Does it Impact Ethereum?

Before deep-diving into how the OMG Network works, let’s take a brief look at the blockchain scalability problem with a focus on Ethereum.

While centralized systems, such as Visa, PayPal, or MasterCard, can process thousands of transactions per second, decentralized networks often struggle with limited scalability.

The main reason behind the issue is the intensive mechanisms needed to reach consensus and verify data on blockchain networks, which are key to maintaining a high level of decentralization and security.

For that reason, every validator in the network has to reach a consensus to verify transactions and add new blocks to the chain. Bitcoin can handle only around 5 transactions per second (TPS), while Ethereum can process up to 15 TPS.

When scalability is limited and the network experiences high demand, it can easily get congested, leading to excessive transaction fees and processing times.

Currently, due to the heavy use of decentralized finance (DeFi) apps, Ethereum is under significant load. As a result, the network is getting increasingly congested, with the average gas price reaching $24.67 on February 9.

How Does the OMG Network Work?

To free up block space on the Ethereum chain, OMG uses More Viable Plasma (MoreVP), an update of the Plasma layer two scaling technology.

Here, the OMG Network bundles transfers together, compresses them into a single transaction, and moves it to the OMG child chain (the layer two chain on top of Ethereum) for verification.

As the last step, the child chain sends the verified transfers back to the Ethereum main blockchain for final verification.

Due to the scaling technology’s efficiency, the OMG Network is able to process thousands of transactions per second, with every transfer routed through OMG costing exactly one-third of what it would cost on Ethereum.

The reason why the OMG child chain can scale so well is due to the fact that there is only a single node, called the operator, in the network. For comparison, there are around 8,000 nodes on Ethereum.

While the single-node structure makes the OMG child chain more centralized than Ethereum, it allows it to achieve much higher transaction throughput than the main blockchain.

However, despite the operator’s centralized nature, a network of decentralized computers, called the watchers, are constantly monitoring the operator for suspicious or malicious activity to ensure the data submitted to the Ethereum blockchain is correct.

Furthermore, since validators on the Ethereum blockchain have to finalize transactions routed through the OMG Network, a similar level of security and decentralization is achieved during the whole process as with standard transfers on the main chain.

Also, the OMG child chain is non-custodial, which means that the users’ funds never actually leave the Ethereum network but instead are put into a smart contract. For that reason, even if OMG goes offline or suffers a major attack, users will be able to recover their funds.

What Is the OMG Token and How Did it Perform in Terms of Price?

The OMG token (OMG) is the native token of the OMG Network that is used to pay the fees of layer-two transfers with the opportunity for watchers to stake the coin.

The OMG Network held an Initial Coin Offering (ICO) back in June 2017, in which it collected $25 million from investors. Interestingly, OMG is one of the few crypto projects that have managed to survive 2017’s ICO boom with significant price appreciation.

In fact, the OMG token has surged from its initial $0.35 valuation to $5.68, representing an all-time ROI of 1,520% as of February 10, 2021.

What’s Next for OMG?

The OMG Network is an exciting cryptocurrency project that seeks to provide a viable solution to one of the blockchain space’s most important problems by enhancing Ethereum’s scalability.

In June 2020, the project released the beta version of OMG Network, which has been deployed on the Ethereum mainnet.

Since its launch, OMG has integrated its layer two scaling solution with multiple cryptocurrency services, including Bitfinex for USDT transfers as well as the Ledger hardware wallet, with the project looking to strike new partnerships with more digital asset enterprises.

In the meantime, be sure to check out the next-generation, LSEG-powered cryptocurrency exchange AAX to trade OMG.

Originally published at https://academy.aaxpro.com on February 10, 2021.