Omega One: A Balance Sheet Solution for Crypto Liquidity
By: Alan Keegan and Alex Gordon-Brander
Omega One is a membership-based automated trading platform for crypto-assets, offering low-cost, secure trading by aggregating liquidity from the world’s crypto exchanges, and algorithmically managing order flow. By using our balance sheet to intermediate between members and the marketplace, we will enable trustless atomic swaps, shielding our members from the increasing exposure of hacking risks. This will provide better trading performance than any centralized exchange, with safety currently only available on decentralized venues.
The Omega One back-end is already executing test trades across the most liquid exchanges, while we develop our front-end, wallets, and blockchain integration in preparation for a mid-2018 launch.
The Omega Token (OMT) Value Proposition
To become a member of the Omega One Platform, traders must purchase Omega Tokens (OMT), an ERC20 token on the Ethereum blockchain. The utility benefits of the platform will be distributed among token holders, with higher token holdings unlocking higher levels of access to platform services: wallets; trading; fee discounts; research; premium analytics; and execution priority.
This will allow Omega One to operate a different kind of business model than the investment banks who provide a similar service in traditional markets. Rather than setting fees at the level that would maximize profit extraction from the system, Omega One aims to keep transaction fees low while still covering costs (exchange fees, blockchain fees, operations and staff), instead maximizing utility accrual for our members. This will drive up demand for the service, causing more individuals and institutions to come on the platform, causing them to buy and hold more tokens, increasing network effects and value.
The Omega One Balance Sheet
Omega One will provide traders with the best of both worlds: the trust and simplicity of atomic swaps, currently only available on decentralized exchanges combined with all the liquidity available across centralized exchanges. This unique design is facilitated by a balance sheet of crypto assets, raised through the sale of OMT. The balance sheet is required for two reasons:
1.To enable us to trade on our members’ behalf on exchanges, only settling when their order is completely filled. This (a) reduces transaction costs on the blockchain and (b) maintains privacy of the order during its life.
2. To intermediate in the settlement process, allowing members to experience an instantaneous (atomic) swap of funds, shielding them from the actual movement of funds in any given trade, which is non-instantaneous, as it involves reaching transaction finality across blockchains, between the clients and the Omega One wallets, and between Omega One and the exchanges.
For the first reason, we must have a balance sheet at least equivalent to the total size of net open orders in a currency at any given time. Additionally, we must have balance sheet to cover orders during the settlement process, covering the round trip time for Omega One to reach settlement finality with the member and to rebalance exchange positions.
Balance Sheet Size
There is no magic number “X” of balance sheet that’s required to enable Y amount of daily trading on Omega One. Nonetheless, it’s instructive to lay the factors that relate balance sheet to daily trading, to provide a broad sense of how much trading our initial token sale may facilitate.
At a high level, the factors that need to be considered in relating balance sheet size to trading volume are:
- Order Size
As average order size increases, we need more balance sheet, to maintain a sufficient float to do an atomic swap for an entire order. For instance, let’s say we trade 10,000 BTC over a given 10-hour period. If this comes in 10 orders, each of which takes 1 hour, we only need to float 1,000 BTC at a time; if this comes in 1 order which takes 10 hours, we need to float the entire 10,000BTC. - Distribution of liquidity across exchanges
Because it takes time for us to move funds between exchanges, we must must maintain a sufficient float of funds for expected orders on any exchange where we might find the best price, in addition to the float for actual open orders. Sometimes moving crypto between exchanges can be considerably slower than blockchain settlement times, and fiat can be an order of magnitude slower than that. The more exchanges that trade a given asset, the more float we need. - Variations between average and peak trading volumes
Trading happens in peaks and troughs, in both patterned and unexpected ways. Ideally, we need enough float to handle peak volumes, although in extreme peaks we would expect to compromise by performing partial settlements. - Variations in trading demand across currencies
Volume distributions differ across assets (e.g. Bitcoin on the day of writing this article turned over about 2% of total cap; Ether 1% and Zcash close to 10%), and these distributions differ by day. It would be expensive for Omega One to keep changing its balance sheet composition to chase the changes in trading volume, so therefore we need more balance sheet to handle changes in trading demand. - Variations in liquidity
A 1000 BTC order may be possible to complete in minutes at times of high liquidity, but require closer to an hour in times of low liquidity (or if we decide to execute more quickly, to cost more in terms of market impact). These liquidity variations will impact how long orders stay open, impacting the size of the required float. - Variations in blockchain settlement times
Because we perform atomic swaps with our members, we don’t receive outbound member funds out of escrow until we have proven to their wallet that the inbound member funds have been settled on the relevant blockchain. This means that we need to float funds for roundtrip settlement times between their wallets, our wallets, and the exchanges, across both blockchains involved in a transaction. These times can vary significantly.
Overall, this means that the amount of balance sheet that must support trading across market conditions is a multiple of the average size of orders that are open at any one time. Although imprecise, our simulations suggest we should be able to support 1–2x the size of our balance sheet in daily volume across nearly all market conditions.
In peak situations where the combination of market conditions and trading volumes temporarily exceed this, we can recycle our balance sheet by performing multiple partial settlements on large orders, at the cost of accepting some degradation in transaction costs and information leakage. As our volumes grow, and demand for our services rise, we will be able to sell more tokens into that demand to expand our balance sheet. We will also develop better predictive analytics on market and liquidity conditions that will enable us to deploy our balance sheet more effectively; over time we hope to grow a sufficiently large balance sheet to cover any reasonable conditions.
The Omega One Token Sale
Our initial sale of Omega One tokens will be via an upcoming public token sale. We are currently conducting a discounted presale with a minimum purchase of 30 ETH. If you would like to be considered for the presale, contact us at tokensale@omega.one
Like this piece? Sign up here for the ConsenSys weekly newsletter.
DISCLAIMER: The views expressed by the author above do not necessarily represent the views of Consensys AG. ConsenSys is a decentralized community with ConsenSys Media being a platform for members to freely express their diverse ideas and perspectives. To learn more about ConsenSys and Ethereum,please visit our website.
