An In-Depth Interview With Omni Layer’s Patrick Dugan

November 30, 2016 - Bitcoin, Cryptocurrency
An In-Depth Interview With Omni Layer’s Patrick Dugan recently chatted with the Omni Foundation’s Patrick Dugan about the project Omni Layer. Omni has launched another release cycle of the Omni Layer platform. The platform creates a layer over the Bitcoin blockchain, enabling various use cases for asset trading and creation. 


Omni Layer and Blockchain-Based Bearer Bonds

In the interview with Dugan also discussed the new Bond platform which puts bearer bonds on the Bitcoin blockchain. Dugan gave us some insights into the ambitious landscape of protocol development using decentralized technologies. (BC): How has the Omni project been going?

Patrick Dugan (PD): Great! Since we last talked the team put out another release cycle, and we’re at the point where the foundational technology could stand on its own as a public utility.

BC: Can you tell our readers about the latest release of OmniDex?

PD: We’ve activated all-pairs trading, and we’re going to activate Send-to-Owners transactions involving cross-properties, so, for example, I could distribute Tethers to holders of a bearer bond token. And pending a bit more testing we’re going to activate the fees after a free period of open Dex trading, where .05% go to OMNI holders, making the asset sort of like shares in an autonomous business.

BC: What types of cryptocurrencies and assets can be found on the OmniDex platform?

unknownPD: There are two classes of an asset on the layer, and there could be a third. The first is tech projects that are going to develop either their own blockchain or an application utility and issue over Bitcoin to fund development. Eventually, the tokens would become interchangeable with the native blockchain version when it’s ready. This covers the big hitters right now, MAID, AMP, and AGRS. This is, of course, a self-limiting category for the platform, since there can only be so many good tech projects, the second major category is tokens that can be classified as securities.

I’ve done a lot of research this year on legal ways of doing Real Estate Investment Trusts, company shares and bonds as bearer tokens: from a US Citizen’s point of view, a UK Citizen’s point of view and a Swiss Citizen’s point of view; there are few ways and the easier ones involve trade-offs like blocking some jurisdictions. This ultimately, once the trails are blazed, is where Bitcoin gets a killer-app of asset-backed security issuance where the total amounts may come to eclipse the value of the bitcoin commodity, while also enabling the network to sustain mining profitability at lower bitcoin prices, due to growth in fees. We’re talking about hundreds of billions if not trillions in real estate primarily, with bitcoin perhaps being worth 100B, down the line.

Finally, the last category would be coins that exist as balance sheet liabilities for companies, like store credit, and are therefore not securities per se, but are not linked to an eventually autonomous decentralized tech. Reward points and credit issued for purchases could fall under this category, and since it’s easier legally, this may become more popular for companies to get Kickstarter-type revenue through crowdsales. For those who don’t speak Accountant, a balance sheet liability would be something like, I am crowdfunding for a farm, I am pre-selling goods (food) if you have a token I legally owe you what it’s worth in redemption value. As far as I can

BC: Can you tell describe “bearer bonds on the Bitcoin blockchain” concept?

Patrick Dugan, Omni Layer

PD: I’ve done a lot of fixed-income investing in my role for the foundation, Poloniex, OKCoin futures, BitMEX swaps; it turns out there’s a whole universe of time-preference in cryptocurrency, there is information in that, as well as returns like 10-15% a year that are arguably safer than US Treasury bonds, if you’re ideologically inclined to discount the establishment.

Meanwhile, the British pound crashed near levels not seen since right before the Plaza Accord in 1985 (i.e. most of our lifetimes), and I networked with some wholesale lending companies in the UK who are offering high-yield bonds backed by secured loans on their balance sheet. For example, Minerva Lending has their note trading on the Irish Stock Exchange and have raised over 100M USD, they lend to small businesses against collateral like real estate or machinery, and a custodian firm called Jade State Wealth holds the title and controls the flow of funds as they are repaid.

Since I’m a skeptical quant who entertains radical notions like fiat currency waning and the debt super-cycle ending, and who knows about bitcoin futures premium and stuff like that, I created an index of some corporate high-yield note issuers’ interest rates, and of rates you can get from different exchanges and derivatives over here in blockchain land. The resulting Blockchain Yield Index gives investors an indication of where time-preference is going in the new financial system and in the old, and the BOND token is backed by a tracking fund that aims to hold the index constituents and deliver the index’s annualized return in a weekly payment. Since its an index fund, a single exchange or note default, as tail-risky as they are, would cost investors maybe a year’s returns at worst.

The other thing that’s annoying about bonds other than credit risk is when the yield goes up the bonds go down, because the payment is fixed. By mixing in money markets that are liquid, for example, I can redeem a BTC deposit on Poloniex within two days, it allows for the index to cycle into cheaper notes when interest rates finally go into a 1960s/1970s half of the cycle. Also, general performance in bitcoin will increase futures premiums, general performance in alt-coins will increase the rates you can get for Poloniex deposits for the BitMEX swaps, so maybe this is an income asset whose returns will grow over time, instead of leaving people underwater. Straight government bonds are not a good place to be right now, you’re at the mercy of centralized power – but corporate bonds in the right sizing can be smart if the credit risk is appropriate. If these UK issuers weren’t doing secured lending, I wouldn’t have included them.

There’s a lot of Ponzi schemes out there, MMM, Onecoin, and these fraudulent products market themselves to the poorest people with unrealistic returns and hand-waves about the underlying “there” there, which is due to their products not having a “there” there at all. Some of my African friends have gotten solicitations to work for these outfits, though I advised them not to take the easy money in doing so, and they still have great reputations in this industry. It’s time that people got a savings option that can hold its value, pay a high but not crazy return, and is denominated in GBP and USD, which despite the political uncertainty of 2016, I believe will be the one-eyed kings in the fiat-currency land of the blind.

Also, it’s time that people had a savings option like bearer bonds. The OECD is trying to choke financial privacy through the multilateral tax sharing program, Common Reporting Standards, with the US being a major exception. CRS would require all financial entities to keep track of everyone they pay, which sounds reasonable on the face of it but goes against the grain of how the Bitcoin protocol works.


BC: Will the Bond token be available to U.S. and U.K. users soon?

PD: U.K. is more likely than the U.S., possibly in Q1 we’ll make a deal with the owners of a regulated vehicle. However, the strict laws in the U.K. against bearer securities add further complications.

The structure is actually U.S.-centric, each set of assets is held in a Wyoming LLC that I manage through a Wyoming corporation, and my British colleagues have created an Armenian company that is a customer of that basic wealth management service. US property law backs the LLC membership’s strict rules towards benefiting investors, and the token is backed by a contract between the Armenian company (which owns LLC membership, and thus pass-through ownership of the assets) and the holder. Other people can become LLC members directly and get a 10% higher payment, due to tax withholding in Armenia, but then they can’t get a token to transfer until a year later, due to the SEC rule 144.

Now if that seems like a bit of a maze run, that’s because U.S. securities law is tricky, global attempts at regulation are tricky, and maze running was the easiest way to properly do this for where the world is today. But, the not so easiest ways would be, do a Regulation A offering that goes up to 50M a year in issuance and costs about 120k to file, plus ~30-50k a year in accounting for SEC reporting. Lots of people can do that and arguably, have the registered stock that is held by the company back the issuance of a blockchain token as a bearer scrip – a term that is repeated across many State Corporations Acts. I’m exploring a deal right now where I would spin-off a company from an existing publicly traded company on the OTC exchange, at present, it seems like that’d be a legal way to get a public, regulated security with little upfront cost though 50-100k in reporting costs each year. I think I want to save that for the real estate product I’ve got coming further down the line. My current feeling is that BOND changes things a lot more for people in Latin America, Africa, and Asia than it would for U.S. persons.

BC: How do you feel about the current state of Bitcoin at the moment and the constellation of projects surrounding it?

bitcoinsign-svgPD: Bullish! As some of these things come to fruition, we may even see a positive correlation with BTC emerge. As the Chinese yuan move towards 7 per USD, we’re going to be collecting some capital gains from our Chinese brothers and sisters, but also competing with them in smaller markets. That money is going to make a new home for itself in our neighborhood.

I was not super pleased with the lack of any added block-size increases in Core, but Segwit and an increase to 1.7MB are helping the core issues. Finally, the average transaction size is falling towards the average transaction size of Omni transactions. In my experience testing Omniwallet and algorithmic trading on Omni Layer, the typical 10 minute block time isn’t a huge flow-killer, but those occasional 1-hour gaps between confirmations and then the whole thing is backed-up in the Memcache, that’s a killer. It seems like we’re past the iceberg on these core issues, though.

Many cryptocurrency investors are so bullish on the underlying commodities that reward those securing blockchains, they forget that the real value of this tech is in diverse applications. Digital gold is cool, I keep my savings in BTC and am a card-carrying Libertarian cliche just as much as your modal reader, but for the world, there need to be real estate tokens, pegged currencies backed by decentralized derivatives, credit platforms, and eventually complex, decentralized applications.

Between Rootstock, Counterparty’s inclusion of the EVM, and our relatively modest hard-coding of It Just Works futures contracts, I think we’re in good hands to open us the range of use cases for Bitcoin.

BC: What’s the overall goal of Omni and operations like the Bond project?

PD: I started out in 2014 researching futures and then hit upon decentralized banking as the ur-application (pegged fiat currencies backed by crypto + smart contract). I’m going to ensure this is seen through – what I really want is to create something that stands on its own legs and frees, everyone.

When I think of Omni Layer’s current functions as a business, I think about market share of volume for different assets on the layer, and I think about total assets. So of the ~50M in tech projects currently on the layer, that trade maybe 500k a day on average, we could grab 20-35% market share there, but then for something like Tether euros, where the EUR/USD market does trillions, it makes more sense to look at cryptocurrency remittances denominated in those two, and try to get a 5-10% market share there. But then, the needle really moves when you go from ~50M in assets to 150M in assets, with that extra 100M coming from a handful of bond, stock, and real estate offerings.

BOND is aiming to change expectations like that for the less sophisticated investor — negative real returns at the bank vs. Ponzi schemes vs. a decently diversified income portfolio. Likewise I want OMNI the token to make people think differently about cryptocurrencies, everyone is so cynical in this space, I’ve traded a lot of alts, I get it, but once there is revenue coming around from a decentralized autonomous process, maybe, just maybe that will make traders raise the bar of quality for the things they hold, and expect more solid fundamentals before punting things to the moon and back.

BC: How long do you think it will take to reach this goal?

PD: The 100M in securities issuance goal is for year-end 2017. The futures implementation I want to see go live in Q1 or Q2. The changing of the conversation about cryptocurrencies part, I think will happen before the end of the year as the fee cache fills up and makes its first distributions.

Images courtesy of Bond, Omni Layer, and Patrick Dugan