I found out about Overline about 2 months ago and since then I've been researching a lot about it. I can say that this is a very tricky project to research because aside from being quite complex, it has been rebranded a few times since the whitepaper was first published in 2017 and has always been in stealth mode. Todd Morley's appearance on Bloomberg last month marks the end of the stealth mode in my opinion. I believe we will be hearing a lot more about Overline in the coming weeks and in this post I will try to present all my findings in a systematic manner as to allow anyone interested in Overline to learn as much as possible in the shortest time possible and make up their own mind about the project.
Hard core fundamentals
Overline is a unique interoperability protocol that enables kyc-less offline cross chain peer to peer trade through proof of work rather than validators. In other words, it is the only interoperability protocol on the planet that doesn't rely on a validator or a single individual confirming transactions. Moreover, peer to peer here means peer to peer, in the sense that you can trade eth for btc directly without having to use a wrapped token. The only protocol today to allow cross chain trading without wrapped tokens is Thorchain, which however relies on a limited number of validators. Collusion risk in this case is non negligible and the degree of decentralization is inferior to that of networks like Bitcoin. Instead of validators, on Overline trades are mediated by a decentralized network of miners that are constantly performing proof of distance work. This is a unique proof of work algorithm that was invented by the founders of Overline, and allows miners to prove cryptographically that they are acting based on the most recent states of the connected blockchains.
Proof of distance is Overline's proof of work algorithm. I'm not a mathematician or coder, but I studied a bit how this algorithm works and found out it's actually easy to understand. Proof of distance is a string similarity algorithm. To understand string similarity algorithm you can think of it as a variation of facial recognition algorithms. If you show 2 faces to a facial recognition algorithm then it can tell you by how much these 2 faces match. For example if the match is quantified as 10% then one way to ready it would be 90% distant. If they match 99% then they would be 1% distant. So if you draw someone with asian features and compare it against a caucasian face the algorithm is going to show a very low matching score. If you insert another drawing of an asian person then the algorithm will probably show a higher match score. String similarity algorithms do something similar, but instead of faces they compare strings and they tell you by what degree 2 strings match. A string is a sequence of numbers and letters. Strings are important because the block headers of blockchains like Bitcoin are strings. On Overline this string similarity algorithm is used in order to allow anyone to prove that they are acting based on the most recent state of the connected blockchains when clearing a trade involving any 2 of the connected blockchains.
For example let's say Bob is buying ETH with BTC from Alice on Overline. Bob and Alice put up their collateral on each side of the trade, and once the trade is executed (because Bob takes Alice's ask or vice versa) they are given a window of time (in OL blocks) to exchange the respective assets. After the set amount of OL block is mined, then miners check if Bob sent his BTC to the receiving address that Alice provided and if Alice sent her ETH to the receiving address Bob provided. While in other defis we have to trust a validator, on Overline the verification is done cryptographically by miners. Miners take the most recent block headers of the BTC & ETH blockchains and find a string that meets some minimum similarity parameter (distance) with the most recent block headers of the respective blockchains. This is also why it is called proof of distance, it indicates how close the new string has to be to the block headers of the reference blockchains in order to be accepted as proof that the miner is effectively watching these blocks. 5 blockchains are connected to Overline currently: BTC, ETH, Waves, LISK, NEO.
Because the miner is required to act on the most recent known state of the reference blockchains and because it is required to prove it is watching the most recent block through proof of work, if Bob sent his BTC then an Overline miner cannot arbitrarily mine an Overline block transferring Bob's OL collateral to Alice as if Bob had walked out of the trade. Because for this he would have to use the header of an old BTC block which would be rejected by the other OL miners for not having the header of the most recent BTC block.
In validator defis on the other hand a validator (or group of colluding validators) could not acknowledge Bob's transaction and transfer his collateral to Alice anyway. For this attack to be viable the size of the Bob's trade would have to be higher than the collateral the validator or validators would lose. So while in validator based defis the incentives for an attack become stronger as the trade size grows, in Overline the opposite occurs. As more trades are conducted through Overline, more miners join the network. As result the network gets safer because a 51% attack (the only attack vector in pow) gets more and more expensive as the network grows.
Tokenomics: Overline token (OL) and EMB are the 2 tokens of the Overline network. OL is its native token, it can be mined and it is the token users must lock as collateral for each trade. It stays locked only for the duration of the trade window, after which it is unlocked and can be used in another trade. OL is also the token in which miner block rewards and transaction fees are paid. Emblem (EMB) is the utility token, it is an ERC20 token that boosts miners' block reward in a sublinear fashion. EMB holders can extract value by lending EMB to miners in 3, 6, 12 month contracts for which are paid in advance. When this happens their EMB is frozen and L-EMB is instead issued to the miners who then can mine with it and benefit from the boost. EMB's sublinear boost combined with L-EMB create a barrier to excessive mining centralisation. Since (small) EMB poor miners can generate much higher marginal returns from EMB than EMB rich miners, then EMB holders looking to maximize returns earn more by lending their EMB to small miners than big miners. As result of this even big mining pools are incentivised to break into smaller pools after a certain point. Moreover, as result of EMB's ability to boost OL reward, an increase in the price of OL trigger a rush to EMB among miners as they try to max out the amount of OL mined. According to this model based on the actual boost formula the price of EMB should be at least 10x the price of OL. Currently OL is only traded peer to peer on the Interchange, Overline's DEX interface.
Liquidity model: Overline doesn't use liquidity pools, instead the Overline Team has released a multi market maker bot (MMM) where liquidity providers make money by exploiting market inefficiencies in different crypto exchanges for a given trading pair. Considering that Patrick McConlogue, Overline's co-founder, is a former Citadel quant its founding team does have an edge in a tech like this. Aside from ensuring much higher volumes than what we are used to with DEXes, this also means that liquidity providers here do not make money by charging fees to users but rather through arbitrage. Considering that there are no exchange fees on Overline (Interchange is just an interface), this results in >99.5% lower fees compared to DEXes that rely on the LP model. Overline's Interchange V1 was released earlier this year and the trading method can be validated there. Overline liquidity model however will also probably change the game for DEX liquidity once and for all. The first 12 LPs of the MMM bot alone managed to bring over $19m in volume to Interchange's V1 while generating 7-9% passive returns per month on average.
Wireless Miner and Overline Business Program: Overline's network is maintained by 2 types of miners, highly competitive block miners and less competitive transaction miners. Although there a lot of blanks to fill when it comes to transaction mining, from my 2 months in the Overline community it seems clear that transaction mining will be much more accessible than block mining, since anyone doing transaction mining will be competing only with other miners operating within a 40 mile radius. The function of transaction miners is to pick up transactions locally by POD mining them against their own miner address. Again this uses the pod algorithm, only that the distance/similarity is measured between the transaction data, miner's address and a new string the miner has to come up with. Since the total distance in a block is limited, transaction miners can also increase the odds of a single transaction to be included in a block by continuing to mine an even smaller distance. For this purpose starting from July 4th Overline's wireless miner (proprietary device but you can BYOD too) will be available for sale. Transaction mining is also known as Overline's small business program, because it will allow anyone to start a mining business with very little upfront cost.
More Usecases beyond DeFi
Attention economy: In these 2 months of research I've found different cues that Overline is planning to enter the attention economy. There is no official announcement from the team yet but there are 3 main cues:
- Borderless Services Inc. (Overline's mother foundation) bid $700m for the acquisition of Forbes 2 months ago. BSI's plan, according to reports of the bid, is to somehow incorporate a crypto wallet into Forbes. The offer was funded by Ares Capital.
- Overline has developed a verified viewership tech, developed and stress tested, which allows the followers of content creators to verify themselves as viewers of a particular event by scanning a QR code.
- Affiliation with media personalities like Donald Trump Jr and Kimberly Guilfoyle
- Overline's co-founder Patrick McConlogue shared a Daily News article about Trump's upcoming social media network launch the 4th of July, which coincides also with the launch of Overline's wireless miner.
Tokenized assets: For the Overline protocol cross chain crypto trading is only the first trading use case, however the tech can be used also to trade tokenized assets as well as NFTs. Pertaining the trade of tokenized assets, last month it was announced that there is already a joint venture agreement with JDS over the tokenization of its $3bn real estate portfolio.
Opportunity
Overline's value now is practically null, it has only 1 exchange listed token, EMB. The total supply of EMB is 300m, 100m are held by BSI, 100m by the team and 100m are circulating. EMB was listed on FTX 2 months ago (which is how I first bumped into Overline) and currently has a market cap of $20m (<70m diluted market cap). This is why I believe the opportunity here is immense. I believe defi investors will at least diversify in Overline.
I personally believe that proof of stake/validator defis are centralized by nature as they give a permanent first mover advantage to early adopters. However this is just my opinion, and I understand a lot of other people don't agree with me and think POS is just as decentralized. This ideological diversity is what makes crypto powerful, so I'm not here to change the mind of those who believe in POS defi. But I believe that even though validator defi enthusiasts might not be as bullish as I'm on Overline, it is hard to not acknowledge the potential that a project like this has to perform should the remaining 6 months of 2021 be bullish.
Other interesting reads I recommend:
[1] Why Overline’s token EMB will probably outperform crypto in the next couple of years. (Medium)
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