Brief Background on the case for Defi
Bitcoin was created as hard, censorship resistant, digital money that you cannot debase, confiscate or control. Decentralization is the key feature that conveys these properties to Bitcoin, without it Bitcoin would be much easier to control.
Bitcoin was a one time freak out experiment that succeeded. Even though a lot of others tried to emulate or fix it, to this day no other crypto has outperformed bitcoin consistently in the long run. Bitcoin tackled a fundamental problem, went straight for the heart, and solved it without leaving any loose ends.
One issue has plagued bitcoiners ever since though, that of custodianship. As bitcoin gained traction, and demand for trading soared, the only way to trade bitcoin was through 3rd parties that matched buyers and sellers. These 3rd parties were custodians. So while bitcoin removed trust from currency, because of bitcoin's censorship resistance and unconfiscatable nature, trust became a big factor when trading it. In other words, we have hard peer to peer money but we don't have a protocol to allow peer to peer trade.
A solution for peer to peer trade has been desperately missing. A lot of nefarious actors have been taking advantage of this loophole. For example ecommerce as we know it cannot work through bitcoin because sellers are incentivized to take the money and run without ever delivering any goods or services. Others have tried to fill this need in traditional ways, such as by building reputable businesses that one can trust. Relying on custodians however distorts market dynamics, even when the custodian doesn't take our money and run, they have access to a lot of our information. Custodianship leads to centralized hubs that see the market at bird's eye view because of the high amount of information they process from all the market participants that use them. This huge amount of data pertaining the financial decisions of smaller market participants can be used by these custodians or sold to major players that then use it to profit by exploiting this excessive asymmetry of information. We saw this with Robinhood earlier this year, and we see it in crypto exchanges all the time.
Market Misallocation in Defi Today
DeFi is that branch of fintech that aims to solve this by bringing to the masses protocols that tap on the demand for peer to peer trade. Today DeFi protocols rely on the so called validators. Validators are centralized hubs whose duty is to verify information of all sorts to then release or freeze funds. For example, Alice bets with Bob that tomorrow it will rain in Washington DC. To allow Bob and Alice to place the bet trustlessly, DeFis today ask Alice and Bob to send the money to a validator. The validator is supposed to monitor the outcome of the event in question, if it rains then the validator sends both Alice's and Bob's money to Alice, because Alice won the bet. If it doesn't rain then it sends the money to Bob. What if the validator cheats? To become a validator one must stake collateral, which means the collateral is frozen for a period of time that varies from a few weeks to several months. All defis today tackle this problem more or less in the same way, if it rains but the validator scams Alice and sends her money to Bob then the validator's collateral is confiscated. However, if the amount at stake is much higher than the collateral or if the value of the collateral suddenly drops a lot in a short period of time (because the price of the currency drops), then validators have no incentive to conduct their function and could turn into nefarious players, just like a bank, exchange or any other mediator in traditional finance could if they get hacked or take excessive risks.
In other words validators are custodians, one needs to trust a validator. 99.9% of defis today use validators, and sell them as trustless.
Since Satoshi gifted us trustless money, a solution for trustless trading has been sorely missing. In the current crypto bull market, all the protocols that try to solve this have resorted to this validator model. However validators are custodians and trust is required when picking a validator. In fact you will find a lot of reputable validator lists online for any defi coin out there, which contradicts the very notion of defi. The multi billion dollar DeFi sector today consists only of protocols that are simply taking advantage of impulsive and uninformed market participants.
Overline Protocol
Even though some might see current DeFi protocols as grifters, we've to acknowledge them at least one merit. For one they have increased awareness for the need for trustless trading, and secondly have shown how much money a working defi protocol could be worth today. The current DeFi market cap is $87.1bn, just from protocols that use validators. A protocol capable of delivering peer to peer trade would be worth much more. Does such protocol exist? Yes, it exists, it is called Overline. Overline replaces validators with a network of miners, this means that we don't have to look for reputable validators anymore. All we have to do is use a specific blockchain, the Overline blockchain, whose miners are rewarded for monitoring other blockchains. On Overline miners have to prove cryptographically that they are monitoring the most recent states of these blockchains. Cryptographically means that if numbers don't add up then the transaction doesn't go through. Nobody, like a validator, can act as if something that didn't happen happened.
To get a feel of what trustless means, let's see how a trade happens on Overline:
- Alice wants to buy $500 worth of ETH with BTC. So she publishes an order on Overline's Interchange. When she does this she specifies price, how long she wants her trade to stay in the books, her OL collateral address, and settlement window. OL is Overline's native token, to be able to transact on Overline you need to have OL to put up as collateral. Once Alice posts the trade, the Overline chain automatically locks her OL collateral. This means that as long as her trade stays in the books she cannot spend her OL.
- Now that Alice's trade is included in the Interchange books, Alice has to wait for a taker. Let's call him Bob. So Bob is browsing the Interchange books and decides to take Alice's trade specifying his own sending (ETH) and receiving address (BTC). From the moment Bob takes the order, Overline automatically locks his collateral OL (equal to $500).
- Once the order is taken Overline miners watch for transactions of a particular size to arrive on the relevant addresses on each side. Then depending on what events they have observed at the end of the settlement window the collateralized OL will either be moved to an unlockable state, or be transferred to the ownership of a counterparty. If Bob tries to scam Alice and does not deliver the ETH in the address specified by Alice, then his $500 worth of collateral is sent to Alice. In the end Alice doesn't lose any money either way.
This is DeFi. Alice didn't have to trust anyone, she posts a trade, waits for it to be taken, and walks away with her ETH. She doesn't have to trust a validator, because miners have to prove cryptographically through proof of distance that they are watching the most recent blocks of ETH and BTC before mining the next OL block. If a miner tries to cheat then other miners will reject his OL block as invalid and the block of another miner that sends the correct proof of distance will be accepted. It doesn't matter who the miner is, the network will not update its state unless a miner can show suitable proof of work. In all this, Alice doesn't have to show her ID to anyone like Binance, Coinbase Pro, or Robinhood. She doesn't even have to share any info about herself with Bob, and she doesn't even care who Bob is. Last but not least, nobody can stop Alice from posting a trade. She needs an internet connection to do it, but even if she doesn't have an internet connection she can still post a trade through radio waves. Overline is the only blockchain out there where you can send and receive money offline. Why? It is so by design because the internet can be censored, servers can be tracked, miners can be shut down. Like the Chinese shutdown of Bitcoin is showing. This protocol is even more unstoppable than Bitcoin.
Why Emb is the play
There are many ways to take advantage of a market inefficiency. One way could be to short DeFi now, that's one way to play it. For those long/holding defi coins it could be good to take profit. Yet I believe that carefully retreating in Emblems, the utility coin of Overline, is the smartest move at this time. I will explain why below:
Tokenomics
The entire Overline network has only 2 tokens, OL (the native token) and Emblems (ERC-20 token). The maximum supply of OL is 9.8bn, with only 0.44% of it having been mined so far. The maximum supply of Emblems is 300 million, but 100 million are in circulation right now. 200m are locked (100m by BSI and 100m by the team).
The prime function of Emblems is that of boosting the block reward of miners and also that of increasing a block's tx capacity. For Emblems to boost the block reward a miner needs to be owning at least 6500 Emblems. Without Emblems the block reward is 2 OL. On emb.overline.network you can find a calculator that will show how the amount of Emblems in your mining address will boost your block reward. For example, 13000 Emblems will boost block reward to 9 OL/block. 26k EMB will boost it to 15 OL per block. 52k EMB will boost block reward to 25 OL per block. Notice how stacking Emblems in the same miner address is less convenient than spreading them among different miners. An implication here is that the emission rate of OL will increase much faster as mining gets more decentralized. A more decentralized mining means that real adoption is happening since more and more independent miners are getting involved. Another implication is that excessive centralization will get less and less cost effective with time.
So it should be clear now why by looking at tokenomics Emblems are primed to the prime beneficiaries if Overline succeeds as a protocol, and they will likely outperform OL. As demand for OL increases, demand for Emblems should increased even faster as miners compete to accumulate as much of it as possible.
Overline adoption drivers and EMB price catalysts
Good tech and good tokenomics are not enough for a token/tech to perform and get adopted. Figuring out the real potential of Overline in this sense is the most difficult part, because despite the fact that there has been a lot of development, there has been very little communication with the public. In crypto normally we see the opposite, very little development, and a lot of materials explaining the ins and outs of the tech.
This may seem like a weakness, but if you think carefully then it becomes clear this actually a big strength. The reason why crypto projects normally make a lot of noise before even starting to develop is that they need funding, money from the public. In fact even a lot of DeFi tokens today exist only as narratives, and aside from the inferior tech, I can't find even a single one that is even remotely as advanced as Overline in development.
The explanation for this is that Overline's funding doesn't come from the public or from retail investors, it comes from bigger funds and it must have been secured in these years. Here are some cues about where their funding could be coming from, and what type of players are involved with it:
- In the Forbes acquisition talks news last month, it came out that The Borderless Services [$700m] bid has a debt financing commitment from private equity firm Ares Management Corp. Borderless Services (BSI), as stated on their website, is the lead maintainer of the open source blockchain Overline Network. So BSI is Overline, and it is receiving funding from Ares Capital, a fund with $207bn AUM. As a reminder, BSI's bid was the highest bid on Forbes' desk and talks should be finalized next month.
- The Chairman of Overline is Todd Morley, who is cofounder of Guggenheim partners that has $315bn AUM. He is also founder of Y2X, a blockchain centered merchant bank, and Block Collider (former name of Overline was Block Collider) is listed as one of their investments in the about page. Today BSI/Overline has bid for Forbes, Todd Morley seems to have a history with Forbes.
- Donald Trump Jr joined Overline Media Partners last winter. Kimberly Guilfoyle is CSO at OMP according to the same article. In Kimberly Guilfoyle's words a new industry is being birthed.
- This week it was revealed the Overline-JDS joint venture over the tokenization of its $3.6bn real estate portfolio included the $1.4bn 111 West 57th Street (the tallest residential building in the world). By tokenizing real estate it means that it can be traded anonymously and in a peer to peer fashion directly on Overline via Interchange. This implies that in the future anything will be tradeable on Interchange. We could tokenize our home and post a trade on the Interchange to sell it.
- Overline has developed technology like Verified Viewer technology, where a political figure can display a QR code during an event & everyone viewing it can scan the qr code to claim some digital tokens that will prove viewership. These in turn can be used for other things such as polling. This can be a famous political figure, or it can be any content creator. The incentive system will ensure that content creators, reporters, and the viewers themselves have as much or more power than the TV station itself. This implies also a media arm to Overline, although there is very little information on this side of the project if there are any plans to build a social media network or something else like Youtube and so on.
Considering the players involved the most likely explanation for the cryptic communication are NDAs. Todd Morley's appearance on Bloomberg this week however might be a signal that this project is starting to slowly go public and might be consumer ready.
Risks
This is an extremely disruptive technology, that will probably expand well beyond crypto and disrupt communication just as much as financial services. In February the Overline co-founder Patrick McConlogue was on Fox News explaining how the Robinhood debacle proves why defi is desperately needed, or small retail traders will always be front run by bigger players. Considering the disruption this will bring the obvious risk here is a backlash from the establishment. However, Overline also has a lot of establishment/successful figures in it. Todd Morley, Ares Mgmt, Donald Trump Jr. I believe Overline gained traction among big funds during the last years of the Trump presidency, when the limits of centralized media hubs and centralized finance became clear. Censorship of users for their political beliefs on social media and payment platforms like Paypal and Stripe must have made it clear to some people in the establishment that the free flow of information is at risk and this can back fire even on them.
Speculation/Rumours
- Late last month a pitch was leaked that valued Trump's brand at $15b. Considering some of the tech that Overline has already made public, its profound censorship resistant nature, the fact that Donald Trump Jr joined OMP, there are rumors that Trump's alternative to the current media and financial establishment will be based on Overline. Trump is scheduled to resume his MAGA rallies in June. Considering the timing of Todd Morley's Bloomberg appearance, I don't think the idea is that far fetched. For now though we have to wait and see.
- Today Paolo Ardoino (CTO of Bitfinex) tweeted by the end of 2021, few teams I'm working with, will deliver the first products and infrastructure for a new private, unstoppable and free web and services. It will be about peers being peers and freedom. No strings attached. Considering that USDT is one of the 6 currencies connected to the Interchange there were rumors that he might be referring to Overline as it is the only blockchain out there that can also work offline and it was designed in this way exactly to be unstoppable.
- The Overline Team is famous for their cryptic messages. This is done imo because of the NDAs. This week they posted a tweet that also implied 2021 would be an important year 1215 1776 1844 1969 2021
This is the full picture on Overline and Emb. At the time of writing the price of one EMB is 21.6 cents, for a market cap of $20m. Considering the current DeFi market cap, the Overline adoption drivers and the tokenomics of EMB my price target for EMB EOY is $50-$100 which would place it at $10bn market cap.
Disclosure: I have a position in EMB
