"Basic Financial Services is a 21st-Century Fundamental Human Need:" OMG Network's Vansa Chatikavanij

Hello Defiers! This week’s interview is with Vansa Chatikavanij , the CEO of OMG Network. The Bangkok-based project formerly known as OmiseGo has spearheaded research and work on a scaling technology for Ethereum called Plasma. Scaling solutions will be ke...

Hello Defiers! This week’s interview is with Vansa Chatikavanij , the CEO of OMG Network. The Bangkok-based project formerly known as OmiseGo has spearheaded research and work on a scaling technology for Ethereum called Plasma. Scaling solutions will be key for Ethereum and therefore DeFi, to continue growing. The network is already at capacity, and gas prices are getting prohibitively high, especially for complex DeFi transactions.

OMG launched in 2016, did an ICO in 2017, and has since been heads down building its highly anticipated scaling solution, which promises to help the Ethereum network with its heavy lifting, take some transactions off-chain, without compromising on security. It finally launched in May, and it did so in a big way, partnering with the biggest user of the Ethereum network right now, Bitfinex and Tether.

In this interview we talk about OMG’s beginnings, the changes the project went through from conception until shipping, realizing that marketing should come after the project’s launch, and the different Ethereum scaling solutions. Most interesting to me is Vansa’s big vision of global value transfer as a basic human right and how she wants to help make that a reality.

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VC: I was born and raised in Bangkok, Thailand. And when I was about 11 years old, my parents put my little brother and I to boarding school in the States. So, we then spent the latter part of our teen years in the US and then eventually, I came back to Bangkok. So I've been kind of two culture kid for most of my life.

CR: Where in the US?

VC: We were in Connecticut. So, the typical boarding school kids, right? And then I actually went to undergrad in Vermont and went to Middlebury. And there are a couple graduates actually from Middlebury that are doing blockchain stuff now too, so it's been really exciting. Then I went on and did my masters at Columbia in New York and that was actually around GIS and remote sensing. And that path led me to the World Bank, which is how I actually stumbled onto Bitcoin, funny enough.

CR: What an interesting career. First can you talk about what GIS is and remote sensing and what were you doing at the World Bank?

Geographic Information System

VC: Yeah, so GIS stands for Geographic Information System. And the idea was with a lot of the world bank loans to the government, a lot of that time, the money goes out into public infrastructure financing and usually, it's out in the remote areas. So, you don't have a lot of data when you're making investment assessment and decisions. And so, we pull a lot of satellite information and things that are now dug like IoTs, a lot of sensors, to try to paint a picture on what kind of social environmental impact and investment might have. Things that we were working a lot around was water resources management and agriculture.

And so, having more data input in terms of what does the topography look like, demographics, people are using a lot of these technologies now to actually do poverty monitoring. You know, Social Giver has a really cool project, there's also a company called Planet Labs that do really cool satellite imagery stuff associated with the UN, like Sustainable Development Goal monitoring stuff.

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Vansa Chatikavanij. Image source: OMG Network

World Bank

When I was hired into the World Bank, I was actually probably the first 10 GIS remote sensing people right into the bank and that was when they started to leverage a lot of more of these technologies. One of the first projects I got sent to, this was around 2011, was in Myanmar when the country started reopening. And the project I was working on at the time was improving resource management and utilization in the agriculture industry.

So, what's really interesting there is particularly in Southeast Asia, agriculture is so embedded in a very long supply chain and the fields are so small and so you don't have these large production systems that you do in the West. So, from getting from planting, processing, shipping until the food actually reaches the table, like your table, it goes through multiple steps. And a lot of that has to deal with rural commerce and financial services. How do you pay for things? And so that was how I got exposed to the rural financial services area. Yeah.

What was actually really interesting for me was when we started working in Myanmar, the banking infrastructure wasn't there; today, it's still not there. I think the bank population in Myanmar today is about 25% and credit card penetration rate is less than 2%.

What was actually really interesting for me was when we started working in Myanmar, the banking infrastructure wasn't there; today, it's still not there. I think the bank population in Myanmar today is about 25% and credit card penetration rate is less than 2%.

CR: And these really long supply chains, how were people transacting with each other and paying for services? Was it all cash? And I guess, that's really limiting when, you know, sometimes you're expecting to get paid for a crop in the future, but you need to pay for products right away. So yeah, I mean, I can imagine how limiting that is for an economy.

VC: Yeah. And so, you see things like we joke about sticking your money under mattresses and stuff. Right? I mean, that's reality.

CR: Right, they actually do that.

VC: And even with the World Bank work, that was also reality. When we disbursed the loans, there wasn't like a good way to transfer and wire money from DC to Yangon in the capital of Myanmar and then out to the countryside. Right? And so, we used to have to carry cash out to local government offices.

C: No, that's crazy. Like did you have to carry a suitcase full of cash around Myanmar?

V: Pretty much.

C: That’s amazing.

Discovering Bitcoin

VC: Now, the dollar had a premium, right? Because the country was opening up and the local currency now is more widely accepted, but before that, there was a preference to actually get US dollars, but you had to pay those in like $1 bill. And even if there's like a little crinkle or a tear in the bill, you have to kind of sit there and try to iron it out or like when you go back to the States, we would have to exchange it to get new dollar bills because people didn't trust it.

C: I guess, there was like a lot of forgery, so bills had to be perfect?

V: Yeah. So, those two trends, the banking coverage or the lack thereof and looking at how people view different currencies, having premium in the US dollar. And then at the same time, if you look at the smartphone penetration rate in Myanmar, I think that's the third trend in the picture that really started sending me down the Bitcoin rabbit hole, was that the smartphone penetration in Myanmar now is about 80%.

When I first started going into that country, it was about $500 per SIM card and that's just for call. And so in that sector, the cost came down really quickly and that sector grew so much faster than the banking sector. So, I mean, you're looking at these trends, right and as an entrepreneur, you have to kind of think, but there's just got to be a better way that you can start doing payments and fund transfers.

To add on to that, what I always think is really funny is Myanmar land is so expensive, it's like mind blowingly expensive. And it's not just in the capital, it’s anywhere. And so, it doesn't make sense for banks to then start following the old traditional way of opening up bank branches, right? Like it just doesn't make any business sense in that way. So, I started learning about Bitcoin and essentially, I was just floored. Like, in a way you can open a debit account, not having to talk to another human being and then not having to go to a bank branch. You can get all that done in a few minutes. And then on top of that, you can send it anywhere, which is amazing.

So, I started learning about Bitcoin and essentially, I was just floored. Like, in a way you can open a debit account, not having to talk to another human being and then not having to go to a bank branch. You can get all that done in a few minutes. Right? And then on top of that, you can send it anywhere, which is amazing.

CR: I know that in other countries in a similar situation in the sense that there's low bank penetration, but a high smartphone or mobile phone penetration, there have been kind of traditional FinTech banking solutions to cover that gap. Like M-Pesa is the classical example. And in Myanmar, that wasn't even the case, there was nothing?

VC: Not in 2011, today, there are. People are trying to push the wallet play into Myanmar for sure. If I understand it correctly, similar to Thailand, it's due to different financial licensing too. So, with wallets, you can only do certain things. Lending, all these complex, more banking services, are not under a wallet license. So, I think it's just kind of a progression towards mobile banking. It’s not there yet.

C: It's really interesting to have seen this area where something like a distributed network for value transfer was so needed, that not even these mobile phone-based solutions were there. So that's when you were saying you got interested in blockchain technology. How did that develop?

Omise Blockchain Labs

VC: Yeah, so that panned out away where I actually came back to D.C. to the World Bank headquarters. And I wrote a little memo to my manager and I said, hey, why don't we look into Bitcoin? At least we can try it for our own fund disbursement. I think I got stonewalled multiple times. I parked that idea.

And then fast forward to a couple years later, I moved back to Bangkok to start my own p2p organic farming lending project. So, you touched on this earlier where there's a lot of different pieces that go into the agriculture supply chain. Right? Part of that was I wanted to see if I can help finance organic farmers and so that was when I learned about Ethereum. And I actually got introduced to Jun and Donnie, who are the founders of the payment gateway company, Omise. And back then, they were experimenting with Ethereum from their own payment stack.

CR: Omise was a traditional payments company back then, using bank rails?

VC: Yeah. So, the payment gateway in a nutshell switches credit card transactions, so they work with Visa to process that payment.

And back then, we were actually called Omise Blockchain Labs. And Jun and Donnie, one of their earlier forays into the Ethereum space was they funded the first Ethereum Dev grant. So, part of that cohort, if I remember correctly, were people like Status and Raiden and so, we got a lot of really good OG Ethereum exposure with that, both on scaling and also on the mobile side of things.

C: In what way did you join their team? To work on blockchain solutions to their gateway or what were you doing exactly?

V: So, I was actually trying to poach one of the developers that they had. Because Bangkok is not a very big ecosystem in terms of startups to begin with. I'm like walking around and saying, okay, who knows how to interact with a smart contract, was like finding a needle in a haystack. So, I was trying to lure this guy away from their project. Jun caught me and called me in one day and was like, what are you trying to do? I was like, well, want to build this rail where I can transfer money because I want to do this p2p lending.

Jun caught me and called me in one day and was like, what are you trying to do? I was like, well, want to build this rail where I can transfer money because I want to do this p2p lending.

And I think after a couple of back and forth, we really hit it off. And what we realized is we had the same basic belief, that basic financial services like online payments, making a transfer, is a 21st-century fundamental human need. We share this vision of a world where people have the options and the ability to transfer money globally without any restriction.

CR: I heard you say this before and I think I've read it on these websites, this idea of the global value transfer being a basic human right or human need. I'd love for you to kind of expand on that a little bit, since it seems to be like very core to what you do?

Financial Services as a Human Right

VC: Yeah. I mean, so right now, about 60% of the world’s population has some sort of access to the internet, right? And as more of this moves online, for me, if someone cannot participate in that online economy, they can't get paid or they can't pay for services, then they're essentially at a significant disadvantage. You can't participate. It's like the UN, I think declared that internet access is a human right. From a very high level, I see basic financial services and online payment as the same thing. You can have communication, you can exchange services, but you can't get paid. I think for me, it's pretty simple in that sense, where it's just being able to participate in a global economy.

And I think in Southeast Asia where so much of our economy is importing and exporting and it's cross border goods and services and knowledge. The ability to move money around across those borders becomes really important and I think it's a lifeline for the region in terms of growing beyond just within the regional economy itself.

The ability to move money around across those borders become really important and I think it's a lifeline for the region in terms of growing beyond kind of just within the regional economy itself.

CR: Right. I think you're totally right. And I think it's interesting to have your perspective from that side of the world where I think that the issue becomes even more stark, how important having this basic ability is to transfer value globally. And yeah, it's pretty amazing that we're still not able to and we still have this like geographical barriers for money.

So once you established like that you and Jun and Donnie had the same kind of values, going forward how did it then progress?

Launching OMG Network

VC: Yeah. So, I think once we realized that, we said, okay, let's join hands and do something together, because we need common infrastructure. And as we've seen today, scaling in terms of being able to transfer money on Ethereum becomes even more of a pressing issue.

And so, them coming from a payment gateway experience, right, they know that 14 TPS is not going to be enough if they want to build any sort of financial applications on it. For me, I think even with lending at 14 TPS and having to share and pay high transaction costs was going to be a problem, because I was targeting small-scale farmers.

The end of 2016 actually, was when we decided that we would launch OmiseGo, now OMG network. And then we went down the whole path of we raised an ICO to fund it, because the way that we view it, the network is a public good.

I'm actually very bullish on the fact that I think a lot of the payment systems will converge on to an open public infrastructure like Ethereum. And I say this, because you need to build up an ecosystem when you talk about financial services and it's much more effective to scale that when it’s a open public system.

I'm actually very bullish on the fact that I think a lot of the payment systems will converge on to an open public infrastructure like Ethereum.

So, we launched the ICO in 2017 and I think we became the first company to ever do a full KYC and AML and everyone. This one lesson that I learned was always listen to your CFO. Because I think in the long term, it helped us with a lot of regulatory headaches as well. But I just remember when we announced that one side of the crypto space was like, yeah, this is probably the right idea and the other side just completely blew up.

One lesson that I learned that was like always listen to your CFO.

CR: Yeah, I imagine. And I mean, an ICO in 2017, must have been crazy and yours was one of the bigger ones. How was that whole experience like?

VC: Yeah, I think, bigger ones, probably one of the ones that were talked about more, we certainly raised a lot less money than a lot of projects. But our goal for raising the ICO and our goal for founding OMG Network has always been the same. It's to build a scalable infrastructure to then enable in financial services, whether it's for payment or for transferring digital values.

So, I think, from the white paper of the ICO itself, the why has always remained the same. What's been really important and interesting for me and I think for our team to learn is that the how to go about achieving this can change and you can expect these things to change, right, because the space is new. The research and technology progresses so quickly and the user behavior, the market demand, all those change.

From 2017 to what we launched as a commercial launch of the OMG Network earlier this month, the big scope change for us was that we shifted from a fully on-chain DEX using Plasma, to focusing on building infrastructure that scales up transactions.

From 2017 to what we launched as a commercial launch of the OMG Network earlier this month, the big scope change for us was that we shifted from a fully on-chain DEX using Plasma, to focusing on building infrastructure that scales up transactions.
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Image source: OMG Network

CR: I wanted to ask about this kind of perceived delay in shipping. And this is something that I've heard in this space a lot like OMG has the example of the ICO that was big in 2017, but hadn't shipped yet. And when you shipped, there was even more confirmation of how much building there's been in Ethereum all the way through the bear market, even by the big ICOs of 2017 which many people like to laugh at or say, oh, these were all like get-rich schemes or whatever, but OMG was a great example of… no, actually, many of these teams like stayed on working. So, in these couple of years, what was that transition from your initial concept to what you finally launched and why did that change happen?

Building over Marketing

VC: From then until now, I think the big shift was one is in our marketing. I think, in 2017, a lot of people got caught up in the marketing of their product, selling it a little bit too early before a product is available. And we were guilty of that, we also were on that wave.

I think in 2018, we decided, when you put the marketing so much earlier than when the product is available, it's just irresponsible. And so, we hunkered down for two years and then we just said, let's build, and then 2020, let's come out, let's get a really good launch partner and then let's just let the product speak for itself.

In 2017, a lot of people got caught up in the marketing of their product, selling it a little bit too early before a product is available. And we were guilty of that (…) We decided, when you put the marketing so much earlier than when the product is available, it's just irresponsible. And so, we hunkered down for two years and we just said, okay, let's build.

In terms of our actual shift on why we went away from the DEX to just focus on scaling itself, I think the reason for that decisions, pretty straightforward from a business perspective. In a mature Money Lego world that we're all excited about, products should be interoperable, in my opinion. So, what this means is products are designed to not only be used as a standalone thing, but to easily integrated with other services and products.

And so, this is the idea that everyone should be able to do one thing really well. So, we look at it as, okay, let's stay simple, we're going to be an infrastructure, so, you want to minimize all the unknowns, all the complexity, solve that scaling pain point really well for a specific customer and then depending on what people want to use it for, they'll be able to put these different solutions together and have the best combination for what they're trying to do.

Yeah, so I joke with my team that we don't want to be a duck’ I don’t know if it’s a Thai saying, but with a duck, right, you can swim, you can fly and you can walk, but you don't do any of that stuff well.

I joke with my team that we don't want to be a duck’ I don’t know if it’s a Thai saying, but with a duck, right, you can swim, you can fly and you can walk, but you don't do any of that stuff well.

That's what we want to avoid. And it's clear that the congestion problem is a problem today, right? And so, we want to be able to solve that.

C: That makes total sense. And I think what you said about marketing is such a valuable lesson. I think that's a great lesson that this space learned from 2017 and I think it's matured, from what I'm seeing now in projects launching today, it looks like people are doing marketing after launching and after shipping more and more. So, I think that's a great development.

VC: Yeah, I think, it's maturity of the space as well, right? For us right now, we want to focus on let's talk, let's communicate to customer what we can do today, so let's be realistic about it.

And I think, from a product perspective, it makes a lot of sense but also from a consumer perspective, right, like consumer protection. That's the part that worries me is that we over-market and the product’s not ready, there's so many solutions that go to market and don't get security audits. Right? We were terrified. We did two security audits simultaneously. So, I think we just need to realize we're dealing with real people's money and there are implications. And so, I think just being a lot more responsible and take a cautious approach, it's going to be better for us as a space in the long run.

CR: Yeah, for sure. Okay, so speaking of that, tell me about what OMG can do today and is doing today?

The Ethereum Congestion Problem

VC: Yeah. The problem that we're focusing on is solving the Ethereum congestion problem. So, the way that I've always framed this is, I think blockchain is still in the early dial-up days if we compare it to the internet and these Layer 2 solutions are meant to essentially be broadband. And once these starts to mature more, I think it'll unlock a lot of different use cases that we haven't even thought about today. We didn't know Spotify was going to be a thing, we didn't know that Netflix is going to be a thing, which is really cool. That's what I'm very excited to see in terms of the layer to maturity.

Blockchain is still in the early dial-up days if we compare it to the internet and these Layer 2 solutions are meant to essentially be a broadband. And once these starts to mature more, I think it'll unlock a lot of different use cases that we haven't even thought about today.

In terms of the problem itself that we're solving, I think March 12 is like a really widely talked about congestion event, where even with a small number of adopters today in the crypto space during peak hours, the Ethereum network clogged up. And I think the average wait time of Ethereum was like 44 minutes.

Also, the last month or so, Ethereum gas prices have just been insanely ridiculous. The average is like $0.20 cents. So, I think it's a very timely launch of our network and also some other Layer 2s. But also, I think with our launch partner Bitfinex, USDT transactions on Ethereum, alone was spending about $2.4 million over the last 30 days. It makes up 25% of Ethereum transactions. And so, partnering with Bitfinex really was meant to start unlocking, taking some of this Tether off of the main chain to decongest and then help the exchanges save costs as well, because a lot of the USDT transactions are between exchanges right now.

CR: I wanted to ask, before we get into whether OMG is achieving that right now with USDT and Bitfinex, I wanted to kind of take parentheses and for you to explain a little bit of how exactly Plasma works. And what's the difference between OMG and Plasma and layer 2, all those terms, I think can get a little bit confusing for people who are not reading and doing stuff on Ethereum every day?

Plasma and Layer 2

VC: The OMG network scales up Ethereum transactions right now to a couple thousands of transactions per second and we do this at a third of the transaction costs of Ethereum today. We solve this problem by using a scaling framework called Plasma.

So, at the highest level, Plasma is an off-chain scaling protocol and it's predicated on the creation of a child chain, which is in this case, the OMG Network. The child chain batches transaction before committing them to Ethereum and this is how we get to scale. So, the OMG Network, the child chain, relies on Ethereum as the ultimate arbiter of security in this sense.

There are many flavors of Plasma out there, I think at one point in early 2019, we were counting and there were like 20 different flavors of Plasma. It was during research phase as well, right and so, people are trying different constructions to optimize for their use case. And with the OMG Network Plasma construction, what we use is what we call Plasma More VP. And the objective of this construction is to achieve higher transaction throughput at lower costs while maintaining the same security guarantee as Ethereum itself.

With the OMG network Plasma construction, what we use is what we call plasma more BP. And the objective of this construction is to achieve higher transaction throughput at lower costs while maintaining the same security guarantee as Ethereum itself.

So, we take one step back and we say, okay, you know the blockchain trilemma challenge. You have scale, security and decentralization, right, and you can really tinker with two out of the three. So, what we chose with this construction is we optimized for scale and then we maintain the security.

CR: So, you're compromising on decentralization?

VC: No, so we don't optimize for it.

CR: Okay, that makes sense.

V: So, maybe the hardest part and the part that took us the longest to get right, is really the trustless piece of us. So, credit to our CTO Kasima, the way that he framed the product itself, we have to say a one liner what it is, right? He says, it's a trustless, centralized transaction processing service with decentralized security.

It's a trustless centralized transaction processing service with decentralized security.

C: Okay, that's a lot to process.

VC: I have to essentially imagine the words as I'm saying it every time. So, what it really means though, is we do the decentralized security and trustless piece while including this piece of non-custodialality, which is like what people like about blockchain. But you get the centralized transaction processing piece, which is how you get to scaling. So, it's a single block producer and an OMG network is the block producer.

CR: Okay. So, that’s this kind of limbo when transactions are being batched in the OMG child chain and at this point, they are depending on a single block producer, so they are going through kind of this centralized transactions processor. How do you maintain security there when transactions are at this point?

Maintaining Security

VC: Yeah, we have these players call the Watcher. So, if you imagine the high-level construction of how all the services fit together, there are three players in this. We have the root chain, which is Ethereum and within Ethereum, we have a set of smart contracts that manage the Plasma protocol on the Ethereum root chain itself. And that handles the deposit and the exit in and out of our network, so we deploy that contract and we don't control it. So, going to your point, that's the decentralized piece.

The second entity is the child chain that we talked about, so this is what we operate. And then the third component is what we call Watcher. So, Watchers are operated by our users or our partners or OMG token holders. Right now, staking is not in the implementation, but that will be later down in our roadmap. So today, we essentially have partners running Watchers and the Watchers validate everything that's happening on the child chain against the root chain. And that's the part that we're using right now as decentralized security piece.

We essentially have partners running Watchers and the Watchers validate everything that's happening on the child chain against the route chain. And that's the part that we're using right now as decentralized security piece.

CR: Got it. So, Watchers make sure all the transactions are going through correctly while they're being batched in the child chain?

VC: Right. So, it's a similar approach to the Watcher Tower on Lightning for Bitcoin. That’s more or less the concept.

CR: Who are the Watchers?

VC: Right now, we're the Watchers and then we're assuming that Bitfinex and a lot of the exchanges that integrate will actually have to run their own Watcher as well, because they have the incentive to essentially look at the transactions that are going on. Anyone can actually download a Watcher. My dad actually has a Watcher. It doesn't require a lot of processing, but it takes a lot of power to setup and you still need a laptop. So right now, we rely on, really goodwill and community to help until staking comes on board.

Right now, we're the Watchers and then we're assuming that Bitfinex and a lot of the exchanges that integrate will actually have to run their own Watcher as well. (…) Anyone can actually download a Watcher. My dad actually has a Watcher. It doesn't require a lot of processing, but it takes a lot of power to setup and you still need a laptop. So right now, we rely on, really goodwill and community to help until staking comes on board.

CR: And then with OMG incentives, that will be the piece that kind of helps decentralize the Watcher system. Right? Do you have a timeline for staking?

VC: We don't. We're still working on it. It's one of our priorities for things to do this year. And I think we want to do it in steps. We'll have to kind of see how we roll it out slowly and obviously cautiously because it has a lot of implications on the network and long-term sustainability of the network itself.

Exchange Integrations

CR: Okay, so that's how Plasma and OMG works. And so, is this system, how is it helping Ethereum right now? I mean, you launched with this huge partner Bitfinex and USDT, as you said, is a huge contributor to gas consumption. So has there been any impact so far?

VC: Yeah. So, Bitfinex integration is still progressing. So, once that's done, I think we can then start to actually claim we’re helping to offload the congestion. That piece is not done yet.

CR: Okay. So, what's missing?

VC: The integration. So, we're still integrating with the exchange itself.

CR: Oh, got it. So Bitfinex isn't processing its USDT, it transfers through OMG yet?

VC: No, not yet.

C: Got it. And then, will the next step be, adding more exchanges? Because as you mentioned, most USDT transactions happen between exchanges, people doing arbitrage with the stablecoin. So, to really have a meaningful impact, you need all exchanges to be on board, to be using this system right?

VC: Right. So, I think we talked about this in our last chat where you do need a couple exchanges and you can kind of see in the Flipside chart who the big exchanges are. So, there's the big top tier exchanges, they're using USDT and then there's kind of the long tail. And in terms of our partnership roadmap, we're in discussion across that board. So, you need a couple people for the use case to be completed for sure.

CR: Yeah, make sense. I'm also really curious about how this scaling solution compares with others across Ethereum. Because scaling is the big problem and there's a couple of teams working on different ways to achieve it.

Scaling Solutions Across Ethereum

VC: Yeah, so today, it's like this Cambrian explosion of L2 research. I feel like it's one of those things where the cool kids do in 2020. So, like from a high level, I would expect things like sidechains, state channels and plasma to be more production-ready and robust compared to the newer research like the roll-ups. Just because it has more development time, more tooling, more ecosystem and we talked about this earlier, security audits.

When scaling, there's no such thing as free lunch and so, everything has a trade- off, you have to choose this trade-off based on your use case. The core element of Plasma and what makes it different from other 2 Layer scaling solutions out there is that every block on the Plasma chain is bundled into a Merkle tree and committed to the root chain. So, this provides the benefit that even if something goes wrong on the child chain, the honest users will always be able to exit their funds. This is the hard trustless piece that we were talking about earlier to figure out. And, so that's a value prop to Plasma.

When scaling, there's no such thing as free lunch and so, everything has a trade- off, you have to choose this trade-off based on your use case.

Now, I'll go down through maybe three or four kinds of scaling framework, maybe starting from the OGs. So, sidechains, right? So, sidechains compared to Plasma, sidechain attaches itself to the main chain by using a peg that enables the two-way transfer of assets. There’re different ways that you can operate them and the nice things is that it gives the flexibility to a given use case.

The trade-off of sidechains, generally, is that it asks the user to trust the mechanism of the sidechain itself and not the root chain. So, how Plasma is different is security-wise, because it's ultimately secured by the root chain. If something goes bad, then the users’ funds are safe. I think Vitalik describes Plasma chains as like sidechains that have a noncustodial property.

How Plasma is different is security-wise, because it's ultimately secured by the root chain. If something goes bad, then the users’ funds are safe.

CR: Interesting. Okay, that's a good way to look at it.

VC: Yeah. OG #2 is State Channels. So, I think the big difference there is how transaction finality is reached and it's also the limitations around the fixed number of participants in a given state. So, the aim of State Channels generally is to allow transactions off the blockchain without needing any additional trust. So, this is done in order to essentially improve the cost and the speed of the transaction itself.

So, with State Channels, just for people who are curious about how it's done in a high level, you need a unanimous agreement on the state updates. So, how it works is like, one, you have a set of users and they have to agree to lock up part of the main chain state. And they also need to agree on when to update the state. When they update the state, they do it by signing a transaction to validate the new state, but these updates are not submitted to the main chain yet.

Then when they're doing some transaction, the third piece is the participants have to submit the final state back to the main chain and then they close the channel. So here, you need all the participants to show up, because if they don't, it can essentially block status updates. Right? So, it's great for applications that require a lot of changing sets of participants. Compared to Plasma, on the other hand, we rely on Merkel proofs to submit to the main chain. So, that means that finality and plasma is the same as finality and Ethereum.

CR: Okay, and you don't require all of these participants to be constantly online and updating and like reaching this consensus?

VC: Correct. Yeah, we don’t.

CR: Is anyone using, Side channels on State channels?

V: State channel is Raiden. Raiden, I think just had a launch recently as well. I haven't been following that closely, but they had some sort of announcement earlier this month.

C: Because, recently I've been hearing about plasma and roll-ups and ZK roll-ups and all that stuff, Optimism. But yeah, I haven't heard too much about State Channels.

Ethereum Research Ecosystem

VC: Yeah, no, no, they're still there. I think the Ethereum research ecosystem is very interesting, right? Because with research, you can change the scope and you can look at different things in a short timescale. You can pivot, you can do all that. But once you get into production, you take all that research into production. I think a lot of these projects are just heads down building. They’re not so much top of the research discussions, but I think they're actually working.

C: To your point earlier, it's good to hear from projects that are actually launching and shipping stuff

V: And like there’s two spaces there. There's the research space, which I would still put a lot of the roll-ups there because it's so new. And then, Plasma was in the research space in 2017 and 2018 and then you saw a whole shakedown. But the constructions that can find a use case stay and then you take that to production, the constructions that don't necessarily have the demand kind of go away or turn to some other research solution. So, I think it's just a natural part of kind of the research into production maturity as well.

C: Right, the Darwinian survival…

Optimistic Rollup

VC: But I actually think OR will, like all the roll ups will probably do the same thing over the next couple of years. So, it's a very exciting research space. But I think, for me looking at it from offering a business service to customers, I would want to wait a couple of years and see which shakes up, because I think it's just a natural progression of where things go.

CR: Between Plasma and, and roll ups, I mean, beyond roll ups being in a more kind of research phase, what are some of the main differences there?

VC: Yeah. So, the optimistic roll up guys, the Optimism guys, we've seed-funded those guys. Initially, they were Plasma Group and then they pivot, so I can speak a little bit more about their approach and how it's different to Plasma.

There's actually a lot of similarities between the two as well. So, both of those approaches have a smart contract on the main chain that holds users’ funds and that gets compact state updates from the child chain periodically and fund exits go through the same kind of similar challenge exit game. So, you can kind of look at it as Plasma and optimistic roll-ups are essentially consequential innovation for Ethereum scalingin that sense.

All of Layer 2 comes with a trade-off. And so, with OR, it runs an EVM compatible virtual machine called OVM. The innovation here is enables something like Optimistic roll-ups to execute anything Ethereum can, so arguably, this gives it a wider range of use case compared to Plasma. The challenge of OR is that it's more complex and there are a lot more unknowns. And so, as an example, like at Devcon, I think OR and Uniswap did a demo and that was customized demo to showcase roll-ups with no smart contracts.

The challenge of OR is that it's more complex and there's a lot more unknowns.

Now, I believe the recent one that they did with the OVM testing on Synthetix, it didn’t have roll-ups. So, what this means is you can't do deposit or withdrawal and so you're just running logic. So, at some point, you're going to need to put all this together and it will be exciting to see, but it's definitely a complex undertaking.

CR: Yeah. And in that sense, do your potential partners or clients, are they missing that smart contracts piece, that kind of EVM piece?

VC: Yeah, we've been focused on payment and value transfer. And so, you can push some of that logic up a layer on top of the scaling infrastructure, right? So, we do get questions, whether or not there is future compatible compatibility or functionality we can add. In August last year, Karl’s Optimism had a blog post that was talking about how Plasma is critical if we want to scale up to thousands of transactions per second, because OR, I think does a couple hundred, maybe probably 1,000. But in his view, he was saying that in a mature Layer 2 ecosystem, the two solutions will probably coexist. And I think I would agree with that. I don't think it's a winner take all game. There's just too many use cases, but this technology can support, I agree.

CR: I really wanted to understand how these Layer 2 solutions will fit with ETH2. Do they work with ETH2, will they kind of transition into this new chain? Like, how would that work?

Layer 2 Solutions on ETH 2.0

VC: Yeah, I mean, I can speak from our perspective. I think every system has to evolve and ETH2 is incredibly complex, but it's a worthy undertaking. It's going to take a few years to get ETH2 engineering work done. But I think it will get done. The unknown for me from a business perspective is once the engineering is done, then you need to make it economically compelling enough to attract the Ethereum ecosystem over. So, I think all this will take time to mature. In the meantime, the congestion issue is real today. So, I think that L2s in today's world have that space to be solving today's problem.

The unknown for me from a business perspective is once the engineering is done, then you need to make it economically compelling enough to attract the Ethereum ecosystem over.

The OMG network, the protocol, is dependent on EVM support, so we don't expect that there's going to be a problem with future adaptability to ETH 2.0. And I think another thing about Ethereum 2.0 sharding is that there may be a strong use case for L2 to accommodate cross-shard transfer. I would need to, Kasima, our CTO can probably speak a lot more to that, but that's the theory that we've been kind of looking into.

CR: Very cool. Okay. But I guess for now, the idea is what we'll be using ETH1 for a while. And so, in that time is where Layer 2s can really help drive increased throughput and drive adoption forward with hopefully more mainstream adoption?

Layer 2s Towards Mainstream Adoption

VC: Yeah, exactly. I think, it's about solving a problem that people have. Right? I think, the build it and they will come mentality no longer is going to work. It didn't work in 2017, it’s not going to work now.

So, I think for me, maybe the final two thoughts that I have just around talking about Layer 2 scaling at of the end of the day, I think there's going to be multiple Layer 2 solutions in the market and based on the use case and functionality, they'll all find our niche. But really, at the end of the day, the market decides who the winner is. And so, I think It's going to be interesting to see all the chains are in production today and the Layer 2s that are under research and see how the landscape pans out.

CR: And then finally, you came into this space with this really big vision of bringing global transactions to everyone in the world and making value transfer accessible and easy. Has that vision changed at all? I mean, do you think it's still possible for Ethereum to bring this kind of basic human rights of value transfers to everyone? And how close are we to getting there?

VC: Yeah, I mean, I think how close are we is a hard prediction to put in a timeline. I think there's a lot of different moving pieces. But I think, for us, we're trying to do our part to build the infrastructure. Going back to why all this matters to OMG, the real end goal for us is enabling access to open financial services. And that's really providing people with the option and choice. And I think these things come in steps.

Going back to why all this matters to OMG, like the real end goal for us is enabling access to open financial services. And that's really providing people with the option and choice. And I think these things come in steps.

So, we've achieved what we would think is a first major step in the grand plan, where we did the commercial launch of the OMG network. Now, we're going to continue to ramp and build up business and partnerships. You probably saw in the news earlier this week, our holding company closed a Series C, so that's essentially a strategic raise and it brought on a lot of corporate partners that we're going to be leveraging.

We want to bring both the current open finance space and the enterprises together. And I think that's in terms of looking at where the company sits and the resources that we have at hand, we're in a really good position to be able to forge those two worlds today. And so, when you talk about mass adoption, you kind of need the enterprise as much as some people might not agree with me, but that's where the customer is sitting.

CR: So I guess you're now building the foundation for this vision to become a reality, but it's definitely still there.

VC: Yeah. I mean, it'll take time, right? Things don't just happen overnight. And I think that we have the resources and the partnerships that understand that. What I'm very excited about is the network is live, we're at the position where this is where things get really fun. You start building up use cases and it's out there in the wild. I've been very proud of my team. We've been very lucky to have our CTO Kasima, our VP product, Connie and our CEO, Steven. Their leadership has just been amazing in bringing our team together and keeping them focused and always, Jun, and Donnie. And so, I think I'm very excited to see the next couple of years and how it pans out with the space and also with our business.

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The Defiant is a daily newsletter focusing on decentralized finance, a new financial system that’s being built on top of open blockchains. The space is evolving at breakneck speed and revolutionizing tech and money.

About the editor: Camila Russo, is a financial journalist writing a book on Ethereum with Harper Collins. (Pre-order The Infinite Machine here). She was previously at Bloomberg News in New York, Madrid and Buenos Aires covering markets. She has extensively covered crypto and finance, and is now diving into DeFi, the intersection of the two.

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