In a time when banks in the Western world are embracing machine learning and predictive banking, it’s easy to forget that over 2 billion households worldwide are unbanked. In South-East Asia, for example, a staggering 73% of the population is considered ‘underbanked’, numbering 438 million people.
A large percentage of those affected are in Indonesia. Here, a young and growing population of 250 million people are rapidly gaining internet access, while remaining unable to use debit or credit cards. As a recent study by KPMG shows, existing banks in the region are more likely to slow things down, trying desperately to protect their existing customer base, leading to very limited interoperability.
The payments pain in South-East Asia is also felt in regards to remittances. According to a study by the Asian Development Bank, more than two million migrants from Indonesia, Malaysia and the Philippines send over three billion dollars to their home countries every year. Keeping in mind that the World Bank indicates remittance fees between 6-25%, many families are left out of pocket because of inefficient money transfer providers.
Complicating matters in the region are the disparate regulatory environments which vary from country to country. These often involve strict rules regarding the types of companies permitted to intermediate funds, inhibiting competition and resulting in a fragmented cross-border payments infrastructure.
This short summary helps to illustrate the woeful condition of payments in South-East Asia. For ordinary people this creates several important pain points:
- Domestic and cross-border payments are expensive
- The majority of domestic transactions are made in cash, making accurate taxation impossible
- The underprivileged cannot receive subsidies from the government, as they overwhelmingly do not have bank accounts.
But times of crisis are often times of opportunity.
OmiseGO has made this their mantra as they take on the trillion dollar payments problem in South-East Asia.
What is OmiseGO
OmiseGO was first conceptualized by Joseph Poon and the Omise developer team in a white paper published in June 2017. The authors are noteworthy for several reasons: Joseph Poon is one of the inventors of the highly anticipated Lightning Network, and Omise is a thriving payment service provider focused on the East-Asian market. It’s worth noting that Omise is exceptionally well funded, having raised over $20 million in venture capital and another $25 million from its ICO.
The ICO saw the birth of the OMG token, which helps power the OmiseGO blockchain. Omise holds some of OMG tokens, meaning that the company has vested interest in the coin doing well. This is not uncommon, as companies like Ripple also hold on to their native cryptocurrency XRP as well.
The detailed white paper put forward by Poon and the Omise team describes an Ethereum-based decentralized exchange which aims to revolutionize payment services. It plans to do so by making the multitude of closed service providers interoperable using its own technology platform and the Ethereum blockchain. If OmiseGO is successful, customers could buy groceries using PayPal, AliPay or even AirMiles.
What is the role of the OmiseGO blockchain and OMG token?
For this level of interoperability to take place, there needs to be a ledger to track the level of funds for each eWallet service. Additionally, this setup requires a public, decentralized blockchain which acts as an order book, matching and managing order execution on the Ethereum blockchain. These are the two primary functions of the OmiseGO blockchain.
As you can imagine, managing transactions across multiple blockchains poses some serious questions around scalability. Interestingly, this problem is being tackled using a blockchain scaling solution called Plasma. Plasma uses innovative child chains which report back to root chains in order to increase transaction throughputs and bypass the typical security concerns associated with similar methods.
Importantly, there is also an OmiseGO token called OMG, which provides computation and enforcement. More specifically, the OMG tokens are used to confirm transactions, as the OmiseGO blockchain uses Proof-of-Stake (POS) rather than the more common Proof-of-Work (POW) used by Bitcoin for example.
What is Proof-of-Stake?
In order to understand Proof-of-Stake, we first need to take a look at its forefather Proof-of-Work. POW is a cryptographic, asymmetrical scheme which is used to verify the correctness of a block of transactions. For a block to be accepted on the Bitcoin blockchain, for example, miners must check the data within the block and prove that they have done so by creating a unique hash. Once the hash is created, the block is verified on the blockchain, and the next block of transactions can begin.
The important word here is “asymmetrical”, because POW has to be hard to do, but easy to validate. The POS used by OmiseGO has a different approach. Specifically OmiseGo’s POS does not rely on computational power as POW does, but instead chooses the creator of a block in a predetermined way. In OmiseGO’s case, the largest stakeholders verify the blocks.
What this means is that the stakeholders, ie the people who hold OMG, will be the ones who dynamically determine the fees. This should safeguard the integrity of the blockchain and keep the network running. It follows, therefore, that stakeholders will be rewarded with transaction fees, while block rewards are removed.
What solutions is OmiseGo offering?
Now that we have a good understanding of where OmiseGO comes from and how it works, let’s look at the pain points it is trying to remove.
Firstly, OmiseGo wants to provide an easy way for the unbanked to participate in a cashless society. This will be achieved by using the internet and OmiseGO’s technology platform to hold, receive and send money electronically with minimal fees.
The second problem OmiseGO wants to tackle is described as the fundamental coordination problem between payment processors, gateways and financial institutions. These are often closed systems with no interoperability whatsoever. As an example, imagine trying to send someone who does not have a PayPal account money using PayPal. Both parties need to be on the PayPal network in order for the transaction to take place.
If OmiseGO is successful, closed systems will be able to interoperate using the OmiseGO SDK (Software Development Kit), blockchain and any asset of their choosing.
Where does OmiseGO stand today?
The health of a platform often depends on the partnerships it has managed to strike. In the case of OmiseGO, there are a number of impressive collaborations to report. The first one being a strategic cooperation between OmiseGO and the Thai Alliance Payment System which culminated in a $30 million dollar investment.
— JUNΞ (@JUN_Omise) September 28, 2017
This was soon followed by a partnership with Credit Saison, the third largest credit card company in Japan. Although the exact nature of the collaboration is still opaque, it will seemingly revolve around managing student tuition fees in a more cost-effective way.
Cost-effectiveness is also at the center of OmiseGO’s recent partnership with Tesco Lotus in Thailand. As announced on November 13th 2017, Omise merchants will now be able to offer cash payments at the 1800 Tesco Lotus locations.
Perhaps OmiseGO’s most impressive partnership, however, is with McDonalds Thailand, which was announced on September 25th 2017. This collaboration will make Omise the exclusive payments gateway for the McDonalds Thailand website and mobile APP. In addition to the revenue this will generate, McDonalds’ trust in Omise stands as a testament to the quality of the product OmiseGO is providing. Onboarding such a globally recognized brand has the added bonus of engendering trust with investors, individuals and merchants in the future.
As we have seen above, OmiseGO is one of the most promising blockchain companies tackling Asia’s payments problem. By using its POS network, OmiseGO aims to provide a decentralized exchange which can transfer value between individuals and merchants. If this is successful, it will enable the unbanked to participate in a digital, cashless society wherever there is internet penetration.
Additionally, the impressive technology stack developed by the team at OmiseGO has the potential to revolutionize the remittance market in South-East Asia by cutting costs and providing an instant settlement.
Finally, OmiseGO has shown that it can strike partnerships with powerful conglomerates, raising hopes that the company will grow well into the future.
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