While Bitcoin is currently the dominant, most widely accepted, and most secure cryptocurrency available, it has consistently come under fire from critics for various different reasons. One of the more prevalent criticisms of Bitcoin has been that the transaction fees are too high for the coin to be used at scale. The validity of this criticism is arguable, but for the purpose of discussion, this article will accept it at face value. OWO is a new coin, currently in development, which claims to solve the problem of high fees in bitcoin. However, the solutions that OWO Coin proposes in their whitepaper are fraught with problems of their own. Furthermore, the “DMO” funding scheme currently being marketed by OWO is troublesome as well.
The premise of OWO Coin is that Bitcoin is broken because of high fees, and fees are high because there are not enough miners. The reason for this supposed shortage of miners is that difficulty is too high.
So, they will fix (or replace) Bitcoin by creating a coin that incentivizes more miners through lower mining difficulty. They will do this by revising the protocol to manually lower mining difficulty when portions of the coin supply are voluntarily burnt by the users.
The Discounted Mining Offer, or DMO, is a crowdsourced funding scheme currently marketed by OWO to fund the development of its coin. The DMO is billed as a combination of an ICO and a cloud mining contract, but is in fact simply a limited-term traditional cloud mining contract. The claim is that the DMO will return a profit to investors through two ways. It will first return OWO coins to investors, which will “skyrocket” in value due to market speculation. In addition, it will also provide the opportunity for investors to fund development of the OWO coin, which should theoretically increase utilitarian value in addition to the speculation value.
OWO: A Coin Based On a Fundamental Misunderstanding
The primary issue with the OWO coin is that it seems to be based around a fundamental misunderstanding (or misrepresentation) of the relationship between mining hashpower and transaction fees. In short, there is no relationship.
It does not matter how much more hashpower or how many new miners are brought onto the network, it will have no impact on transaction fees because transaction fees are a function of transaction volume and blocksize. Trying to lower transaction fees in this manner is like trying to fix a leak in your above-ground pool by fencing off your neighbor’s rose garden. It makes no sense.
There are other problems with the OWO coin proposal as well. It pays no attention to the relationship between block time and mining difficulty. In fact, the entire purpose for a variable mining difficulty is to maintain a consistent block time. When more hash power enters the network, difficulty increases to prevent blocks from being found too quickly. When hashpower reduces, difficulty declines as well to prevent block times from being too long.
Manually reducing mining difficulty while at the same time onboarding more hashpower or new miners, as the OWO whitepaper proposes, will have the effect of drastically reducing block times. When blocks are created too quickly, the result will be issues with block propagation and validation. This will eventually lead to a break in consensus and fundamental failure of the coin.
Will Users Voluntarily Throw Their Money Away?
There is yet another problem with the OWO coin. Their whitepaper proposes that the signaling method for manually reducing the mining difficulty in order to attract new miners would be to have community groups or individual users burn portions of their holdings. Because mining difficulty for OWO coin is tied to total coins in circulation, a sudden mass burn would result in a sudden reduction of mining difficulty proportional to the amount of coin burned. This method introduces certain contradictions and attack vectors.
First, burning enough OWO coins to make a relevant difference in mining difficulty will most likely be significantly more costly than the “massive” $1-$2 transaction fees currently seen on the Bitcoin network. The whitepaper claims that this loss of coin would be compensated for by a proportional rise in value, presumably due to an increase in scarcity after the burn.
However, this is not necessarily the case. It is impossible to guarantee the price of a coin because it is determined by the market.
Furthermore, this would actually introduce an entirely new branch of attack vectors that could be exploited if the OWO coin ever managed to gain any real value. For example, a holder of OWO could short the coin in anticipation of a mass burn, then when the burn happens, he could dump his holdings. The value lost from the resulting drop in price would be multiplied by the loss of coin from the burn. Such a sudden drop in value may prompt a massive sell-off, which would benefit the attacker even more since he has already locked in a short position. Since the coordination for the burning is decentralized and permissionless, this attack vector is made even easier.
The attacker does not have to wait for consensus to exploit the burn, he could coordinate and execute it himself.
The Problems Continue
The OWO coin itself is not the only source of concern. The DMO crowdfunding scheme seems very dubious as well.
The claim is that this token will return double value by being both a fundraising method and a mining contract. Unfortunately, these 2 things are necessarily mutually exclusive. If the DMO is a mining contract, and the money from DMO sales goes to fund OWO coin development, where will the money for mining hardware come from in order to fulfill the mining contract obligations? On the other hand, if the money goes towards mining hardware, it will not be available to fund development of the OWO coin.
It could be argued that a portion of the DMO proceeds can go to fund OWO coin development, and the rest would go towards mining hardware. Unfortunately, this is not a valid solution either. Mining returns are directly proportional to the amount of processors that an operation has running. By diverting funds to pay for OWO coin development, less mining hardware is able to be purchased, and the time needed for return on investment is drastically increased.
This increase in time needed to get a return translates to a significant increase in risk. It also locks away funds, thus preventing investors from participating in other safer or more lucrative investments.
Just Buy Your Coins on an Exchange
Like most typical cloud mining contracts, the DMO is an agreement between the investor and a centralized mining operation where the investor receives coins and the day-to-day operation is handled by professionals. The difference is that with a typical mining contract, the investor is promised a certain amount of hashrate in proportion to the amount of money invested. They then receive a fraction of the total coins produced (minus fees), based on how much hashpower they purchased, for as long as the mining operation remains profitable.
With the DMO, however, the investor is promised a specific amount of coins. And once those coins have been paid out, the contract is considered closed. OWO developer, Anari Sengbe, describes the concept like this:
“When you buy a DMO, you get the amount of OWO coins you want, stored in our central database. You say you want 1000 coins mined for you, you will see that reflected in your account when you log in. When the OWO blockchain is ready, we mine your coins for you and credit the coins to your OWO wallet. Once the coins are delivered to the user… That’s it. You buy x coins you get x coins”
The advantage of a traditional agreement is that you keep the mining power for the life of the operation. The advantage of the DMO scheme is that you get a guaranteed amount of coin, which is supposed to provide a sense of protection against a mining operation going out of business before they are able to provide a satisfactory return to investors.
In truth though, both options are a pretty bad idea. Most investors would be better served just buying whatever coin that interests them on exchange.
The Smart Address: OWO’s Saving Grace?
There is one possible redeeming factor in the whitepaper: the “smart address.”
The smart address is a typical bitcoin (or OWO) address, which is appended with supplementary information. The claim is that this supplementary information will provide the functionality of smart contracts, but without the associated overhead and vulnerabilities that go along with advanced blockchain scripting. Unfortunately, this concept is not sufficiently developed to be honestly evaluated. Hopefully, in future revisions of the whitepaper, this idea will be described in better detail.
There have been many altcoins and ICOs that claim to fix whatever ails Bitcoin. Unfortunately, nearly all of them miss the mark and rarely have any real merit. This latest project from OWO is no different. While the pump-happy environment that is cryptocurrency may provide a chance for profit if you manage to sell your bags of OWO to a greater fool in time, fundamentally, this offering has no legs to stand on.
Can transaction fees be lowered by manipulating mining difficulty? Are mining contracts a good idea? Share your thoughts in the comments below.
Images via OWO