Basics

Before reading further, we strongly advise to get familiar with the following concepts, they are the foundation of the OMG Network, and are reffered to in several pages of this guide. To comprehend the mechanics of OMG and its different components, you will need a solid understanding of these concepts.

Decentralized Network

In a centralized network, which is how Internet and most information services are designed, data is stored in a private server. Centralizing data makes it vulnerable to attack because they present a single point of entry for bad actors looking to steal or manipulate that data. Centralized networks require trust in a central party, which may be secure and act responsibly, or not.

In a decentralized network, data is stored in a "blockchain", redundantly stored and monitored by many nodes, distributed amongst a web of individual machines with different owners. If this sounds like you're being asked to trust a bunch of strangers to behave honestly, it's actually quite the opposite : there are mechanisms in place to reward owners that enforce the network consensus (the law that defines how the data should be updated), and penalize those which do not.

See the Proof of Stake section for more on OMG's specific enforcement mechanisms

Decentralized networks are transparent in that every balance and every transaction is stored on a shared ledger which can be viewed by anyone, or are obscured in a way that makes traceability possible where necessary.

Proof of Stake (PoS)

Proof of Stake (PoS) and Proof of Work (PoW) are enforcement mechanisms to validate a transaction running on a blockchain. Because the blockchain is stored on a network of "nodes", the nodes need to trust each other by providing "proof" that the data they are submitting is legit.

Proof of Work requires miners (validators) to spend an enormous amount of computing power in order to validate a set of transactions.

Proof of Stake requires a validator to "stake" their tokens in order to validate. Essentially, validators put their tokens in a security deposit. If they validate actively and honestly they are rewarded, if they behave dishonestly they lose tokens. Both systems are designed to make faulty behavior cost more than it's worth :

The brute computational strength needed to mine a block in a PoW system represents both a substantial investment in hardware and a great deal of energy consumed. The first miner to demonstrate correct PoW on a mined block receives a block reward as well as transaction fees associated with that block. That investment is a sunk cost regardless of the outcome; miners who misbehave (e.g. submitting incorrect proofs) will expend resources and see no returns, while honest ones have a chance of collecting block rewards that make them their money back and then some.

In PoS, we skip all the hardware and burned energy. Validators just put their investment (in the form of tokens) directly into the system, get rewarded in the form of transaction fees for non-faulty behavior and are penalized by the protocol for faulty behavior. That penalty can take the form of either hard slashing (loss of all staked tokens) or soft slashing (loss of returns). OMG will use soft slashing in its initial Honte implementation.

Returns are distributed in proportion to the number of tokens staked. However, PoS still represents a more equitable system in that returns are directly proportional to your stake. In PoW, the more computing power you have, the cheaper it is to add more - and since computing power is what earns you mining rewards, this leads to people with lots of money collecting disproportionately larger returns. In PoS, a dollar is a dollar no matter how many of them you have.

OMG token function

The OMG token is first and foremost a staking token. By holding OMG tokens, users gain the right to take an active role by running validator nodes on OMG's Proof of Stake network, using their tokens as a security deposit. Returns may be paid out in any currency, including but not limited to OMG.

The value of OMG will be backed by the value of the amounts transacted on the OMG network; both external, real-world money, and crypto-money that is being pushed through the network's decentralized exchange (including the other applications, businesses, and token projects that are outsourcing their DEX requirements to it).

The token will have value derived from the fees derived from this network, with the obligation/cost of providing validation to its users. This token must have value, to prevent low-cost attacks and is necessary to enforce this network.

As the OMG platform and underlying network develops and evolves over time, so does the nature and role of the OMG token.

Scalability (Plasma)

Plasma is a framework for scalable decentralized applications, conceived by Lightning Network creator Joseph Poon and Ethereum creator Vitalik Buterin. We will provide a brief overview here; the full whitepaper can be found at http://plasma.io and a community website to learn more about this framework can be found at https://www.learnplasma.org.

OMG is being built as a scaling solution for decentralized finance on Ethereum, using the Plasma architecture. Plasma enables the OMG network to process more transactions (on "child chains") than the Ethereum network can handle, while the data remains secured by the main Ethereum network (the "root chain"). This is achieved by allowing many child chains to run on top of the main blockchain, each interacting with the root chain with its own customized set of smart contracts. Transactions happen primarily within these child chains, and only state proofs (snapshots of the balances within the child chain) are enforced by the root chain. This means that transactions can be processed instantly off-chain, but are ultimately stored on and enforced by the Ethereum root chain.