Exchanges and their Alternative: Understanding the HOT Omni Protocol
These days, many cryptocurrency users are faced with the need to fund their USDT balances through exchanges. This process involves sending tokens on a certain network to an address belonging to an exchange. Once the incoming funds are processed, the exchange attributes the corresponding balance to you in its database. This has allowed centralized exchanges to get rid of the complexities associated with specific blockchains and manage users' assets in their centralized databases.
At first glance, this seems convenient: users are spared network fees, liquidity is pooled, and transactions are faster. However, despite all the advantages, exchanges have their disadvantages. Unfortunately, the security of exchanges is questionable. The problem is not only possible hacker attacks; while you are confidently “playing” in the exchange sandbox, for example, it could happen that an employee of a risky investment subsidiary of the exchange starts using high leverage on your crypto assets. We'll find out about it when it's too late.
Nevertheless, balance sheet abstraction is a great approach to make cross-chain transactions and move tokens from one network to another. How do you get rid of this centralization and still provide safe and secure token storage at the abstraction level? The HOT Omni protocol provides the answer to this question.
What is the Omni Protocol?
The Omni Protocol is a connection between liquidity contracts and abstract token storage. Similar to a centralized exchange, it stores your balances, but does so in a decentralized way using an audited contract on the blockchain.
Think of liquidity contracts as ATMs through which you deposit and withdraw money in different currencies, and the abstract vault can be compared to your local bank account, which holds all your money in one currency and is safe from sanctions.
When you deposit money into an “ATM”, it gives you a receipt confirming your transaction. With this receipt you go to a special bureau where each inspector independently verifies your check. Only with the full consensus of all members of the bureau, the system credits your account with the amount you deposited in the ATM.
When you make a withdrawal, the opposite situation occurs. You go to the bureau again, where each inspector confirms your right to withdraw a certain amount in the desired currency. After the consensus you are given a receipt, with which you go to the ATM and take your money.
The most important step in this process is the approval of the transaction by all members of the bureau. Even if one of them is dishonest and tries to steal from you, the other inspectors will not allow this to happen, as it is much more profitable to get rid of the unscrupulous employee and get an extra reward for it.
HOT MPC protocol
In the HOT Omni protocol, it is the HOT MPC protocol that functions as this office is a network of independent computers. The computers in this network perform check authentication and provide a secure signature that confirms that you can deposit or withdraw money from your account.
Because your personal account is a secure contract on the blockchain, no one but you has access to your tokens. At the same time, you can easily transfer them to another user without having to return them to the network. All you have to do is send USDT within the HOT network, and the recipient decides which “ATM” to withdraw their funds from (i.e. which network).
For example, if in the Tron network you would have to pay a commission of 4 dollars, then within the HOT network the transfer will cost less than a fraction of a cent and will be done very quickly. There are many applications of this technology - from mass distribution of tokens with minimal costs to a full-fledged decentralized exchange.
Conclusion
This is how the bridges in HOT Wallet function and ensure that the hot wallet functions remain cold (non-custodial). Thank you to everyone who is still reading these long pieces of content! 🫶