Neo “The Chinese Ethereum” or “Ethereum Killer”
You may have heard of Neo as the Chinese Ethereum. Why is that? Will it ever surpass Ethereum in market size? This text summary will explain NEO and how it is different than Ethereum. It will also explain why or why not it may successfully compete with Ethereum.
What is NEO?
NEO uses blockchain technology and digital identity to digitize assets, the use of smart contracts for digital assets to be self-managed, and to achieve a “smart economy” with a distributed network. A smart contract is a software-coded contract that pre-programs conditions, and when those conditions are met, the corresponding contract terms are triggered. To put it simply, it is a platform for smart contracts to operate on that could impact applications of identity, legal contracts, social networking, decentralized currency exchanges, secure communication protocols, data exchanges, intellectual property markets, prediction markets, advertising markets, etc. NEO was created in China and is similar to Ethereum in the sense that it can be used as a platform for smart contracts, so it was nicknamed the Chinese Ethereum.
Isn’t Ethereum already a platform for smart contracts? Why do we need another platform?
Ethereum provided a major innovation the cryptocurrency industry but it has some pitfalls that NEO addresses. Additionally, Neo has some core differences to Ethereum that do not directly address some of Ethereum’s pitfalls, but those differences could potentially lead to itbeing a better smart contract platform. It is hard to say. We will address the differences.
On the other hand, NEO has a software development kit (SDK) and smart contract complier that accommodate coding languages that developers probably already know, such as Java, C#, Python, and Go. Judging by the number of decentralized applications on Ethereum, it does not seem that hard for an experienced coder to transition to coding in Solidity, but NEO makes it easier for developers to code smart contracts.
Delegated Byzantine Fault Tolerance Consensus
Ethereum uses a Proof of Work consensus method. Leaders of Ethereum announced that it wants to adopt a Proof of Stake consensus method in the future (2018-2019) but that has not happened yet. Proof of Work is an energy intensive process that limits the number of transactions per second that can be processed. Ethereum’s peek number of transactions per second hit 15.6 on January 4th, 2018.
Instead of Proof of Work, NEO uses a delegated byzantine fault tolerance (dBFT) consensus method. It’s white paper says that the dBFT can handle 1000+ transactions per second but its network has never demanded nearly that number of transactions.
The dBFT enables large-scale participation in consensus through proxy voting. Token holders can vote for a leading consensus node to represent their share of validating transactions. At the time of writing this, there are 7 lead bookkeeping nodes, but NEO plans to expand that number in 2018 to potentially 13 or more nodes. Some argue that 7 key nodes make the network’s transaction verification method too centralized. This is a contentious topic because generally there is a tradeoff between centralization and speed (transactions per second or throughput). Because token holders get to vote for who they want to delegate as their bookkeeper and because NEO plans to expand their bookkeeper nodes, we do not find this to be an issue. Additionally, we feel that some degree of centralization is a good thing for the infancy stage of a cryptocurrency so that leaders can adjust a coin’s code if necessary.
NEO and GAS – The Platform’s Two Native Tokens
NEO has two native tokens: NEO and GAS. The NEO token represents the right to manage the network, which includes voting for a bookkeeper to validate transactions. GAS is the fuel token to use the NEO network, which means that to execute a smart contract on the network, one will need pay GAS as a fee to execute that code.
100 million tokens have been generated (we will explain how they were originally distributed later in this summary) and there will ultimately be 100 million GAS tokens, but those tokens have not fully been generated yet. GAS is gradually distributed to NEO owners through a decay algorithm. GAS is generated with each new block of transactions (about every 15-20 seconds). GAS’s decay algorithm expects 16% of GAS to be created in the first year, 52% of the GAS to be created in the first 4 years, and 80% of the GAS to be created in the first 12 years. About 100% of the GAS is expected to be created after 22 years. In a sense, NEO holders receive GAS tokens as dividends. Certain exchanges like Binance distribute GAS to its NEO holders, so owners do not need to worry about collecting their GAS.
The 100 million tokens were distributed into two portions. 50% went to crowdfunding supportes and the other 50% were distributed to the NEO Council. The Council plans to distribute 20% of their tokens to developers of the NEO Council, 20% to developers in the ecosystem, 30% to invest in other blockchain projects only used for NEO projects, and 30% to be retained as contingency. The annual use of NEO in principle will not exceed 15 million tokens.
The fact that 50% of the tokens were distributed to the team makes the coin relatively centralized, which some argue defeats the point of cryptocurrencies. Although there is merit to that argument, some centralization in the infancy of a cryptocurrency provides motivation to developers and communities to improve the code of that cryptocurrency and can help ensure that it can evolve to meet mass adoption.
Blockwolf’s research suggests that the tokens that NEO’s council owns will be used effectively and appropriately to further the development of the coin, so we are not concerned with the network’s centralization.
Right now, Neo tokens cannot be devised (minimum unit is 1 NEO) but GAS can be devised. The minimum GAS unit is .00000001.
It should be noted that NEO’s consensus method is quantum resistant. Quantum computing poses a risk to certain cryptocurrencies that require cryptographic proof of work because quantum computers can quickly solve those problems. This could be important in the future if quantum computers are mass-released but they currently do not pose a threat to cryptocurrencies.
Tokens Already Using the Neo Platform
Ethereum is the most popular platform but NEO platform already supports some cryptocurrencies. The most popular ones are Red Pulse, DeepBrain Chain, Trinity Network, Qlink and Zeepin. We expect more cryptocurrencies to use the NEO platform in the future.
We believe that cryptocurrency (smart contract) platforms have the most upside in terms of market capitalization. It is okay to invest in multiple platforms. It is a good investment strategy to diversify within subgenres of cryptocurrencies (platforms, digital monies, private digital monies, supply chain coins, etc.) The biggest issue regarding platforms right now is their ability to scale sustainably and securely, without sacrificing decentralization. NEO has started to address that issue with dBFT but has not found a comprehensive solution. Other competitors like Ethereum, Cardano, EOS, NEM, QTUM, and ICON promise to address the scalability issue. None of those platforms have solved that issue, and neither has NEO, but we believe it has the best working solution yet. It is possible that a competitor could create a better solution, but until that happens or if that never happens, we expect a good future for NEO and GAS.