“Let me show you how deep the rabbit hole goes”

*Disclaimer: I’m an investor in all the cryptoassets discussed below*

I recently attended NEO’s first ever worldwide developer conference. It was hosted in downtown San Francisco over 2 days, and featured technical workshops, ICO presentations, and discussions with community leaders.

My main takeaway from the event? I was encouraged by the energy and legitimacy of the developer community, particularly as NEO positions itself as a preferred alternative to Ethereum for smart contract development and as an ICO platform. The event also addressed (although not entirely alleviated) some of my concerns around its consensus model, decentralization, and supply incentives. I’ll go into this below in a later section.

On the flip side, I was extremely disturbed by the pervasive greed and unprofessionalism from the investment community — funds, personal investors, and companies exploring or in process of ICO-ing. This criticism probably applies to the cryptocurrency / asset space as a whole, but felt that much more palpable as investors gushed over ICO returns or young founders justified raising $10m or more with little more than a whitepaper (website optional). Additionally, upon further due diligence several “fund managers” I met claimed to possess but didn’t actually have any experience in the finance industry. There were also a troubling examples of investors I suspect who are unethically (illegally?) re-appropriating funds into crypto-assets.

There is a lot to cover, and will draw mostly from my own personal experiences talking to others on the floor and the select presentations I actually watched in entirety. Let’s start with Da HongFei’s opening remarks.

Opening Remarks

Da HongFei, one of the founders of NEO, kicked off the event with a rousing summary of the “State of NEO.” Most of his ~30 minute long speech was roughly what you’d expect —a brief history of NEO’s origins, ambition to be the #1 blockchain by market cap, etc.

One thing in particular stood out to me from his speech — his lengthy emphasis (~9 minutes) on their decentralized exchange NEX. He equated the concept of an exchange to be the intersection between blockchain’s two most proven “killer use cases”: store of value (digital gold) and fundraising (ICOs). He was adamant that centralized exchanges will die due to security, regulation, and cost…and positioned NEO as the prime platform to host decentralized exchanges:

The case for a NEO decentralized exchange (NEO DevCon 2018, Da Hongfei)

My surprise was shared by others later, including engineers in the audience who currently work at centralized exchanges. One shared his own worries — “should I think about getting a new job?” — but we probably need a couple years before DEX transaction volumes meaningfully rival their centralized competitors.

Interestingly, another developer I spoke to from Shanghai was less bullish on NEO as a platform to build DEXs on. His own team was planning on building on top of Bitcoin’s Lightning Network because of its promised “near-instant” transaction time, and relative stability of Bitcoin as a store of value, versus NEO’s 15 second absolute minimum (block update time, in practice it’s a little longer). Of course, it’s an unfair comparison given that NEO could also introduce 2nd layer transactions via Trinity, NEO’s answer to Lightning Network. And of course, both are analogous to Ethereum’s “Raiden Network” as well.

Stepping back, I have no idea which blockchain will be the long-term winner, nor is that maybe even the right question to ask (there could be multiple big winners with evolving use cases). What was compelling was seeing firsthand the vibrancy of the NEO developer community — building their own off-chain 2nd layers (Trinity), DEX (NEX), and end-to-end developer frameworks (NEO One).

Should we be worried NEO’s consensus is so centralized?

Coming into NEO Devcon, I had a couple concerns regarding some fundamental aspects of the NEO blockchain, which I think is shared by other critics. The first involves its consensus mechanism, “Distributed Byzantine Fault Tolerance” (dBFT), which is essentially the “representative democracy” version of Proof-of-Stake. It requires bootstrapping consensus via high centralization, and is a major, and valid, criticism of NEO.

For those not familiar, here’s their whitepaper writeup, but the simple explanation is that stakeholders of NEO elect “consensus nodes” to represent their vote, and out of these nodes, 66% must agree to maintain honest consensus. Currently on mainnet, all 10 nodes are maintained by NEO Council, but they are in the process of decentralizing, with 3 provided to the developer community “City of Zion,” and 1 to KPN, a Dutch telecomm company. This new node distribution is currently already running on NEO’s testnet — CoZ plans to go live on mainnet in one month, and KPN in 2–3.

The tradeoff for such high centralization / dBFT is much faster transaction speeds (1,000 txs per second). But is it fast enough, and what levels of centralization are acceptable? Ripple, which shares a similar “whitelisted node” approach, has a theoretical limit of 1,500 txs per second. And shifting farther down the centralization spectrum, the Visa network currently handles ~25,000. Isn’t the whole point of blockchain, and why Bitcoin became so valuable, was its decentralized nature?

It’s a complicated question, and Malcolm Lerider, Senior R&D manager at NEO, partially addressed this during his talk by pointing out that Bitcoin and Ethereum themselves are already quite centralized due to the rise of mining pools: the top 4 BTC pools, and top 3 Ethereum pools, control > 50% of hash rate of their respective chains. Additionally, he said that since there are only about 20 mining pools, at 22 consensus nodes NEO would be less centralized.

It’s a good point, but doesn’t entirely alleviate my concerns because unlike NEO, anyone with a computer and an Internet connection can still contribute to BTC/ETH hash power. Individual miners can easily leave and join another pool (it literally takes 10 seconds in a text editor), or create a new one. That’s not true of NEO, which as of today requires the explicit blessing of the NEO Council, and requires you meet certain criteria. This is theoretically supposed to change later, when the community can vote for new nodes, provided they stake 1,000 GAS (a not insignificant $30,000 USD, at time of writing).

Significant NEO supply reserved for founders

My second big issue with NEO is something that Da Hongfei addressed directly in his opening remarks. He talked / lightly joked about NEO’s treasury supply — a whopping 50% of all NEO tokens (total supply 100m).

Large “pre-mined” amounts for any blockchain can result in a divergence in incentives between investors, founders, and developers. For comparison, Bitcoin had no pre-mine, while Ethereum raised $14m from issuing 72m ether. Ethereum was accused as a “scam” at the time due to this raise, which was deemed high at the time, but looking back seems relatively modest (although at today’s prices, still high).

Ultimately, there’s not really much you can do except trust Da HongFei and the NEO Council to be responsible fiduciaries of capital. If you don’t like it, or newly discovered this, then you can always sell and opt out of the network…

For what it’s worth, he said he hasn’t received a single NEO for compensation (other than what GAS he mined or bought himself with fiat early on), although his co-founder Erik Zhang has. It comes down to trust, I suppose — and makes one appreciate Bitcoin more as a fully trust-less system.

Does this pre-mined supply bode ill for NEO? I don’t think so, but further highlights the centralization of the blockchain compared to its peers. I’m interested to see what benefits could come from a more centralized approach to blockchain technology. Like nation-state politics, different governance models can be successful.

We’ll see.