This is part 2 of my article on EOS.

In part 1 I covered the following:

The origins of EOS.

Features of the EOS system.

The Delegated Proof Of Stake (DPOS) mechanism.

You can read Part 1 here.

In this part I will be covering the following:

The Ownership Model of the EOS which leads to 0 transaction fees.

The Constitution of the EOS.

The EOS ICO.

Some concerns that have been raised about EOS.

So, without further ado, let’s begin! (or to be more accurate, let’s continue)

Eliminating Transaction Fees Via An Ownership Model

One of the most eye-catching features of EOS is the elimination of transaction fees via an ownership model whereby users own and are entitled to use resources proportional to their stake, rather than having to pay for every transaction. So, in essence, if you hold N tokens of EOS then you are entitled to N*k transactions.

The barrier to entry for a new developer in Ethereum can be relatively high as “cryptofreedom” states in their Steemit article.

The costs of running and hosting applications on Ethereum can be high for a developer who wants test their application on the blockchain. The gas price involved in the early stages of development can be enough to turn off new developers.

With the increase in the value of the Ether, the cost of purchasing enough tokens to host applications also goes up. Also bear in mind the way smart contracts function in Ethereum. Each and every instruction of the smart contract has a corresponding gas price. The network may find it hard to handle the activity is a DAPP does go mainstream.

The fundamental difference between the way Ethereum and EOS operate is that while Ethereum rents out their computational power to the developers, EOS gives ownership of their resources. So, in essence, if you own 1/1000th of the stake in EOS then you will have ownership of 1/1000th of the total computational power and resources in EOS.

As ico-reviews states in their article:

“EOS’s ownership model provides DAPP developers with predictable hosting costs, requiring them only to maintain a certain percentage or level of stake, and makes it possible to create freemium applications. Furthermore, since EOS token holders will be able to rent / delegate their their share of resources to other developers, the ownership model ties the value of EOS tokens to the supply and demand of bandwidth and storage.”

Upgrading the Protocol and Constitution

As has been mentioned before, the EOS has a binding constitution which details the terms and conditions of the service of the blockchain. Governance is maintained by establishing jurisdiction and choice of law along with other mutually accepted rules. Every single transaction in EOS must include the hash of the constitution to the signature. This legally binds the user to the constitution.

The constitution and protocol can be amended via the following process:

The change is proposed by the block producer who obtain a 17/21 approval rate

The 17/21 approval must be maintained for 30 straight days.

All users are required to sign off their transaction using the hash of the new constitution.

Block producers adopt changes to the source code to reflect the change in the constitution and propose it to the blockchain using the hash of a git commit.

Block producers again need to maintain 17/21 approval for 30 consecutive days.

After that, full nodes are given one whole week to adapt to the new changes.

Any node that doesn’t follow the new protocol is automatically shut down.

Speeding Up the Process During Emergencies

So what happens if something like the DAO happens and the EOS system is forced to look for a quicker change and solution to the protocol? In emergencies like that the block producers have the power to speed up the process.

The EOS ICO

Image Credit: Cryptorated

We finally come to the ICO.

EOS tokens are ERC-20 compatible tokens distributed on the Ethereum blockchain. As you maybe aware of, Ethereum can not only fund DAPPS, it can fund other blockchains as well. The token sale opened on 26th June 2017 and will run for 341 days till July 3 2018. There is a total of 1 billion EOS tokens available.

The reason why there are so many tokens and ICO is so long is because the EOS devs are aiming for mass adoption. Most token sales only account for a small group of people to take part in the sale. EOS wants as many people as possible to take part. Also, they can see the development of the EOS software in the given time period before they make a deicision.

The token distribution goes as follows:

200 million EOS Tokens (20% of the total amount of EOS Tokens to be distributed) will be distributed during a 5-day period beginning on June 26, 2017 at 13:00 UTC and ending on July 1, 2017 at 12:59:59 UTC.

From July 1 2017, 700 million EOS tokens (70% of the total supply) will be split into 350 divisions of 2 million tokens each and sold in 23 hour periods.

There are two reasons why the EOS tokens available during the 5 day period is higher than the number available during the subsequent 23 hour periods:

· To accommodate for the current interest and demand that EOS tokens have received.

· To accurately determine the early stage price discovery of the EOS tokens.

The remaining 100 million tokens will remain with the devs i.e. Block.one. These cannot be transferred or traded on the Ethereum network during the EOS token distribution period. During this time Block.one are not allowed to:

· Purchase EOS tokens.

· Pay any dividend to their shareholders.

· Perform any share buy backs.

The Ether to EOS conversion will follow this equation:

EOS received = a*(b/c).

In the equation:

a = Total ETH contributed by an authorized purchaser during the period.

b = Total number of EOS Tokens available for distribution in the period.

c = Total ETH contributed by all authorized purchasers during the period.

Let’s take an example and see how this works out.

In one specific period.

The total number of EOS tokens available is 30. Alice contributes 4 ETH and Bob contributes 1.

So, let’s calculate how EOS Bob receives.

a = 1

b = 30

c= 1+4= 5

So, Bob receives: 1* (30/5) = 6 EOS tokens.

And, Alice gets= 24 EOS tokens.

According to this weusecoins article , any blockchain based on the EOS software will have to generate a 5% natural inflation per year. This will be distributed to the platform’s block producers in connection with their confirmation of transactions on the platform and to the top three smart contracts or proposals that receive the most amount of votes from holders of such tokens. The reason why this happens is to make sure that a blockchain is not reliant on any one single one foundation, organization, or individual for its growth, development or maintenance.

Wallets and Exchanges For EOS

EOS coins can be bought and sold in exchanges like Kraken and Bitfinex.

The coins can be stored using wallets like Metamask and MyEtherWallet.

Concerns Going Forward

There has been some concerns about EOS that has been raised by Ethereum co-founder Vitalik Buterin which you can read here and here.

The gist of issues that have been raised is as follows:

Firstly, the DPOS system could use the co-ordination game theory to its disadvantage.

The block producers in charge of decision making are, in essence, master nodes. There could be a scenario where a certain situation is favoured by the master nodes which are not in accordance with the the rest of the nodes. Suppose the master nodes want to transition the chain from state A to state B. It could be a very hard task for them to help the entire chain do the same transition along with them.

Secondly, the system is extremely reliant on voting mechanism. Voting has the following problem:

Low participation.

The Tragedy Of The Commons: Imagine a great big meadow. A farmer discovers it and brings their cattle over for grazing. Over time, more and more farmers discover the place and choose it as a grazing spot. Eventually, the meadow’s resources becomes depleted, even though the farmers individually were acting rationally. This in a nutshell is the tragedy of commons.



Individuals acting rationally and independently according to their own self interest and depleting a shared resource even if it is contrary to their best interest.



So, how does this apply here?



As Vitalik puts it: “Each voter only has a tiny chance of influencing the result, their incentive to vote correctly is thousands of times lower than the socially optimal incentive. This means that situations like everyone putting their coins on exchanges and exchanges voting on users’ behalf, with users not really caring how exchanges vote with their money, are likely to happen.”

Individuals acting rationally and independently according to their own self interest and depleting a shared resource even if it is contrary to their best interest. So, how does this apply here? As Vitalik puts it: “Each voter only has a tiny chance of influencing the result, their incentive to vote correctly is thousands of times lower than the socially optimal incentive. This means that situations like everyone putting their coins on exchanges and exchanges voting on users’ behalf, with users not really caring how exchanges vote with their money, are likely to happen.” A coin holder’s interests are not perfectly aligned with a user’s interest. Because of this, proposals that increase the coin price at the expense of user experience may get implemented.

Finally, the “0 transaction fees” mechanism. Vitalik noted that users need to hold a certain amount of EOS tokens in order to get some amount of free transactions i.e. N EOS tokens will result in N*k free transactions. This means that people are basically cornered into holding N tokens to participate and expose themselves to coin volatility. This has terrible consequences on:

People who are not that economically well off.

Hobbyists who just want to use the blockchain a few times and go away.

If negative volatility does occur, the users will have to make up for it by buying more and more tokens to make sure that they don’t run out of transactions.

There has also been concerns raised about the “Nothing At Stake” problem. In a POS system, when a chain forks, a validator can put their stake in both the forks and rest easy knowing that no matter which route the chain takes, they will always win. This is called Nothing At Stake problem. Ethereum’s casper punishes any validators who attempts to do this by slashing away their stake.

However, critics have said that EOS doesn’t punish their malicious validators harshly enough for taking part in the act. As a collateral, the malicious validators would suffer a loss of reputation, which critics don’t find harsh enough.

Looking Ahead

Image Credit: CoinMarketCap

EOS has definitely caused a stir in the crypto space. The technology behind it is quite fascinating. The team behind the project is definitely excellent and well worth the hype. There are some issues though and it will be interesting to see who they resolve them going forward. Can EOS truly overtake Ethereum? By the time EOS takes flight will Ethereum already implement sharding, plasma etc. and be far out of sight?

All that remains to be seen.