NEO Announces a Move Towards Decentralization

NEO made a cryptic announcement about decentralization on July 3, causing a jump in prices.

The rough translation of the tweet is as follows:

‘No innovation. No Decentralization. No communication.’

We’ve heard many voices of “No” over the past.

While the Market changes, NEO’s vision remains unchanged. From this first step of decentralization, a new era of NEO ecosystem is about to unveil!

The first step of the transition took place on July 4, with the election of a City of Zion node onto the network. City of Zion describes itself as “an independent, open source group of developers” working on the NEO blockchain.

City of Zion has been running a validating node on the NEO testnet for the past six months in preparation for the switch.

The phrase “NEO’s vision remains unchanged” probably refers to the fact that NEO has long claimed that it would take a gradual approach to decentralization, but has nonetheless been criticized for its centralization. NEO’s team has argued that this strategy allowed them to improve the protocol and more efficiently make necessary changes before “releasing it into the wild,” so to speak.

Market Reaction

Investors and traders have been reacting very positively to the announcement. NEO’s price jumped from ~US$33 to ~US$36 in the immediate aftermath of the announcement, and since then has experienced steady upward pressure, bringing the price to over US$42 at the time of writing.

So why is the market so excited about this development?

The security of NEO’s network depends on validating nodes. These nodes store a complete copy of the blockchain and are responsible for making sure all transactions are accurate. If enough dishonest validators get into the network, they can threaten the security of the network by double spending funds.

These nodes are meant to be chosen by way of votes cast by owners of NEO currency. Until now, NEO has been running on just 7 servers run by the NEO team, and even one of these servers going down can shut down the network, which happened briefly a few months back.

Skeptical spectators may have questioned the sincerity of NEO’s stated intention to move towards decentralization, since it means that the NEO team will need to relinquish some power over the network. With the election of the City of Zion node, concrete steps are being taken towards decentralization.

Greater decentralization distributes the need to trust among a larger group of people and reduces both the vulnerability of the network and the temptation for nodes to behave badly.

Future Plans

The NEO team posted an updated timeline of the decentralization process on their blog on July 4.

Fenbushi Capital, a venture capital firm with Vitalik Buterin on its board of advisors, and KPN, a European telecom company are also planning to join the mainnet in the coming months.

The timeline has the new validating nodes scheduled to be voted onto the network by the end of the year. This still probably won’t be enough to satisfy decentralization zealots — even after the new nodes join, the network will still be operating on only 10 nodes, which is still quite centralized compared to Bitcoin’s nearly 10,000 estimated nodes.

Following the successful integration of the new nodes, however, NEO plans to open the network to the public, at which point anyone will be able to start operating a node on the testnet. After showing their ability to operate a node continuously for 6 months, potential validators will be able to be voted on to the mainnet.

Looking at the reaction of the market so far, it looks like the measured and methodical approach to decentralization is finally paying off.

Related: NEO Development Roundup: A New R&D Roadmap and Ontology Collaboration