The NEO project, formerly known as Antshares, was founded in 2015 with the goal of creating a corporate-level blockchain with an emphasis on identity and smart contracts. After raising more than $3.7 million during the ICO and launching the main network in 2016, the project has already taken a place of honor among the long line of "new Ethereums."

NEO Software Update

The development of the next version of the software, NEO 3.0, began in the second quarter of 2018. In a blog post, NEO's co-founder and lead developer Erik Zhang described the key components that will be introduced to NEO after the update: "NEO 3.0 will be an entirely new version of the NEO platform, built for large-scale enterprise use cases."

This goal will be promoted, in particular, by the introduction of cross-platform smart contracts, native smart contracts, increased stability, and the changing economic model of NEO. And the last point has already managed to incite unrest among the community.

How It Currently Works

To achieve consensus, NEO uses an algorithm called the delegated Byzantine Fault Tolerance (dBFT).

With a simple BFT protocol, which is used, for example in Ripple and Stellar, the network should use this interaction scenario so that even in the presence of malicious nodes the "loyal" nodes always reach a consensus and do not give power to the their opponents.

"Delegated" BFT assumes that transactions on the network are confirmed (and blocks are created) not by all participants, but only by "delegated nodes.” And these nodes are selected by all users, that is, NEO holders, by voting.

In fact, dBFT is a modified standard of the more popular proof-of-stake consensus algorithm, since the NEO token provides its owner with a share in the network and the right to make decisions on certain issues.

There are two native tokens of the NEO platform, NEO and GAS. "NEO is kind of like the stake of the network; GAS is designed as a utility," said NEO co-founder Da Hongfei in a conversation with CoinDesk. GAS is used for payment for services provided by the platform, for example the implementation of smart contracts.

In this case, the NEO token is indivisible, that is, unlike Bitcoin or Ether, using which you can spend 0.001 part of the coin, NEO can only be spent as a whole. Hongfei notes that such a construction of NEO is due to technical reasons, including the paired nature of the network tokens and the GAS distribution mechanism: each time the platform consumes the GAS, it is redistributed among all NEO token holders in proportion to the number of NEOs owned by the user.

With such a system, the user does not have any economic incentives to be active, that is, to take part in the management of the network, including in the selection of delegates nodes, because when they redistribute, they receive GAS regardless of whether they voted or not. According to Hongfei, such a behavioral model of users can prevent the project from becoming truly decentralized, as decentralization depends on how many users actually participate in management.

The second problem, related to the current nature of the NEO and GAS tokens, concerns the so-called "black hole addresses,” that is, wallets whose owners have lost their private keys. Hongfei considers it possible that "the distribution of GAS to the lost NEO could be circumvented by enabling GAS distribution only to the voting NEO. At the start of the next voting period, all the unclaimed GAS of non-voting NEO during the current voting period is added back to the GAS pool to be distributed later."

How It Could Work in the Future

Hongfei and Zhang believe that the restructuring of the incentive system will help eliminate these shortcomings of today's model. In a post on Github, Zhang offers a new economic model that can be implemented in the NEO 3.0 version and according to which the NEO token should be divisible.

When accepting this proposal, the changes will also affect the GAS token. Instead of being immediately redistributed among the holders of the tokens, it will be sent to the pool and eventually distributed among those users who participate in voting and reach consensus.

In a post entitled "Adjusting the economic model for GAS distribution," Zhang suggests several more ways of solving the GAS problem, including increasing its emissions each year, rewarding delegated nodes, and allowing the use of GAS decimal shares when paying commissions within the network.

In a conversation with Coindesk, Hongfei noted that such a model would help overcome the "technical limitations" of blockchain, for example, slow processing of transactions, while preparing the ground for more lofty goals, such as decentralization of the network management process.

At the same time, Zhang notes that these are only proposals and their discussion is on Github. At the same time, on the eve of the software update, active members of the community published their own proposals on improving NEO on Github. The user under the canesin nickname suggests making GAS divisible, but leaving the NEO token structure unchanged, and the Edgegasm and cryptogirlHODL users described an improved voting system that can be applied even if NEO becomes divisible. It is designed to introduce a system of incentives, reduce the influence of centralized exchanges on the election process and its results, and make it unprofitable to vote on a random principle, which now resorts to lazy or unscrupulous users. The proposed solution consists of using contracts for voting with a temporary lock and an approving vote—a system in which each participant can vote for several candidates (or several decisions).

The user saltyskip offers an economic model of GAS distribution, which includes GAS inflation (unlike today's deflationary system), stimulation of node delegates, and limiting the number of transactions with zero commission.

"Currently the NEO network has no fees which makes it susceptible to spam. We have already seen spam attacks carried on the test network, and most recently, on the main network as well," saltyskip writes, noting that limiting the number of zero commission transactions that can be included in one block is a "natural solution" to the problem of such attacks.

He also points out that according to today's system, "GAS becomes a deflationary currency over time" and "this makes the GAS supply more stable, and disincentivizes users from hoarding GAS.” "We are extremely lucky to be able to leverage the dual token model to have one asset be used as a store of value, and one asset to be used as a means of exchange. If something is planned to be used as a good medium of exchange (a utility token) as opposed to a value preservation function, it MUST be inflationary,” writes saltyskip. "Making GAS inflationary solidifies the use case and separation for NEO and GAS instead of blurring the lines. So by making GAS inflationary we have achieved goal three which is encouraging use and spending of GAS in the NEO ecosystem."

Finally, the "inflationary GAS,” in the opinion of the author of the proposal, will help reward delegated nodes, without putting them in conflict with ordinary users: "Consensus nodes can now be rewarded with a fixed or percentage amount from the mined GAS, so that they are always incentivized to keep producing blocks, and keep the network stable because that is their only source of income,” saltyskip writes, meaning that commissions on the network under such a system should not be distributed among delegates only GAS.

Classical Split

While one part of the community makes its proposals, the other is categorically against and criticizes the NEO management model. One of the users of the Discord messenger described this idea as "simple stupidity." And although the divisibility of the token can make it more affordable in the event of a price increase, many fear that the price movement will take the opposite vector. "Divisible NEO is total shit, I would never vote for it. The price will collapse if they do it."

And even one of the main developers, Hongfei, is not sure of the correctness of such changes. "Personally, my position is that the NEO token remains indivisible. The price of one NEO token is about $30, and it is not so much. I do not think it's worth voting by share from $30," he told Coindesk.

The impact of investors on the structure of NEO 3.0, however, is limited. Although the developers argue that plans for changing the platform are still "being discussed, nothing has been decided definitively." NEO is not going to allow the holders to vote for the changes.

"At the moment, the official discussion channel is Github, and many developers and users are writing [their opinions there], and everyone listens to them," Hongfei said. But in the end, the fate of the NEO and its owners will be decided only by the five main developers, including Erik Zhang. According to Hongfei, these developers have this right because they understand all the technical nuances of the blockchain. "Voting is a rather confusing system. If you ask people to vote for things they do not understand, the result will not be good. Blockchain is a system that involves a lot of money, and we do not want to make it too complicated. Complex software usually has complex security problems," he said.

Discord users were again prepared with a counterargument: "If there is a [system] in the NEO, does it not make sense to vote on such a significant issue as the division of NEO? Why don’t they create a contract to vote to allow people to vote for it? Otherwise it's just a totalitarian decision and everything that happens next will be suspicious."

Blockchain Is All about (De)Centralization

The development of NEO 3.0 should take at least a year and during this time, the situation in the community can only get hotter. Another prerequisite for this is the recent election of the first independent delegated node, which, in itself, served the noble purpose of decentralizing management, but the "vote" was held with the participation of two members, Zhang and Hongfei, and as delegates, they chose the City of Zion development team, which has long been engaged in the development of NEO and is sponsored by the project. "Personally, I would not agree to call it voting. This is not the word I would use," said City of Zion team member Ethan Fast.

NEO declares that this event was a step towards the gradual transfer of power to the holders of the tokens and continued to assert that this process was considered a vote because theoretically, the holders of the tokens could also take part in it. "Now people that use the NEO client or the node's software can vote as they wish. But in reality, very few people know how to do it. We did not make it public," Hongfei said.

In general, he said, the current consolidation of power in the hands of the project management is part of the plan: "We do not think that we can be decentralized at such an early stage," he said. Decentralization should come "in a few years, when the protocol will be more stable." "We do not have a technical definition of stability, but what we are sure of is that now [the protocol] is unstable," added Hongfei.

At the same time, NEO plans to continue to connect other "external" nodes to the network, and the next candidate is the Dutch telecom company KPN.