The last two months of 2017 in the cryptoverse was all about bitcoin, as the price skyrocketed to over $20000, from around $10,000. However, bitcoin’s gravity-defying price surge overshadowed the meteoric rise in valuations of a relatively lesser-known cryptocurrency, called NEO. The monster rally, which began in the second week of November and continued into the second week of January, catapulted NEO into the ‘top 10 crypto charts’, basically earning it a spot among the highest-valued cryptocurrencies, as the price increased by more than 5x over the period. The cryptocurrency, widely dubbed as “Chinese Ethereum,” is expected to rival Ethereum as the dominant platform for smart contracts in coming years. In this week’s newsletter, we touch upon the fundamental differences between the two rival blockchains and the roadblocks NEO needs to overcome to become the leader in smart contract platforms.
NEO’s goal for the future is different from Ethereum’s to the extent that NEO is predominantly focused on creating a ‘Smart Economy’ where every asset is digitized and the proof of ownership is stored on the blockchain. These assets can be traded, exchanged and leveraged using smart contracts, while Ethereum plans to build a more globally accessible, more free and more trustworthy internet through the development of DApps and smart contracts. Additionally, NEO is building a digitised ecosystem that is likely to be regulator-friendly (it has to be, given its provenance) as it plans to issue digital identities in accordance with the globally accepted standards. Ethereum is also focused on creating and securing digital identities, but regulatory compliance as such is not an explicitly stated goal of the core Ethereum developer community.
NEO claims to bring online the capability of processing over one thousand transactions per second and faster confirmation times by using its dBFT (Delegated Byzantine Fault Tolerance) consensus protocol, a variant of the PoS consensus protocol, in which tokenholders elect the consensus nodes to participate in the consensus process on their behalf. That said, the biggest trade-off here is that the validator pool requires trust among the participants to run at optimal speeds. In other words, dBFT works best when a high proportion of validators follow the protocol (i.e. more honest nodes). This translates into higher barriers to entry for public participation as the process of becoming a consensus node involves staking large sums of money and obtaining an identity verification certificate from a government-authorized entity. In addition, the process of electing consensus nodes is prone to well-known stakeholder voting challenges such as low participation of the voters (Ethereum too faced this problem around the time of its DAO hard fork), centralization of voting power (whales and exchanges), and the difficulty in keeping voters informed and engaged. On the other hand, Ethereum’s base protocol is permissionless and trustless, attracting significant public participation, which is a key feature of a public blockchain.
NEO’s success is largely predicated on its ability to achieve decentralization of consensus without compromising on the high performance (throughput and confirmation times) of its blockchain. Conversely, Ethereum’s base protocol is more decentralized and the scalability concerns are being addressed through the deployment of second-layer solutions such as Plasma, Raiden Network, etc. This is essentially a race to find the sweet spot between decentralization and scalability with both the blockchains presently operating at opposite ends. More about the decentralization vs scalability dilemma here.
Recursing out, we might well be seeing the beginning of a new ‘currency’ war, a paradigm war rather. We are seeing a fragmentation of consensus realities, with a multiplicity of blockchain frameworks, this time broadly around political and ideological lines. Unlike much of the Anglo-speaking world, China (and to an extent Russia), have had their own Alibabas, Baidus & WeChats for every Amazon, Google and Facebook. If we agree that currency is just a consensus reality, whether it be dollar or bitcoin, we should not be surprised that Governments are now influencing the definition and the emergence of new consensus realities in the spheres that they can control. Admittedly, it is far easier to do so in China than in most places in the world, given the ’Great Firewall of China’. Representing the ‘Western Bloc,’ this time around, we have ETH and its multiple ERC-20 offshoots, including 0x, the decentralized exchange. The Chinese have NEO, QTUM, even a planned NEX decentralized exchange as their answer to Kyber/0X. Certain features of the blockchain make it hugely attractive to regimes that have a command-and-control mindset, especially when it is coupled with the ability to design a ‘custom’ version of the blockchain and unilaterally impose this version on a pliant populace, that vast majority of which do not have the international or transborder physical or digital mobility to protect themselves against such regime. While the Venezuelan ’Petro’ might prove to be nothing more than a desperate fourth-quarter hail-mary from a flailing regime, the Chinese Neo Council, the Russian WAVES platform, and potential efforts in this direction by India et al will be interesting in the way they evolve and redefine a new era characterized by an unprecedented overlap of technology, economics and politics.