DISCLAIMER: I am diversified across Ethereum, QTUM, and Vechain. All of which are competing smart contract platforms. I choose not to diversify into NEO.
As before, there will be a few avid NEO supporters that will… respond negatively to this article. I implore anyone who is inclined to do so to avoid ad hominem attacks and address my arguments. Look into them and verify them yourselves.
I wrote about NEO back in July 2017 when it was still Antshares and at $7. Today, it’s more than $150. I’ve been following NEO closely since I was fascinated with the platform. A smart contracts platform that can perform up to 10,000 transactions per second (source)? Smart contracts that can be written in multiple popular languages like Java and C#? Earning GAS rewards just for having NEO in your wallet? NEO was a nascent cryptocurrency that seemed like it. could easily challenge Ethereum and I wanted to learn everything about it.
Some of you know that I’ve been highly skeptical of NEO over the past few months. A few have stated that I’m a critic either because I’m invested in Etheruem and QTUM (competitors to NEO) or that I sold early and missed the boat. I see these as crude arguments that completely ignores the reasons I put forth from the research I’ve poured into NEO.
I’m a diehard fundamentals investor and I dig deep into every aspect of a project. What made me balk at NEO was the layers of deceit and manipulation I found that I couldn’t accept and be quiet about. If I truly believed in projects that were rivals, I would diversify among the competitors to derisk. That’s why I’ve invested in QTUM, Ethereum and even Vechain. I have very good reasons why I won’t diversify into NEO.
Nevertheless, I believe that it’s best to compile everything I’ve found about NEO and let my readers be the judge.
10,000 feet summary
- NEO is a smart contracts blockchain started by Onchain, a Shanghai-based blockchain R&D company led by Da Hongfei and Erik Zhang.
- Held two phases in its ICO, one in August 2016 and another in September 2016.
- Originally named Antshares, the platform was rebranded to NEO in August 2017.
- Uses the delegated Byzantine Fault Tolerance (dBFT) algorithm as a consensus algorithm. NEO is not a Proof of Stake system.
- Claims to support up to 1,000 transactions per second and 10,000 transactions per second with optimizations.
- Smart contracts platform that supports multiple languages including Java and C#.
- Several ICOs have launched on NEO since the rebranding event in July.
- NEO acts as shares of the blockchain and owners can vote on consensus nodes. Holding NEO also automatically generates GAS. Every NEO will eventually generate at most 1 GAS and this process is slated to complete in a few years.
- GAS is the fee to use the network. It’s supposed to pay for transactions and smart contract deployment.
- NEO’s team currently operates all 7 validator nodes in the network and has set transaction fees to zero. To deploy a smart contract, one needs to pay 500 GAS. At the current GAS price of about $60, it would cost $30,000 to deploy a smart contract (source).
- NEO’s consensus algorithm requires every validator to know every other validator. The global number of validators needs to be known and constant as well. This validator list is maintained by NEO’s team and the team gets to choose validator candidates to be voted in by the community. Candidates are legally liable for operating the validators (source).
- NEO is undergoing a process of decentralizing the location of their validator nodes, but they still maintain full control over the nodes. They are not in a process of decentralizing control, as many would like to think.
- NEO is more centralized than Ripple.
- NEO has a strong third party developer ecosystem led by the City of Zion (CoZ). CoZ develops blockchain tooling such as wallets and blockchain explorers.
NEO’s history, team, and Onchain
NEO held the first phase of its ICO in August 2016 and the second phase in September 2016. It was originally named Antshares before rebranding to NEO in August 2017.
NEO is an open source blockchain developed and managed by Onchain, a Shanghai-based blockchain R&D company. Onchain was founded by CEO Da Hongfei and CTO Erik Zhang. Erik Zhang is also the lead developer of NEO. A large Chinese international conglomerate investment company, Fosun International, has invested in Onchain. Onchain has its own blockchain product, called the Distributed Networks Architecture, or DNA. DNA is comparable to the Linux Foundation’s Hyperledger project.
Da Hongfei is popular among the NEO community. He is soft spoken and often implores his audience to “focus on the technology and not the price”. He has appeared in numerous interviews with popular cryptocurrency public figures and was even on Bloomberg recently.
Consensus algorithm - dBFT and NEO
A good resource for NEO’s consensus algorithm is Erik Zhang’s paper on dBFT which can be found here. I’ve scoured through it and here’s what I found.
The global validator count in dBFT needs to be constant and every validator needs to know every other validator. Validators work together to reach consensus on the next block. As long as more than two thirds of the nodes are in agreement, the network moves forward. dBFT is very similar to Ripple’s and Stellar’s consensus algorithms; all three fall under the Byzantine Fault Tolerance class of consensus algorithms. This is why NEO can match Ripple and Stellar speeds of up to 10,000 transactions per second.
The key difference, however, between Ripple/Stellar’s consensus algorithms and NEO’s consensus algorithm is that NEO’s is closed and much more centralized. In Ripple and Stellar, anyone can join as a validator whereas NEO is very strict on how many validators can exist and who the validators are. This closed-ness and the requirement that two thirds of the network needs to be in agreement to reach consensus forces the NEO’s team to maintain centralized control in order to keep the network secure.
NEO’s team currently sets the total validator count to be at 7 and they operate all 7 nodes. They have claimed to decentralize the network by placing validator nodes in different locations such as in a Swiss bunker and a Dutch telecommunications company’s (KPN) server farm. However, the NEO’s team still owns and operates these nodes, so it’s decentralization of location but still a centralization of control. This is a very important distinction.
Another important thing to keep in mind is that dBFT is NOT Proof of Stake. dBFT is a consensus algorithm where validators aim to cooperate instead of competing for rewards. NEO holders do not have the ability to provide input in the consensus algorithm.
Legally liable for operating a validator node?
NEO’s team has a plan to eventually allow NEO holders to vote on validator operators. However, since validator up time is incredibly important, the team gets to approve candidates. In addition, those that are voted in will be held legally liable by the team to keep the validator up (source).
So much for decentralized control.
Centralized control means possible blockchain blackouts
A very interesting event happened in October last year when NEO’s blockchain went offline for several hours. This was incredibly disturbing to many people since blockchains are not supposed to just disappear.
NEO’s team provided a very vague reason for the blackout: they had to shutdown the blockchain in order to perform “manual checks” when they attempted to free 15 million NEO from the 50 million NEO locked up as a developer fund.
Whatever the reason, the fact that NEO’s team could turn off their blockchain at a whim should be unsettling for any cryptocurrency investor. No single entity should have so much power over the network. However, it is also not surprising that the team can turn off the blockchain… they control all 7 validation servers!
This incident demonstrates the tremendous risk of centralization in a cryptocurrency. In times of mania, it’s always good to remember the fundamental value propositions of cryptocurrencies and not be blinded by price action.
Smart contracts on NEO
The price to deploy a smart contract on NEO at this moment is 500 GAS (or $30,000 at $60/GAS). Because it’s so expensive to deploy smart contracts on NEO, there are very few smart contracts on the main net right now. In fact, as of last week, there were only 10 smart contracts. 3 of which are test smart contracts deployed by Erik Zhang. 6 of the rest are cookie cutter ICO smart contracts. There is one smart contract for Hash Puppies, an upcoming game on NEO similar to CryptoKitties.
It’s also interesting to note that there are 27 dApps listed on NEO’s website, yet many of them are from a CoZ competition held in November last year that will probably never be deployed on the main net. Each winner of the competition won 1350 GAS but none of them have used it to deploy their smart contract. Would you consider the listing of demo, test net smart contracts as dApps on NEO dishonest? At the very least, it doesn’t increase my confidence in the team.
City of Zion - NEO’s community of developers
For all the shit I give NEO, I am actually quite impressed with the third party developer community that have formed around the project. While Erik Zhang and his engineers work on NEO core (which consists the consensus algorithm and the core wallet), NEO’s large third party developer community, City of Zion (CoZ) works on tooling around the fledgling blockchain. This tooling includes blockchain explorers, blockchain APIs, and light wallets.
CoZ is well known in the community and have often even acted as the mouthpiece of NEO’s team, publishing blog posts on NEO’s mission, vision, and roadmap.
GAS generation and US securities law
NEO holders earn GAS at a constant rate based on the amount of NEO owned. GAS generation is finite and gas rewards stop in a few years.
GAS rewards are essentially dividend payments for owning NEO. This is because GAS is generated at a predictable rate and NEO holders do not have to do any work to receive GAS. As such, NEO is easily classified as an equity security under securities laws in the US, South Korea, and certain EU countries. This makes it illegal for non-certified exchanges to trade NEO in these countries.
We see that Bittrex, which has disabled their NEO wallet for over a month now, is likely in the process of phasing out NEO trading as the US tax season approaches. Bithumb and Coinone, two of the largest South Korean exchanges, have refused to list NEO even with so much investor interest.
I write about this in further detail here.
Since the rebranding event in August and the launch of their smart contract 2.0 system, NEO has hosted quite a few ICOs. There are a little under 10 ICOs so far, not a breathtaking amount but still impressive. However, many have turned out to be questionable; dubious ideas, mysterious teams, and amateurishly run ICOs.
Red Pulse was the first ICO on NEO. The ICO started in August 15th and ended in October 8th. Red Pulse is an interesting project. The company provides paid research and news reports of Chinese markets to Western consumers. Users pay for their services in fiat.
So how does the Red Pulse token (RPX) factor into their system? From what I can gather reading their website, it seems like the Red Pulse token would be used as a means of payment to independent Red Pulse contributors… and that’s about it. The only reason any contributor would accept these payments is because the exuberant cryptocurrency markets right now has given it value. Otherwise, the value of the RPX token is really a one way street. Without market speculators, there is no demand side to this token, only a supply side.
I don’t think this is a sustainable economic model. Besides being a vehicle of speculation and a way for Red Pulse to fund their content, the RPX token has no utility. The RPX token market cap is currently at $150 million.
Aphelion was NEO’s second ever ICO. The ICO ended last year on December 8th. There were so many red flags the project and I was quite surprised NEO’s team and community managers failed to issue any warnings about it. Here’s a very good explanation from NEO’s subreddit on why the project is a scam: https://www.reddit.com/r/NEO/comments/7c35ks/aphelion_is_probably_a_money_dump/.
DeepBrain is a Chinese AI company. They concluded their ICO last year on December 15th. The company develops AI software and plans to build a decentralized AI computing platform with the DBC token as a means of payment. Users that want to access the computational power of the platform will pay in DBC tokens, and the users that operate “mining nodes” providing computational power are paid in DBC.
Combining Artificial Intelligence and blockchain technology sounds exciting but is it practical? Take a look at this post by a Harvard postdoctoral researcher who works on neural networks. The researcher believes that DeepBrain Chain is impractical and will very likely turn out to be vaporware.
TheKey is a company aiming to build an identity verification system on NEO. It’s essentially NEO’s equivalent of Ethereum’s Civic project. TheKey’s ICO ended recently on January 15th.
I’ve heard from many accounts that TheKey’s ICO was a disaster. One author went so far as to dub it the “worst ICO of 2018”. In the hours leading up to the start of the ICO, the website was slow and often failed to load. The ICO’s Telegram group was filled with scams, porn, and shit posts with zero moderation. The team also whitelisted 40,000 people for the ICO, yet was only going to accept 10,000 NEO (NEO is indivisable so at most 10,000 people will get their orders filled). This needlessly overloaded the ICO. To make matters worse, the team significantly raised the price RIGHT BEFORE THE SALE STARTED. Finally, when you thought it couldn’t get any worse, it does. Apparently, any extra NEO sent to the crowdsale past the 10,000 NEO hard cap would be kept by the team in order for them to perform an audit of the sale. Seriously? This not only locks up the capital of investors who failed to participate in the ICO, it’s also robbing investors of GAS dividends.
Also, why would an audit of the sale even require the withholding of the extra NEO. The team shouldn’t accept any NEO past the 10,000 NEO hard cap in the first place.
This highly amateurish and borderline scammy administration of the ICO is not the project’s only red flag. Check out ConcourseQ’s page on TheKey.VIP where they have listed numerous other red flags.
Posts on NEO’s main subreddit (/r/neo) that questioned the legitimacy of TheKey.VIP were all removed by the subreddit’s admins:
Trinity aims to build state channels on NEO, similar to what Raiden is doing on Ethereum. Its ICO ended on January 14th. I have my doubts on whether state channels have utility in a dBFT blockchain that is already incredibly fast but sure, let’s bring state channels to everything I guess.
The Trinity ICO exhibits a couple red flags. First of all, they were caught copying source material from the Raiden Network (source). Second, they somehow allowed people to continue sending them NEO even after the ICO hard cap was reached (source).
NEO is a blockchain project that appears to have tremendous potential. A nascent smart contracts platform that is already hosting a wide array of ICOs, a strong third party developer community in the form of the City of Zion, and a fervent fanbase. Taking all these attributes at face value, one could easily believe that NEO is set to dominate 2018.
However, things are not what they seem; there is a lot of misinformation surrounding the project and there are many NEO investors that do not understand what they’re investing in. I hope that by compiling my research into an article, I can clear up this misinformation and help people make their own informed judgement on NEO.