Tokens on the blockchain protocol neo may be indivisible – but it’s becoming apparent that its community is not.
Perhaps ironically, it’s the very notion of indivisibility that has proved contentious to the coin’s investors and users in recent weeks. More specifically, a Github proposal to change the structure of the NEO token – one of two tokens native to the network (GAS is the second) – has the project’s token holders up in arms.
Authored by neo co-founder Erik Zhang, the post ideates a new economic model for the upcoming version (3.0) of the neo software, one the developer team hopes will better incentivize active participation in the network, but that will also see the NEO token become divisible.
It’s the latter change that has many network stakeholders in a frenzy.
One Discord user described the idea of making NEO divisible as “just plain dumb,” while others worried about its potential impact on NEO and GAS prices, saying:
“Divisible NEO is big BS, I would never vote for that. Price will go to trash if they do that.”
But Da Hongfei, another co-founder of neo, said the proposal illustrates a system that can overcome the “technical constraints” of the blockchain, like slow transaction speeds, while setting the stage for loftier goals, like the decentralization of the network’s governance process.
Previously called Antshares, neo was founded in 2014 with the goal of creating an enterprise-grade blockchain designed for digital assets, identity and smart contracts. After raising more than $3.7 million during an initial coin offering (ICO) and launching its live blockchain, or mainnet, in 2016, the project has scored significant interest, even being referred to as “China’s ethereum” at points.
As of today, however, it’s established a name for itself, and its tokens are valued at over $2 billion. Nonetheless, the co-founders believe the architecture of the network needs to be reworked.
According to Hongfei, the NEO token is currently indivisible for technical reasons that relate to its twin token model.
“NEO is kind of like the stake of the network; GAS is designed as a utility,” he told CoinDesk.
In practice, this means token holders use NEO to do things like voting for the network nodes that produce blocks and validate transactions as part of the project’s delegated byzantine fault tolerant (dBFT) consensus mechanism. GAS, on the other hand, is used to pay for the execution of services on the platform, such as smart contracts.
Every time GAS is consumed on the platform, it is redistributed to all token holders. Because GAS is currently redistributed to all token holders proportionally to their NEO holding ratio, Hongfei says NEO cannot be divisible.
But this mass redistribution scheme is one thing the team behind the project would like to adjust when it next upgrades the protocol.
While reconfiguring the platform’s economic model could be overlooked as mere technical minutia, it has become a flashpoint for other issues within the neo ecosystem – namely the platform’s ongoing challenge with maintaining investor trust and its founders’ promise to relinquish at least some of its power to token holders.
Empty polls and blackholes
According to Hongfei, restructuring neo’s incentives system would tackle two hazards posed by the existing model.
For one, the current scheme does not incentivize inactive participants on the network (namely, those that do not vote in node elections) to become active. These users receive valuable GAS regardless of whether they vote or not.
And that could throw a wrench in the project’s plan to “decentralize,” which is dependent on users partaking in governance, Hongfei said.
“We need incentives for NEO token holders to vote for neo consensus nodes,” he said.
The second hazard is more theoretical and involves what neo calls “blackhole addresses,” or wallets to which owners have lost their private keys.
Hongfei explained that it is possible that “GAS will gradually be redistributed to those blackhole addresses and theoretically if the time is infinite, it is possible that all gas or almost all gas will go to that address.”
In the model proposed for neo 3.0, GAS would be sent to a pool instead of being immediately redistributed to all token holders. Once in the pool, GAS would be distributed over time exclusively to token holders that partake in voting for consensus nodes.
The new distribution method would also remove the technical barrier that requires NEO to be indivisible, Hongfei continued.
Unhappy investors
One possible outcome of making the token divisible is that it could become more accessible to investors in the event of a price increase.
However, the prospect of such a significant change to the project’s economic model has left the neo community disgruntled. And even Hongfei isn’t convinced that changing NEO’s design is a good idea.
“My personal opinion is [for NEO] to remain indivisible,” he said. “The price of one NEO token is about $30, that’s not really a lot of money. I don’t think people really need to vote like a fraction of $30.”
Despite the impact the proposal could have on investors’ token holdings, their capacity to influence the design of neo 3.0 is limited. While Hongfei said that plans to alter the platform are still “under discussion, nothing is all set,” neo does not intend to allow token holders to vote on the proposed changes.
“Currently the official channel is to discuss it on Github and many developers [and] users are posting their opinions of 3.0 and everyone is listening to that,” he told CoinDesk.
But in the end, only five core developers (one of which is Erik Zhang) will decide what neo 3.0 looks like.
And according to Hongfei, that’s because it’s the developers who understand all the technical nuances of the blockchain.
“Voting is a quite tricky system. If you ask people to vote on things they don’t understand, the result won’t be good,” Hongfei told CoinDesk. “Blockchain is a system that involves a lot of value; we don’t want to make it too complicated. Complicated software will usually have complicated security issues.”
But the community seems to disagree, as one Discord user wrote:
“If there is to be voting in neo, wouldn’t voting on something as substantial as making NEO divisible make sense? Why don’t they create a voting contract to allow people to vote on it? Otherwise, it’s just a totalitarian decision anyway, and anything that follows is suspect.”
Waiting on decentralization
The revelation that neo will exclude token holders from this process is likely to raise eyebrows, particularly because the platform recently came under fire for another decision executed with limited community input.
The team claimed it had “elected” the first privately-held consensus node to the network several weeks ago. But in practice this meant that the Neo Foundation, which is comprised of Hongfei and Zhang, voted for one candidate – neo-funded developer collective City of Zion (CoZ).
Nonetheless, the foundation claimed that the event was a step toward gradually handing over power to token holders, and continues to maintain that the process was an election. And that’s because, Hongfei claims, token holders could have voted in the election, theoretically.
“Currently in neo’s client or node software people can vote as they wish. But there are really very few people that know how to do it,” he said, adding: “We didn’t advertise it.”
He also argued that token holders could have campaigned to be consensus nodes, or at least, “it’s almost possible now.”
But according to Hongfei, the current consolidation of power within the platform is all part of the plan.
“We don’t think we can be decentralized at this early stage,” he said.
The development of neo 3.0 is expected to take at least a year. In the meantime, neo is expected to elect other privately operated consensus nodes, with Dutch telecommunications company KPN projected to be the next candidate.
Speaking to the network’s planned decentralization, Hongfei said that it will come “after a few years when the protocol is more stable.”
However, what that means is anyone’s guess, as Hongfei continued:
“We don’t have like a technical definition of stable, but what we are sure of is currently it’s not.”
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