EOS: The Centralized Decentralized Network
Dec 07, 2018
EOS is a decentralized network whose underlying EOS (EOS) token is the world’s eighth-largest cryptocurrency by market capitalization. EOS is exceptionally young compared to other major cryptocurrencies as its network only officially launched on June 9th, 2018 after a year-long token sale and the launch of its testnet on November 29th, 2017. More facets than one drive EOS’ unique reputation in the cryptocurrency industry; among them are its initial fundraising process, network-specific features, and controversial consensus protocol.
Perhaps the most unique part of EOS’ history is its launch, which began on June 26th, 2017 when parent company Block.one announced a 355-day long Initial Coin Offering (ICO) for the EOS token. Block.one kicked off the fundraising efforts by hosting an initial five-day long crowd sale of EOS tokens that raised USD$185 million -- at this time, Block.one had yet to write a single line of EOS code! Following the five-day long crowd sale, Block.one hosted daily EOS auctions lasting 23 hours, where blocks of 2 million tokens were auctioned off each day. Each daily auction’s token sale price was determined by the highest bid for EOS tokens in that auction, which set the price for the entire block of EOS tokens. By the end of the 355-day period, Block.one raised more than USD$4 billion. Block.one pledged to invest at least USD$1 billion of funds received into startups that are building projects on the EOS network.
A few different network-specific features of EOS drove Block.one to raise USD$185 million of funding over five days without releasing a single line of code. The EOS network was built to facilitate the adoption of industrial-scale applications through the elimination of transaction fees and capabilities to scale to millions of transactions per second. EOS developers, including founder Dan Larimer, believe that zero-fee transactions are integral to facilitating the wide-scale adoption of cryptocurrencies. “If you went to Amazon, and it cost you three cents to load the page, you would never load the page,” EOS developers explain. In order to eliminate transaction fees, however, the transaction confirmation process must be scalable. While EOS’s delegated proof-of-stake (DPoS) protocol does just that by enabling the network to process potentially millions of transactions per second, it does not come without sacrificing core values at the heart of the cryptocurrency industry.
EOS and Delegated Proof-of-Stake
Delegated proof-of-stake is a consensus protocol method invented by EOS founder Dan Larimer. At its core, DPoS is an extremely efficient consensus protocol that leverages a democratic governance structure to enable a capability to process millions of transactions per second. Prior to its implementation on the EOS network, Larimer utilized DPoS in Bitshare, a cryptocurrency exchange venture by Larimer prior to his involvement in EOS. Larimer founded DPoS because he foresaw what many others did not: as cryptocurrency mining gained mainstream traction, Larimer believed that consolidation would begin to occur, effectively pushing out smaller miners. Today, we know Larimer’s prediction was correct, evident by cryptocurrency mining pools’ dominance in the most profitable cryptocurrencies to mine. So, what exactly was Larimer’s solution to avoid centralization in cryptocurrency mining?
Delegated proof-of-stake is essentially democratized cryptocurrency mining that is governed by smart contracts. In a delegated proof-of-stake network, a specified number of ‘representatives’ are elected by the holders of a network’s underlying token. After being elected, these ‘representatives’ are granted the privilege to validate transactions and form consensus with each other and are paid through the system for their efforts.
On the EOS network, 21 ‘representatives’, called Block Producers, are tasked with validating all EOS transactions, and are rewarded well for their efforts. On average, EOS Block Producers receive the equivalent of USD$1.64 million/year of EOS tokens in block rewards. EOS Block Producers are rewarded through a pre-determined 5% annual inflation rate of the EOS token: 1% of new EOS minted are used to pay Block Producers while the remaining 4% are placed in a savings wallet, which will be allocated for improvements to the EOS network by a yet-to-be-implemented worker proposal system.
In EOS Block Producer elections, all token holders are allowed to vote for up to 30 different candidates. In order to vote, token holders must ‘stake’ their EOS tokens, which effectively prevents holders from transacting with their EOS tokens until they remove the stake (upon ending their stake, EOS tokens are locked for an additional 4 days). EOS elections are ongoing with results being recalculated roughly every 2 minutes. In addition to the privilege of validating transactions on the EOS network, EOS Block Producers have the authority to vote on and institute protocol changes on the EOS network if consensus is achieved.
At first glance, the EOS network’s delegated proof-of-stake consensus protocol sounds like a great system. With an ability to process millions of transactions per second, the EOS network maintains by far the highest network capacity among major cryptocurrencies. Additionally, the EOS network’s delegated proof-of-stake system prevents the formation of mining pools and leaves all token holders with a voice. Meanwhile, the EOS network achieves all of these feats while maintaining zero transaction fees. While delegated proof-of-stake appears to be a strong system that benefits token holders while maintaining the integrity of a network’s validation process, one fact remains: by implementing delegated proof-of-stake on the EOS network, Larimer prevented centralization of its mining community only by introducing centralization into its mining community.
EOS and its Affinity to Centralization
Plain and simple, delegated proof-of-stake introduces every problem associated with centralization into the EOS network, and then some. After their initial election, Block Producers have every reason to want to stay in power – an annual reward of USD$1.64 million for simply validating transactions is more than enough incentive to want to keep their position. This, paired with the fact that Block Producers know exactly who each other are, creates a problem in delegated proof-of-stake.
As previously said, Block Producers will likely do everything in their power to maintain their positions on the EOS network after initially being elected. In order to keep their positions, Block Producers must consistently receive votes and continuously hold a top 21 spot for votes received. To receive votes, Block Producers will align themselves with the largest holders of EOS tokens, many of which are Block Producers. To guarantee their positions, Block Producers will work with each other and form alliances to vote for themselves. Once alliances are formed, it will be extremely difficult for these Block Producers to lose power. This exact situation occurred in Lisk (LSK), a top 40 cryptocurrency by market capitalization that uses a system similar to delegated proof-of-stake.
The formation of Block Producer alliances would introduce a slew of problems on the EOS network. If able to achieve consensus, Block Producer alliances would be able to institute changes on the EOS network that sacrifices its integrity or censor the network. Imagine a cartel-like system where, in order to transact on the EOS network, users must first pay a fee to these alliances, otherwise they would not process your transaction. Another possibility is that Block Producers could institute network changes without explanation; a happening that, on a certain level, has already occurred on the EOS network.
The first product of EOS’ flawed delegated proof-of-stake system occurred on June 22nd, 2018, just weeks after the EOS network officially went live. Shortly after the EOS network officially went live, Block Producers formed the EOS Core Arbitration Forum (ECAF), a sort of judicial branch of the EOS network. On June 22nd, the ECAF issued an, “ECAF Emergency Measure of Protection Order,” ordering all Block Producers to freeze 27 accounts on the EOS network. The order, which leaked to the public, read, “The logic and reasoning for this order will be posted at a later date,” and was followed by Block Producers without question. This occurrence is the epitome of censorship and is the reason cryptocurrencies were created and popularized in the first place.
Another event highlighting the flaws in the EOS network occurred on November 12th, 2018 when an EOS network moderator reversed previously-confirmed transactions on the EOS blockchain. After a user’s account was hacked via a phishing scam, the hacker conducted transactions unbeknownst to the user. The user then contacted an EOS network arbitrator, who promptly reversed the malicious transactions. Although the EOS arbitrator may have been good intentions by reversing the transactions, it highlighted that the EOS blockchain is not immutable, a core value of cryptocurrencies.
Most recently, on December 3rd, 2018, EOS came under fire again after one of its 21 Block Producers, Starteos, published a post on Medium offering a financial incentive for voting it as a proxy. Starteos advertised that, upon delegating it as a proxy, users can get, “continuous and stable EOS revenue.” While Starteos phrased the scheme as a simple reward for token holders, it is nothing more than an attempt at paying for votes.
EOS developer and parent company Block.one have not remained silent amid criticisms of its network. On October 3rd, 2018, Daniel Larimer appeared in YouTube series, “Colin Talks Crypto,” and outright said, “Decentralization isn’t what we’re after,” adding, “What we’re after is anti-censorship and robustness against being shut down.” Earlier, on October 1st, 2018, Block.one CEO Brendan Blumer published an official statement on the company’s blog. In the statement, Blumer vowed that Block.one would use the tokens received from EOS’ ICO to prevent voting cartels on the EOS network, similar to what happened on the Lisk network.
EOS is a promising and robust network whose reputation is bolstered by its year-long USD$4 billion fundraising round, which is still the largest in the history digital assets; but can we classify EOS as a cryptocurrency? Two values live at the core of any cryptocurrency; decentralization to prevent censorship, and a public, immutable blockchain to create trust on the network. EOS does neither. As discussed, EOS is not designed to facilitate a decentralized network nor is its blockchain immutable. This is not to say that EOS does not have a promising future, rather, it just simply does not align its goals with those of the broader cryptocurrency industry. If you disagree, look no further than EOS creator Daniel Larimer, who wrote on social media prior to the launch of EOS, “Crypto people will hate it.”