Putting EOS on Trial – An Analysis of Cryptocurrency’s Largest ICO
It’s been dubbed the “Ethereum killer,” a complete scam and everything in between.
Merely mentioning the name tends to evoke a strong reaction from most people in the blockchain community. Whether you’ve been following EOS from day one or are just tuning in, there’s a ton of information to process – some good and some bad, depending on who you talk to.
Well today, we’re putting EOS on trial. This article will analyze some of the top claims against the controversial DApp platform, giving equal weight to both sides. Then, as judge, jury, and executioner, we provide our verdict.
This article isn’t a guide. If you want to learn what the EOS project is all about, you should instead check out our EOS beginner’s guide.
If your typical Friday night consists of reruns of Law & Order SVU, hit the bathroom, grab some popcorn and get comfy. This is going to be a good one.
Without further ado, bring in the first case. *Insert Law & Order theme here*
Case #1: EOS is centralized.
1/ No coin is fully decentralized yet, but some, like bitcoin are “on the path to decentralization.” I was very bullish on EOS because I respect Dan Larimer and the team, however this is shameful. I am putting EOS in the same category as Ripple. https://t.co/ia9pYwlykC
— Charlie Shrem (@CharlieShrem) June 18, 2018
EOS uses a Delegated Proof-of-Stake (DPoS) consensus algorithm consisting of just 21 nodes (Block Producers) that create and validate blocks. When you compare this to Ethereum’s over 10,000 network nodes, there’s evident centralization.
The cryptocurrency community generally looks down upon centralization as it has the potential for a single majority to take hold and corrupt an ecosystem.
Dissecting the EOS voting mechanism furthers the argument of centralization. By staking your tokens, you can select up to 30 Block Producers to act as nodes. The 21 Block Producers with the most votes earn the right to validate blocks.
However, the more EOS you stake, the more powerful your vote becomes. Not only does this put more control into the hands of the few, but it could also have the detrimental impact of voter apathy. As smaller holders realize they have little to no voting power, they may become apathetic and refuse to vote at all, giving the wealthy even more control.
We’ve already seen this indifference start to unfold as the platform struggled to reach the 15% of votes needed to validate the chain. Even now, at the time of this writing, less than 30% of the network has voted.
EOS’s DPoS isn’t inherently a flawed system until you realize that just ten addresses hold about half of all tokens on the network. Yes, it’s likely that most of these are probably exchanges carrying large amounts for liquidity purposes. However, a conflict of interest arises if an exchange also wants to be a Block Producer (which is the case with Bitfinex).
There’s also the possibility that the Block Producers in power collude with each other, bribe voters, or both to keep their spots. Bribes don’t have to take the form of shady underground deals, either. A simple one could look like this:
“Vote for me as a Block Producer, and I’ll distribute 20% of the block rewards to my supporters.”
Nothing is stopping individual entities from having ownership in multiple Block Producers as well.
Instead of sacrificing decentralization for the sake of scalability, EOS should work on 2nd-layer solutions that overcome blockchain’s scalability trilemma. Some examples of these solutions are sharding, Ethereum’s Plasma and Raiden Network, and Bitcoin’s Lightning Network.
EOS may not be as decentralized as other cryptocurrencies. But it’s decentralized enough to be effective. Having 21 nodes is still substantially better than the one-party systems in place today.
Additionally, token holders still have a democratic voice on the network. Similar to political democracies, each holder votes on their representation. And they can easily vote out Block Producers that are acting against the will of the community.
Now, let’s address the possibility of collusion through ownership in multiple Block Producers.
According to the EOS Constitution, all Block Producers need to disclose any owners who hold at least 1% equity. Therefore, all voters can check to see if any person or entity has ownership in multiple Block Producers. If someone does, and the network participants feel as if there’s too much centralization, they’ll remove the Block Producer(s) and elect new ones.
There needs to be some sacrifice to decentralization to reach a level of scalability that can handle the real-world volume. EOS solves the scaling issues that Ethereum and other DApp platforms face.
VISA is capable of handling 24,000 transactions/second (TPS). Ethereum maxes out at 15 TPS. A single EOS blockchain currently supports 1,000 TPS with further growth on the horizon. No matter how you look at it, that’s a drastic improvement in efficiency over other alternatives.
The Verdict – Guilty
EOS is more centralized than similar platforms. That’s an objective fact. Whether or not that’s an issue remains to be seen, though.
Punishment: A slap on the wrists.
It’s interesting to note, though, that EOS creator Dan Larimer has publicly criticized delegate based voting models due to his experience at BitShares.
He notes, “One of the first things we learned from BitShares is that the vast majority (90%+) of stakeholders did not participate in voting. This is due to the fact that voting requires time, energy, and skills that most investors lack. How many people have the economic, technical, and entrepreneurial skills to vote responsibly?
In order to boost participation, BitShares 2.0 introduced proxy voting which centralized decision making into about a dozen elected proxies. Even with proxy voting, most people ultimately chose their preferred proxy along party/philosophical lines rather than considering individual proposals.”
If BitShares experienced apparent issues with DPoS, why repeat the same mistakes with EOS?
Having just launched, EOS shows no signs of centralized collusion. Although unconfirmed, it appears as if the Block Producers have already received an order to freeze 27 accounts in which “the logic and reasoning” behind the order will remain hidden until a later date.
The authorities in EOS just instructed the block producers to censor transactions from 27 accounts with no reasons given.
“the logic and reasoning for this order will be posted at a later date"
— Ferdous ฿hai (@ferdousbhai) June 22, 2018
That being said, second-layer scaling solutions on other platforms are still in the works, and it’s difficult to tell how successful those solutions will be. However, sacrificing decentralization in the name of scaling seems to go directly against blockchain’s foundational tenets: its promise to deliver open source operations and distributed governance.
Case #2: Dan Larimer is a scam artist.
If Bitshares removes its John Sculley, then it would be a hell of a lot of fun rebuilding the currency and getting to #2 on CoinMarketCap
— Charles Hoskinson (@IOHK_Charles) April 30, 2015
Dan Larimer has already created and left two blockchain projects, Steem and BitShares. Some people in the blockchain community claim that he spins up new projects with no long-term plan, makes his money, and then high-tails it, leaving the community to clean up his mess. Something akin to the fast-talking monorail salesman from The Simpsons.
Larimer’s second project, Steem, is also no stranger to controversy. Larimer and his team heavily mined STEEM tokens before releasing the platform to the public. At launch, the team already controlled around 80% of the total supply of tokens.
This distribution doesn’t paint Larimer kindly, as the original Bitcointalk announcement promoted the platform as having no pre-mine or ICO.
Steem and BitShares have a combined market cap of over $1bln. The Steemit platform has over 50,000 monthly active users, and BitShares still has an active user base even with Larimer leaving. It’s unlikely that these projects would still be around if a scam artist created them.
Serial entrepreneurs move from company to company all the time in the traditional start-up world. We should treat Larimer’s moves no differently. Switching to a new project after the successful launch of another doesn’t necessarily mean foul play is at hand.
Finally, let’s examine the Steem pre-mine controversy. We have to remember that blockchain projects are effectively start-ups. Even though they’re in this new industry, they experience the same challenges that new technology companies commonly face. Often, these challenges involve seed funding.
Blockchain projects are trapped in a funding paradox. According to FinCEN, mining your project’s coin is practically the only compliant way to source your initial funding other than working with accredited investors. However, opening up public mining before the launch of a platform has some drawbacks.
In doing so, you run the risk of having so many miners immediately on the network that you’re unable to mine enough cryptocurrency to fund the rest of the project. Additionally, announcing the platform before it’s available exposes you to the risk of copycats, looking to steal your idea and beat you to market.
The Verdict – Innocent
The claims against Larimer are overblown.
He seems to be the victim of his scattered mind, continuously attempting to solve problems that surface in the market.
Even if you don’t agree with his beliefs, Larimer has been instrumental in the development of blockchain technology. He invented the DPoS consensus mechanism and also participated in discussions with the Satoshi Nakamoto.
Case #3: The EOS ICO was fraudulent.
EOS held a year-long, uncapped ICO in which the project raised over $4 billion – without a working product. It was only recently that EOS switched from the Ethereum blockchain, a competitor, to its own chain.
There’s also some evidence that the team funneled part of their funding back into the ICO during this time to trick investors into thinking there was more demand than there was in actuality. This accusation is unconfirmed, though.
Chat logs from the Block Producer candidates have recently surfaced revealing a discussion about printing additional EOS to purchase the RAM needed for the launch. Although this isn’t necessarily fraudulent, it should raise red flags that the people in control of network decision-making are comfortable making such an important decision without at least polling the community.
The ICO format was to prevent centralization and provide a fair token distribution. With the recent wave of SEC subpoenas and arrests, it’s unlikely that foul play at the magnitude of EOS’s level would slip through the cracks.
We live in a nation of innocent until proven guilty, and right now, there’s not enough evidence for the conviction.
The Verdict – Insanity Plea
The EOS ICO was probably not fraudulent; however, it was incredibly negligent.
There aren’t many good reasons why a project should raise more than a few million dollars, let alone four billion, without a working product. It’s inevitable that a budget of that size will only lead to poor financial decisions as the project progresses. This isn’t a new story. It’s a common problem with overfunded startups.
And the EOS mainnet launch has been far from perfect.
Let’s look at the issues that have already surfaced.
Leading up to the June mainnet release, Chinese internet security company Qihoo 360 reported several high-risk vulnerabilities on the EOS network.
Although bugs are bound to surface in software, especially software as complicated as a blockchain ecosystem, it’s worrisome that a project with billions of dollars in funding couldn’t find these beforehand. The EOS team has since fixed the reported bugs.
Shortly after, EOS started a bug bounty program to catch any final flaws before launch. Within one week, a single hacker reported 12 critical vulnerabilities, earning $120,000.
Once again, you would expect a project with such a large budget to have these issues resolved well before a mainnet launch.
The project currently has over 500 issues open on Github, although this doesn’t necessarily mean there are that many problems in actuality. Bitcoin has about the same amount.
Case #4: The EOS Constitution is unethical.
In EOS a few complete strangers can freeze what users thought was their money. Under the EOS protocol you must trust a "constitutional" organization comprised of people you will likely never get to know. The EOS "constitution" is socially unscalable and a security hole. https://t.co/WusEqBMGBp
— Nick Szabo⚡️ (@NickSzabo4) June 19, 2018
EOS has a constitution that you must follow if you want to use the network. It’s one of the only blockchains to have one. Failure to support it may result in the invalidation of your transactions or the freezing of your funds. Some community members believe that having a constitution in and of itself is unethical for a blockchain.
But it’s more so the contents of the constitution that are pissing people off. Even blockchain pioneer Nick Szabo disagrees with many of the document’s terms. Here are just a couple of the ones that are causing the most uproar:
“This blockchain has no owners, managers or fiduciaries; therefore, no Member shall have beneficial interest in more than 10% of the SYS token supply.”
Coincidentally, this is the exact amount that Block.one owns. For those of you that don’t know, Block.one is the company that built EOS. It’s led by Brendan Blumer as CEO and Dan Larimer as CTO. Some argue that this is a blatant attempt to ensure that Block.one keeps substantial control of the network.
“Member shall be liable for losses caused by false or misleading attestations and shall forfeit any profit gained thereby.”
We can all agree that lying and perjury are terrible things, but this seems nearly impossible to enforce.
Once again, who acts as the judge when these cases appear (that is, when CoinCentral court is not in session)? Community members are also worried that this is a slippery slope that could lead to platform censorship.
“After 3 years of inactivity an account may be put up for auction and the proceeds distributed to all Members by removing EXAMPLE from circulation.”
Out of all the articles, this is the one causing the most discussion. In an industry that prides itself in HODLing and investing long-term, it’s ridiculous to include a constitutional article that directly penalizes that.
This seems like a clear overreach by the EOS leaders to keep control over the funds on the network. You should be free to do what you wish with your EOS tokens without fear of penalties.
“Each Member agrees that penalties for breach of contract may include, but are not limited to, fines, loss of account, and other restitution.”
Who decides what actions violate the Constitution? Many of the articles use relatively generic wording, so there needs to be a decision maker for activities that toe the line.
Additionally, the ability to freeze accounts and reverse transactions go against the open, immutable nature of blockchain technology.
It’s less than one week out of launch, and the EOS Block Producers have already frozen seven accounts. These seven accounts organized a phishing scam in which they tricked EOS members into sending them tokens. It may seem like the Block Producers have everyone’s best interest at heart. But this decision sets a precedent that gives an extreme amount of power to the 21 entities that control the network.
One of blockchain’s greatest strengths is the ability to have full control of your funds. EOS’s constitution acts directly against that.
A constitution is necessary for a blockchain like EOS to operate effectively. The articles outlined in the Constitution are like the Terms of Service required for other technical services. You can’t use an app like Facebook or Snapchat without agreeing to their terms.
According to Thomas Cox, the man behind the Constitution, these terms must include, at the very least, the following four principles:
- Agree to be truthful and to not profit by false or misleading statements, nor by withholding information the other party has a right to (no lying)
- Reciprocal recognition of the equal rights of other members to property ownership and honest communication (equal ownership rights)
- Non-initiation of force (no forceful taking of funds)
- Agree to submit to arbitration (cases for disputes)
These principles all seem like reasonable terms, and supporters argue that the EOS Constitution follows them.
Because scammers still run amuck in cryptocurrency, a constitution is necessary for a blockchain platform to survive. No one should have trouble following the rules laid out in the articles.
The Verdict –
Jury’s Still Out Guilty
Author’s note: The verdict was up in the air until the “frozen funds” fiasco. Opponents may argue that Ethereum did something similar with the DAO, but that was a decision that expanded far beyond 21 individuals. It was also a hack on a much larger scale and could’ve destroyed Ethereum from the start.
Punishment: Twenty-one strangers get to control the block rewards of the twenty-one Block Producers.
There’s a reason that EOS is one of the only blockchains with a constitution. You need a high level of centralization to enforce them, and that centralization can lead to corruption. Giving such a limited number of people the ability to freeze or redistribute funds is no better than current banking systems.
Blockchain was built on the principles of decentralized governance and complete fund control. EOS takes that away.
This trial only scratches the surface of the controversy surrounding EOS. Brock Pierce, potential hidden fees, poor voter turnout and unprofessional Block Producer meetings – the controversy never ends.
It’s difficult to say whether the EOS team has been intentionally fraudulent or if the project just spiraled out of control into the clusterf*ck that it is today. Either way, the project serves as an excellent example of how young the industry is and how willing people are to throw money at a grand idea of something revolutionary – even if that idea is something as controversial as EOS.
Author’s note: This article was intended to be a 2,000-word feature released to coincide with the EOS mainnet launch. Almost every time the article was ready for publication, new information about the project would surface.
I try to stay objective as possible and give both sides equal time. I hope you enjoyed reading this as much as I enjoyed writing it.
This article by Steven Buchko was originally published on CoinCentral.com, our media partner.
Steven is a managing editor at Coin Central and a blockchain investor. He’s also the co-founder of Coin Clear, a mobile app that automatically turns your daily spending habits into cryptocurrency investments.