Is EOS the iOS of Blockchain?

EOS Explained.

EOS is a smart contract platform for the development and launching of decentralized applications. The project aims to be completely decentralized in the future, with the ability to support industrial applications at higher speeds and no fees. You may have heard of EOS at some point over the last year, but were left to wonder, “What all the hype is about? How is it different from Ethereum? Why should I care?” Importantly, a few notable projects by highly respected blockchain founders have been moved to or built on the EOS chain, including Fred Krueger’s WorkCoin, Mahbod Moghadam’s Everipedia and Reeve Collins’ BlockV, garnering the case for EOS as the next prominent smart contract platform. We at Arca are building on both EOS and Ethereum.

Origins and ICO

If you have heard of EOS, it was probably from its massive and highly publicized Initial Coin Offering (or Token Distribution) that took place over the course of a year. The token sale used a unique fundraising method whereby, after an initial five-day sale, a set amount of tokens were sold every day over a 341-day period.

There was no minimum to participate and individuals received EOS tokens in proportion to their percentage contribution of the day’s total raise amount.

As tokens were exchange-traded immediately after the initial sale, the price that new tokens were sold at was theoretically close to what would be considered the “market price” on that day.

When the token sale finally concluded in June of this year, EOS had raised a whopping $4 billion, more than any other ICO. The sale was not available to US investors.

Raising such a large sum of money, utilizing the new and novel ICO method, garnered attention for EOS, though not all flattering. Unfortunately this story of a large fundraise, and whether it constituted a securities offering, has often overshadowed the importance of what EOS is attempting to accomplish for blockchain.

The EOS project is the brainchild of Brendan Blumer and Dan Larimer, respectively the CEO and CTO of software publishing business, block.one. Larimer is most well known for his work building other successful blockchains BitShares and Steemit. He also created the Delegated Proof of Stake Algorithm (DPOS) and Graphene technology, the blockchain technology powering BitShares and Steemit, and which later became the basis for EOS.

Larimer and Blumer designed the EOS platform to address the issues encountered by other public blockchains. As Bitcoin and Ethereum require a hard fork to upgrade their networks, decisions on how to scale and upgrade happen at a sluggish pace as the entire community must work towards consensus. Even worse, transaction fees and performance have dogged developers of other smart contract platforms. In contrast, EOS offers developers a scalable platform to build on with crucial governance, and economic policies, designed for long-term network stability and massive user adoption.

Breaking Down the Jargon

“EOSIO is software that introduces a blockchain architecture designed to enable vertical and horizontal scaling of decentralized applications (the “EOSIO Software”). This is achieved through an operating system-like construct upon which applications can be built. The software provides accounts, authentication, databases, asynchronous communication and the scheduling of applications across multiple CPU cores and/or clusters. “ – Answer to “What is EOSIO?” on eos.io

The best analogy to describe the EOS project is to liken it to Apple’s App Store: when Apple launched the App Store, they gave developers the ability to easily create and launch applications on Apple’s operating system. They could then list these applications on the store where they could be downloaded by Apple users, generating revenue from app purchases. EOS aims to create a “decentralized operating system,” in the form of their EOSIO software, offering ease of use for developers to create applications and programs for wide usage.

The best analogy to describe the #EOS project is to liken it to Apple’s App Store #Blockchain Click to Tweet

What sets EOS apart from prior blockchains is its consensus method and its economic model.

Delegated Proof of Stake (DPOS) is a system whereby participants use their tokens to vote on a group of nodes or “block producers” who will secure the network and process transactions. The voting system ensures that good actors remain employed and bad actors are removed. Since the processing of transactions and network security are delegated to a specific group, transactions are sped up.

Unlike other blockchains, where tokens are used to pay for transactions in a “rent” model, EOS tokens represent ownership of the network’s resources in an “own” model.

In rent model blockchains, like Ethereum and NEO, users buy tokens so they can pay for the gas to transact. In EOS, a user’s ownership of tokens represents what percentage of the network’s resources  (RAM/bandwidth, compute power, file storage) they control and can use. Dapp developers pay in EOS tokens for network access in order to set up and run their applications. They are then able to recoup their initial investment of EOS tokens by charging users through their Dapp. Denial of Service (DDOS) attacks are therefore solved as a malicious attacker would need to amass a majority percentage of tokens to control the network.

Since users are not charged fees on EOS, how are the block producers paid in exchange for securing the network?

The EOS token supply inflates at a rate of 5% per annum. Part of the token inflation is used to pay block producers thereby eliminating fees to the user.

An economic model like this is better for developers and the larger community; there are zero fees for users to transact (only when setting up an account), allowing Dapp developers to reap the largest rewards on EOS versus other platforms. This is one of the few reasons that EOS has become a popular platform among developers.

Why Developers Like EOS

The EOS platform was designed to address the scalability, flexibility, and usability issues encountered on Ethereum. As it stands today transactions are processed on Ethereum at a rate of 15 transactions per second. Such speed is impressive when compared to Bitcoin’s 10 minute block time; however, greater speeds are needed to run larger applications without crashing the entire network.

EOS is designed to process an unlimited number of transactions per second. Increased speeds are achieved through the DPOS model and by design features that include asynchronous communications, separate authentication from execution, and no count operations.

The DPOS model gives EOS flexibility in running applications; block producers can freeze the network or specific applications if a fix is needed. It is argued that the ability to freeze the network is vital to avoid a repeat of what happened when the DAO was hacked on Ethereum.


Finally, EOS was built with usability in mind.

What most people don’t realize about Ethereum, Bitcoin, and other platforms, is that although they are open source and designed for anyone to build on, they’re not actually that easy to build on.

Ethereum is ahead today due to its strong development community and development tools. However, EOS is quickly catching up; its speed and scalability are outweighing the benefits of Ethereum’s community.

Although Ethereum offers better development tools, the speed and latency experience for developers is beyond frustrating. These issues are solved on EOS without the need for second layer solutions.

What this looks like in practice, on Ethereum, an application can take 15 seconds to process a transaction (potentially longer depending on network bandwidth). Who would wait 15 seconds between placing additional bets in a gambling app or buying a sword for their character in a game? Long wait times do not make for a good user experience. In addition, fees are unnecessarily high as they are dictated by the network’s current bandwidth.

If a developer is choosing between platforms, the one that saves time and maximizes profits is the favorable choice. Interesting to note, research published by Satis Group in August 2018 supports greater adoption of EOS in the future, but likely will not surpass that of Ethereum.

Hiccups Along the Way

Like many new projects, EOS has its problems. The mainnet launch, in particular, was extremely shaky with multiple delays and key governance features such as the constitution and voting protocols missing.

The platform has received criticism for being too centralized. Voting on block producers is done on a 1:1 vote-to-token ratio, and therefore control of block producer selection is centralized with crypto “whales.” Larimer has publicly recognized these shortcomings, and is working to address them. 

In addition to the challenges with its governance, developers have also reported massive costs associated with building and launching on EOS.

RAM storage costs, which are conferred to developers, spiked recently as speculators and Hodlers drove up prices which massively increased costs to deploy new Dapps. Solutions such as increasing the amount of RAM provided for free have since been implemented.

EOS Performance YTD

Recent account and network hacks have also caused a stir amongst the community. A few days after the EOS mainnet launched seven accounts were reported stolen.

Block producers responded by freezing the accounts; however, it was without a directive from ECAF, the EOS arbitration body.

A few days later another 27 accounts were frozen over suspicion that they were spamming the network. The account suspension illustrated to many that EOS, unlike other blockchains, was not immutable and transactions could be reversed. Earlier this week, it was reported that two of EOS’s gambling Dapps were hacked resulting in $260,000 of stolen funds and a 13% dip in market value. Interestingly, this hack did not incite a rollback action from block producers.

Immutability and Next Gen Blockchains

Traditional blockchains were designed to be immutable and tamper resistant; a consequence of  the financial crisis and distrust of centralized authorities.

EOS’s ability to freeze and rollback transactions has shaken the community’s confidence and earned sharp criticism. However, as users lose more money each year to accident or theft the idea of immutability becomes less and less appealing.

As the next, more advanced generation of blockchains come to fruition we may see segmentation by use case. Immutability features are more important in sectors such as identity management, data, supply chains, and records. However, financial products need some modicum of mutability for investor confidence and protection. The possibility for rollbacks are dangerous, but potentially necessary as blockchains like EOS become part of the mainstream.

as users lose more money each year to accident or theft the idea of immutability becomes less and less appealing Click to Tweet

Of Note:

  • Ripple (XRP) had a breakout performance, rising +101% after news surfaced that Ripple is launching a new XRP-backed product later this year, and followed that up two days later with news that another top 10 bank, PNC, is the latest to adopt Ripple’s xCurrent system.
  • Tezos (XTZ) continues its slow march higher, rising 24% throughout the week after big gains the previous week, as anticipation grew surrounding its mainnet launch this week.
  • Bitcoin core developer Bryan Bishop, former Morgan Stanley MD Caitlin Long, and other prominent blockchain figures sent a letter to warn the SEC that enterprise adoption could actually corrupt some of bitcoin’s inherent benefits if not properly overseen.
  • Crypto prices dropped suddenly on Monday as money started moving out of a wallet containing 111,114 BTC ($720 million).
  • The NY Attorney General released a report as part of the “Virtual Markets Integrity Initiative”. The report is based on a questionnaire sent to Crypto Exchanges back in April covering topics such as ownership and control, AML, customer fraud and more.

 

Steven McClurg is a founding partner and CIO at Arca Funds, a full service asset management firm specializing in blockchain. Prior to Arca Funds, Mr. McClurg was a Managing Director and Portfolio Manager at Guggenheim Partners. Mr. McClurg holds an MBA and MS from Pepperdine University, where he has served as a guest lecturer.

Katie Talati is Head of Research and Portfolio at Arca Funds. Ms. Talati is responsible for all research initiatives at Arca Funds, which includes fundamental research in all varieties of cryptocurrencies, blockchain technologies, as well as broad consideration of macroeconomics and other investment vehicles. She is the first female executive investment professional for a major blockchain asset manager and is a prominent member of the Silicon Beach startup community and leader in the women in tech community. Ms. Talati holds a Series 7, 63, and 79 (she is currently not registered as a broker) and is a graduate of UCLA.


*Disclosure: Arca Funds is long EOS.

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