There are many blockchains in the world, each aiming to bring something different to the table. Currently dominating the “meta” are the smart contract-capable layer ones like Ethereum and Solana. These platforms are leveraging their smart contract capabilities to take finance on-chain and decentralize it. This is where DeFi has come from.
Then you have projects like Chainlink that have a different purpose at their forefront; using oracles to take off-chain data and bring it on-chain, something that will be key as blockchain becomes the focus of more of our everyday products.
Then we have projects like Stellar Lumens which aims to digitize different world assets and create a more thorough world on the blockchain, including property and commodities.
Each project has a clear primary objective that it works towards, and each has obstacles it needs to overcome to achieve its purpose. These goals are grand and obstacles difficult. For this reason, most projects have chosen to specialize and focus on tackling a single problem.
However, the focus of today’s simply explained has chosen to tackle all three of the missions covered above. The question is, is tackling multiple problems at the same time the clever thing to do, or, is the team biting off more than they can chew?
Neo was founded by Da Hongfei and Erik Zhang in 2014. At that time, it went by the name Antshares. It was updated to Neo in 2017. Neo is an ecosystem with the goal of becoming the foundation for Web 3.0 – a place where digitized payments, identities, and assets come together. Neo was China’s first-ever public blockchain.
This has led many to dub NEO the Chinese Ethereum.
The Neo Foundation, of which both Neo founders are chairmen, aims to create a community of developers who create new infrastructure for the network and lower barriers to entry. The team behind this project operates an initiative that’s used to incentivize people to build dApps on its platform.
To understand NEO, its goals, and how it works, it’s best to start with the basics. The foundation of NEO lies in its smart contract capability.
Smart contracts
Smart contracts are one of the most innovative mechanisms to come out of the 21st century. They are basically agreements that can be written in code and stored on the blockchain so they can be tracked and authenticated. Think of them as a regular legal contract, but instead of a lawyer verifying terms, the verifying is done by a computer.
Is Neo really the Chinese Ethereum?
Despite being dubbed the Chinese Ethereum by many in the cryptocurrency space, NEO has stressed that it is not a traditional smart contract blockchain. Instead, it’s marketed as a ‘smart economy blockchain’. This basically means that they offer more features than something like Ethereum. As well as their smart contract compatibility, NEO also services file storage, oracles, and digital identity solutions.
All of these solutions lead to the idea of digitising the world’s assets. The digitisation of assets is essential taking as much off-chain data and bringing it on-chain in the hopes of producing a more thorough representation of the real world.
Delegated Byzantine Fault Tolerance
Neo uses a consensus mechanism called Delegated Byzantine Fault Tolerance (dBFT) to secure its network. This name might seem intimidating, as it’s very different from the common proof of work and proof of stake mechanisms. So let’s break it down to understand how it works.
The name originates from “the Byzantine general’s problem”. In this problem, you have multiple generals that are looking to attack a city. In order to succeed, all generals must attack at the same time, if they don’t, they will fail. This doesn’t seem too difficult right? Surely if they all must tell the truth to win, it’s in their common interest, to tell the truth.
However, imagine these generals are all far away from each other and can’t communicate directly. Let’s say they have to use a messenger. The issue now becomes, what if the messenger has bad intentions and lies? That would be catastrophic.
This same issue is what we are facing when looking to secure the network.
So dBFT is a mechanism that allows us to fix this problem.
The consensus mechanism allows token holders to vote for the delegates who will process transactions. Think of these delegates as the generals. They are people we believe to be trustworthy.
This delegate is tasked with verifying the next block at random. Once done, it’s up to the other delegates in the network to deem the delegates’ work successful. Once 66% of delegates give their approval, the block is added to the chain.
This consensus mechanism possesses something called one block finality. This means that it can be confirmed that the funds received are yours after one block.
It’s believed that through this consensus mechanism, NEO is able to process thousands of transactions per second at an affordable price.
What is Neo N3?
NEO recently migrated to an entirely new blockchain. This new blockchain is called N3. It requires architecture updates and works slightly differently to the original NEO. These updates were not compatible with the original NEO and hence everything is being migrated over from NEO to N3.
A little fun fact to tell your friends. If you add up the total value of all the assets being migrated over to N3, it is the largest migration of assets to have taken place in human history.
Once complete both chains will still be operable, but the Neo foundation will only continue work on the N3 blockchain.
What upgrades is N3 bringing to the table?
N3 is bringing many upgrades to the table, however for expediency, let’s focus on a few of the most significant ones.
- Native oracles: an oracle is someone responsible for taking off-chain data and bringing it on-chain. Look at our explainer on Chainlink to better understand oracles.
- NEO File storage: similar to file storage services like Google Drive or Dropbox on Web 2., NEO is looking to offer this same service in a decentralized manner on Web 3. For more on file storage check out our explainer on Filecoin.
- NEO name service: NEO is giving users the ability to have human-readable names for their addresses. Instead of long strings of numbers and letters addresses will have easy to read names. This is similar to Ethereum’s ENS, or Tezos XTZ.
What are the NEO and GAS tokens?
NEO actually has two tokens. NEO and GAS. The purpose of having two tokens is to avoid congestion of the network and fluctuations in fees. This is similar to Vechain and its two tokens.
NEO is the utility token that is used for governance. GAS is used for transaction fees, it’s like the gas you would put into a car to help it run.
NEO = Governance
GAS = Transaction fees
You actually earn GAS simply by holding NEO in your wallet. This means NEO earns passive income simply by owning the token.
As of this writing, there is 70.5 million NEO in circulation, with a hard cap total supply of 100 million. NEO was not mined, instead, all 100 million tokens were generated when the blockchain launched. 50% went to supporters and 50% to the council which was locked.
GAS is generated whenever a new block is produced. The number of tokens created gradually reduces every year, and it’s estimated that it’ll take 22 years for the total supply of 100 million to enter circulation.
