There’s a new crypto platform on the scene and it’s a blockbuster.
Meet NEO.
Dubbed the “Ethereum of China” it’s up over 400% in the last week alone. It rocketed into the top five of coin market caps, blowing past the veteran Litecoin.
Investors are in love. The news media too. A frenzy of stories in the pop press covered its meteoric rise. The Huff Post gushed “Can NEO Become the Biggest Crypto in the World?”
When you show up in the Huff Post as a crypto, its safe to say you’ve broken through. They’re not exactly ground zero for coin coverage.
But is NEO the platform we’ve been waiting for? Will it alter the global financial landscape and remake the Matrix forever?
I dug into the company’s background, website and white paper to find out.
Marketing Blitz
What set NEO’s coin on fire across the trading exchanges?
Turns out it was a clever marketing blitz.
NEO isn’t actually new. It’s been around since 2014, with the unfortunate name “Antshares.” Since nobody likes bugs (except me), they wisely changed that terrible name to a flurry of fanfare at the Microsoft headquarters in Beijing.
And yes, they picked the name for its reference to the Matrix and because it means “new, young” in Greek.
So what exactly do they do? Did they build the world’s greatest iPhone app in a bid for blockchain’s Mozilla moment? Do they have a fantastic new cryptocurrency?
Not exactly.
In fact, they use a really old basket of currencies. It’s call fiat.
From their whitepaper: “NEO will use fiat as its internal currency.”
Yeah, I’m talking about dollars, yuan, yen, etc.
What the heck is going on here? Turns out a lot. That’s the first of many surprises in their whitepaper, some good, some not so good.
The Centralized Decentralized Blockchain?
NEO takes a very different approach to blockchain, one that some people will love and others will absolutely hate.
The first is that it doesn’t really have a crypto coin. They strive to be a bridge to the old financial system, with smart contracts, certificates, identity and legal compliance.
So what’s the coin that’s trading on the exchanges that’s making everyone so much money?
That’s the NEO coin, but it’s not the engine that makes their blockchain go, in the way that Ethereum powers the Ethereum network. Instead, the NEO coin is basically a traditional security. It acts like shares in the company that runs the platform. Many of the NEO coins were sold in an earlier ICO and given to early contributors. The rest are held by the company itself, as many or more than 50%:
“The remaining 50% of the NEO shares held by the NEO team, will be in the NEO net after the use of NEO smart contract locked for 1 year. 1-year lock-up period, this part of the NEO will be used to maintain the long-term development of Neo.”
They even call them “shares” just like a traditionally traded security.
That’s about as close to a perfect fit for the Howey Test as I’ve ever seen. But of course, it’s a Chinese company so not subject to the SEC’s rule sets.
Like Ethereum, they do use “gas” to run the platform, but it’s fiat that buys gas to execute smart contracts. They’re focused on the classic idea that money needs to be a “stable store of value.” That’s the phrase that centrist, big government, bureaucracy loving economists like Paul Krugman are always going on about to discredit Bitcoin and other cryptos: “It’s not a stable store of value.” Bitcoin and other currencies fluctuate wildly.
NEO’s solution to the problem is simple. Don’t use crypto. Just use fiat.
Bam!
They created a stable store of value by leveraging one that already exists (fiat) and bridged the old and new financial system in a single shot. Using fiat allows traditional financial powerhouses to use the revolutionary new technology of smart contracts, a technology that’s poised to change how we do business all across the world.
But what is a smart contract really?
It’s “code as law.”
Basically it’s a legal document executed as a program. Now you may think it’s impossible to make legal documents into code considering that some of the bills that come out of Congress are the size of War and Peace, The Lord of the Rings and The Song of Ice and Fire combined. But really if you think about it, law documents look a lot like code already. They have “if/then” statements, loops and variables.
When I used to run my own company I had to deal with contracts and a lot of legal fees. But after watching my lawyer download a template from a legal repository, fill in the blanks and change a few lines I thought, “I can do that too.” Long before I ever heard of a smart contract my engineer’s brain said “that looks like code.” Those fill in the blanks are variables. XYZ Holdings (“Owner”). Owner is then substituted for XYZ Holdings in the rest of the document.
A contract is really just a bunch of conditionals. If this happens, then this happens. If so and so is with the company for three years, he or she gets this many shares. If someone violates this provision, this is the penalty.
So it’s really no surprise that legal frameworks are turning into actual code. Smart contracts are still somewhat primitive but they’ll explode in complexity and utility in the coming years.
Imagine a smart contract that acts as a last will and testament. The coins are self-escrowed in the blockchain and then released at timed intervals to a person’s beneficiaries. My mother has a provision in her will that if I want to take out a big chunk of money, my sister and I both have to agree. Mom thinks my sister or me will run off and buy something crazy without that check on our diabolical power. Geez. Thanks, mom. Way to trust your kids!
With a regular paper contract my sister and I could game the system. We might get together and pay the lawyer overseeing the will payouts to look the other way on that provision so we could take out money whenever we wanted. But a smart contract stops that from happening. My sister and I would hold the private keys and we’d both have to turn them at once to release the cash.
Contracts like this will become standard in a few years and by the time I’m old enough to kick the bucket a paper will and testament will look like a rotary phone.
NEO is looking to level up smart contracts to reduce and replace complex contracts across the business world. They want to make tracking property, like supply chain assets easy and automatic. In fact, blockchains are a better way to track everything from pork chops, to bonds, and peanut butter. That’s why the Nasdaq is spending so much money on blockchain and why Delaware, the center of the US business world, passed progressive blockchain legislation.
In essence, NEO wants to dominate the electronic contract of tomorrow. They hope that by innovating hard in this area, they can make it easier for today’s companies to do business on the blockchain.
That’s a smart play.
For everyone who thinks that cryptocurrency is a bunch of Tulip crazed madness, like this idiot and this idiot, I’m sorry but you’re dead wrong. You don’t understand that it’s not just Internet nerd money, it’s a whole new wave of financial technology.
Oh and I’ll put my prediction track record up against anyone’s any day of the week. I’ve been getting paid to predict the future for two decades, as an engineer and sci-fi writer.
As a systems architect I’ve helped companies spot trends years in advance. I evangelized Docker containers, deep learning and a software consumption model before most people had any idea about them. As a kid, when my recruiters were telling me to spend all my time learning Solaris I told them to go jump in a lake while I boned up on this new thing called Linux. I pitched an artificial intelligence card in 2004, about a decade before Nvidia started working on it.
NEO: The Good, The Bad and the Ugly
But it’s not all roses with NEO. There’s some stuff I don’t love in the white paper as well.
Beyond smart contracts, they’re looking to unite two competing philosophies in the blockchain universe: on-chain and off-chain transactions.
An on-chain transaction is how most money moves in cryptocurrencies today, like Bitcoin and Ethereum. When I send Bitcoin to someone, it broadcasts to the whole network. Miners verify the transaction and once they’re sure I haven’t tried to double spend my coins somewhere, they enshrine it in a block. But on-chain transactions have some serious bottlenecks, as the near constant scaling debate about Bitcoin’s 1 MB block limit demonstrate.
Off-chain solutions like the Lightening Network propose to dramatically speed up transfers by doing most transactions off the chain and flushing the bundled result of lots of little transactions to the main chain only after a set period of time or in the event of a dispute. That makes the public blockchain the ultimate arbiter of disputes but the off-chain system where most of the day to day action happens.
NEO combines the two concepts into a single platform. They call it a “joint accounting” model. Businesses can conduct transactions off the primary chain, with their own verification methods and then push them to the main chain. This is in sharp contrast to how other platforms, like Ripple and Bitshares, deal with asset transfers.
From the white paper:
“Ripple, BitShares, NXT, etc all are blockchains of decentralized functionality but without layered design.The blockchain itself acts as the ledger and transaction matcher. In such a blockchain, pending orders, withdraw orders, matching and other operations are recorded on the blockchain.”
“Although NEO support the exchange of assets on the chain, the blockchain itself does not provide order book and order matching functionality…through a mechanism called ‘superconducting.’
Under the superconducting transaction, the two parties do not need to host the property to an intermediary (traditional exchange). Users only need send to the exchange an order signed with their private keys. After the exchange matches the buyer and seller orders and broadcast transactions is the transaction complete. From beginning to end, property does not leave the user’s control, putting an end to the traditional moral hazard. Exchange under the superconducting trading mechanism only plays the role of information matching.”
On the surface this looks awesome. Businesses can use their own rules to transfer assets. They can even record the result of traditional financial payments and transfers, like using a credit card to buy some screws for a factory. They can then push the result of the sale to the main chain.
Unfortunately, that opens the door to all kinds of fraud. With users and/or companies in complete control of trades on their private chains, they can easily double up orders and screw with the system. The white paper proposes to deal with that by an “exchange blacklisting the user as a way of punishment and deterrence.”
I’m not sure it will be enough. NEO will have a lot of early challenges to overcome with that system. Not saying that can’t do it, but they’ve opened Pandora’s Box.
Legacies Last a Long Time
The other thing I don’t love about NEO is the use of centralized certificates to act as IDs on the network.
“Individual users and organizations can be certified by the government-authorized CA certification body. The equity registration on the chain chain is electronically signed by a company certified by real name. The transfer and trading of the shares are made by the assignor, the assignee and the company. Before the signing of the three parties, the Company has the obligation to ensure that the transfer and transaction of the shares are in line with the provisions of the Company Law, which are required to obtain the original consent of the original shareholders, the original shareholders’ right of subscription and the limitation of the number of shareholders. The nature of the equity transfer and the transaction is an electronic contract in which the parties are engaged in electronic signatures.”
On the surface this is another fantastic idea. By allowing companies to certify their assets, they can do things like issue shares for their company with complete control while easily complying with existing KYC (“Know Your Customer”) laws and anti-money laundering laws. That’s a good thing.
It also leverages a system we’ve had in place for a long time, central certificate authorities.
The problem is that centralized certificates are not all that trustworthy. They’ve conspired to spy on everyone, issued bogus certificates and gotten hacked. We need a web of trust to really make certificates robust and resilient to attack.
To their credit, NEO recognizes this challenge. They plan to “use the blockchain to maintain the certificate revocation list and gradually form a set of digital certificate systems and identity authentication schemes based on blockchain technology.”
But legacy technology tends to hang around a lot longer than their designers hoped. Just ask Microsoft. Decisions they’ve made have haunted them for decades. We still have a programs (x86) directory (even though most people haven’t used anything but 64-bit processors in years) and a bloated binary registry. Instead of ensuring that users ran with few privileges on the operating system, they let everyone run as administrator and then tried to retrofit security on top of it. It didn’t work. That’s why Windows is still a magnet for all manner of viruses and other malignant fauna.
Even if NEO manages to phase out centrally issued certificates they’ll have to support them for years and years and years, as all the old contracts issued with them will still need to execute.
Even worse, by choosing fiat as the primary currency, private chains to verify transactions/prevent fraud and centrally controlled digital certificate authorities for ID, the NEO platform has made an awful lot of compromises to centralization. Call it centralization with decentralized characteristics. It’s not hard to imagine a system where the blockchain is nothing but a database for the current financial system, which is riddled with waste, fraud and massive compliance costs. Instead of uniting the world and locking in open with a decentralized Internet, they may end up locking in the Balkanization of the web and ushering in the splinternet even faster.
That kind of sucks. Blockchain tech offers us a way to upgrade the world’s financial and trust systems, not just graft old problems onto the new system while we slap a fresh coat of paint on it.
I’m probably being overly harsh here. NEO clearly has a smart group of people behind it.
To be clear: I love so much about what they’re doing.
They didn’t just do a rebrand, they completely revamped their philosophy and architecture for the modern realities of today’s financial world. While Ethereum and others are firmly fixed on revolutionizing finance, they’re focused on iteration and evolution.
In almost every respect they’re absolutely achieving what they set out to achieve, which is to “build a financial system that can bridge the gap to real world assets.”
They’ve cleverly found a way to mash up future technology with legacy systems into an elegant hybrid system.
In the long run, it may not be the system we need to change the world.
But it might just be the system we need right now.
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NOTE: NEO changed their white paper about three days after I posted this, so many of the quotes are now gone. The original link was broken. I have updated the link to the new white paper. The references to fiat are gone in the new paper, as are a few other things, but largely my analysis remains the same, based on my reading of the new paper. They just cleaned it up and made it more focused.
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If you love the crypto space as much as I do, come on over and join DecStack, the Virtual Co-Working Spot for CryptoCurrency and Decentralized App Projects, where you can rub elbows with multiple projects in the space. It’s totally free forever. Just come on in and socialize, work together, share code and ideas. Make your ideas better through feedback. Find new friends. Meet your new family.
If anybody from the NEO team wants to come and chat/debate with me or share with other projects, be sure to pop into DecStack.com. You’ll find dozens of projects there. We’re bigger than most project’s Slack now.
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A bit about me: I’m an author, engineer and serial entrepreneur. During the last two decades, I’ve covered a broad range of tech from Linux to virtualization and containers.
You can check out my latest novel,an epic Chinese sci-fi civil war saga where China throws off the chains of communism and becomes the world’s first direct democracy, running a highly advanced, artificially intelligent decentralized app platform with no leaders.