Since moving to its own mainnet in June, EOS has been faced with near-constant negative headlines. These have mostly centered on controversies surrounding its Delegated Proof of Stake (DPoS) consensus model, with accusations of malicious or unethical behavior from Block Producers plaguing the platform since launch. The latest accusations have centered on vote buying from Block Producers, who it has been alleged are paying out a portion of their block rewards to users willing to vote for them. This follows accusations from Whiteblock in November that EOS isn’t truly a blockchain, and is instead a glorified cloud computing system.
These are just the latest examples of a seemingly endless stream of criticism to have come EOS’s way since August. But the platform still retains many supporters, who point to figures such as these from CoinMetrics which show EOS processing far more transactions than Bitcoin or Ethereum. EOS’s many critics have argued that these figures have been manipulated. Drive Insider’s analysis of the CoinMetrics figures points out EOS has an average transaction value of $29.43, which is far lower than the $811.76 average for Ethereum. Without context, it’s impossible to say what these figures prove. The lower transaction average may be a result of greater activity on EOS-based DApps; it could also be evidence of the transaction volume manipulation that EOS detractors have accused the platform’s supporters of.
EOS has been one of the most talked-about projects in the crypto space virtually since its inception. With an uncapped ICO, EOS managed to raise as much as $4 billion in Ethereum to fund the project. It has long been presented as an “Ethereum killer” a smart-contract platform that is better suited to the needs of business and enterprise than Ethereum. Critics say it does away with many of the most important features of cryptocurrencies such as Bitcoin and Ethereum, including decentralization and transaction immutability.
With 2018 drawing to a close, it’s likely the coming year will answer many of the questions that neutral observers have about EOS’s long-term viability. Heading into 2019, here are the biggest issues that EOS needs to address.
The On-Going Block Producer Drama
As we covered in a recent article, there is much debate about the ideal cryptocurrency consensus mechanism. Bitcoin’s Proof of Work (PoW) mining model sees new blocks produced by miners using computing power to solve complex mathematical problems. This has the advantage of ensuring a decentralized network, but it is also incredibly environmentally unfriendly, burning through as much energy as some developed countries. Ethereum is moving away from a pure PoW consensus mechanism and incorporating Proof of Stake (PoS), but this switch is probably still more than a year away.
EOS’s DPoS model sees token holders voting for Block Producers, who then receive rewards for verifying transactions in the same way that Bitcoin or Ethereum miners do. Given that Ethereum is moving to a similar consensus mechanism, this seems like a big advantage EOS currently offers over its main rival. However, the past few months have shown that Ethereum may be right in proceeding cautiously with the move to some form of PoS.
As reported by CryptoGlobe, EOS investor Maple Leaf Capital discovered evidence that suggested major Chinese crypto exchange Huobi was colluding with others to ensure they received enough votes to retain Block Producer status. CoinDesk has also reported of a divide between Western and Chinese Block Producers that makes achieving consensus and sharing information across EOS difficult, both due to language barriers and restricted access to Western communication networks such as Telegram within China.
Recent videos by popular YouTuber Tim Draper have alleged collusion and vote buying is widespread across the EOS network. While the initial video was intended to expose a problem, it seemed to have the opposite effect. In a follow-up, Draper suggested his video was responsible for EOS moving from 8th to 4th in cryptocurrency rankings by market cap, as buying votes with block rewards incentivizes holding EOS for low-level token holders. As a counterargument, Draper explains that this could produce a death spiral for the EOS ecosystem, with Block Producers competing to offer the largest share of their block rewards to buy votes, corroding the value of EOS tokens.
A Blockchain or a Centralized Cloud Computing Platform?
Whiteblock’s comprehensive 25-page investigation into EOS, released in November and available in PDF form here, focused heavily on collusion among Block Producers, naming Huobi directly. Whiteblock’s analysis suggests that the largest token holders are able to act with impunity within the EOS ecosystem. By communicating and coordinating their activities, they can undermine the functioning of the system to gain economic benefit.
EOS’s DApps work by buying network RAM which is produced by token holders. According to Whiteblock, the largest token holders are able to artificially inflate the price of RAM, making it essentially useless as a distributed virtual machine:
“We have already seen block producers drive the price of RAM up through hoarding for their own profit. By hoarding RAM, token holders can essentially drive the price up to extract money from those trying to access this resource. This speculation around the RAM market has made the price of RAM unaffordable, making it difficult for decentralized applications to operate.”
Recognizing this issue, EOS has instituted an algorithm to control for price manipulation by only allowing RAM to be bought and sold at rates in line with market trends, while also burning a 1% EOS token fee. But Whiteblock’s report suggests this purported solution may actually compound the problem:
“While the 1% fee theoretically limits speculation, this actually shifts the balance of power in the market even more towards block producers, as they are the ones who can afford to pay the 1% fee because they are earning EOS tokens as a reward.”
Whiteblock’s most attention-grabbing claim was that EOS may not actually qualify as a blockchain:
“EOS was originally architected as a blockchain, though the resulting platform failed to achieve the necessary composition of a blockchain system. The platform was instead, built as, a distributed database system.”
An EOS block explorer shows an all-time high of almost 4000 transactions-per-second being processed, making EOS much faster than Ethereum. But the Whiteblock report suggests this figure may be misleading, if not downright fraudulent:
“[T]he transaction throughput in the system does not exceed 250 TPS even in optimal settings with 0 ms of latency and 0% packet loss. During tests with real world conditions of 50 ms of round trip latency and 0.01% packet loss, performance dropped below 50 TPS putting the system in close proximity to the performance that exists in Ethereum.”
EOS Alliance Interim Executive Director Thomas Cox responded to many of Whiteblock’s most damning claims in a post on Medium. Cox rubbished Whiteblock’s claims of conducting tests “with real world conditions,” pointing to the actual real-world conditions illustrated by EOS block explorers and sites like Blocktivity, where EOS is consistently ranked in first place among blockchains for transaction volume.
Cox also suggested the Whiteblock team were both biased toward Ethereum and unfamiliar with the intimate details governing EOS’s operation, claiming that:
“[Whiteblock’s] paper contains numerous errors, some quite basic (they define an EOS “epoch” as 126 blocks; it’s been 252 since before launch)”
Cox also claims that Whiteblock “only recruited Ethereum folks for the project,” and that their characterization of EOS as lacking “the necessary composition of a blockchain system” is based entirely on features particular to Ethereum. Cox quotes EOS lead developer wanderingbot as stating that “Bitcoin is also not using cryptography to validate transactions and results,” meaning that Bitcoin would also not be considered a blockchain according to the criteria Whiteblock used to define EOS as not being a true blockchain.
Security vs Decentralization
The most contentious issue regarding EOS is its abandonment of the principle of transaction immutability. There have been several instances where EOS has reversed transactions in cases of stolen funds. As detailed in this EOS arbitration report from November, a user who fell victim to a phishing scam was able to get the account responsible frozen and then eventually have the funds returned.
Decentralization, censorship resistance, and transaction immutability have all been core principles of most cryptocurrencies since the release of Satoshi Nakamoto’s Bitcoin whitepaper. Even though the user in the above-linked arbitration case was able to provide proof of ownership for the stolen funds, many consider transaction reversal a red line that cannot be crossed under any circumstances.
The most upvoted comment on the /r/cryptocurrency’s subreddit discussion of the arbitration report sums up the feelings of many within the crypto space:
“I can appreciate the good intentions in retrieving stolen funds however as the saying goes... the road to hell is paved with good intentions.”
The debate surrounding this behavior is ideologically driven and there is therefore no clear right or wrong. Your stance on this issue will depend completely on what you consider more important: security or decentralization.
But coupled with other issues related to EOS, some have suggested that this seemingly benign use of transaction reversal could pave the way to much worse in future. The basis for these concerns is explained in the Whiteblock report:
“It is clear that the EOS network is censorable, as the whitepaper explicitly states that block producers can agree to freeze accounts change malicious code. We have already seen accounts be frozen, showcasing how the network has a governance structure that enables censorship…
An even greater concern is large token holders working together solidify their positions, making it even more difficult for malicious block producers to be voted out. If various token holders communicate with each other, then they coordinate various actions on the network, including the censorship of accounts and upgrades to the protocol that reinforce their own authority.”
At the same time, this feature may bolster EOS’s credentials as an enterprise-focused alternative to networks such as Ethereum. As explained in this article from Blockchain Reporter, EOS Block Producers acted in October to thwart a sophisticated hack aimed at stealing $12 million in EOS tokens.
While transaction immutability is frequently cited by EOS detractors as a reason for its inherent inferiority to Ethereum it’s worth noting that similar action was taken to secure the Ethereum network back in 2016. At that time, hackers were able to drain funds from a smart contract connected to the Decentralized Autonomous Organization (DAO). As explained here, 89% of Ethereum holders approved a hard-fork in order to return funds stolen in the hack, resulting in the creation of Ethereum Classic.
Ethereum has grown considerably since the DAO hack and its unlikely such action would be approved again in future. But this does show that EOS’s stance on transaction reversals is not without precedent among the largest and most well-regarded cryptocurrencies.
EOS’s constitution prohibits any entity from holding more than 10% of tokens. But as pointed out here, this neatly matches the exact quantity of EOS held by creators Block.One. And given the strong evidence for collusion among Block Producers, the 10% rule may do little to practically influence the ability of powerful token holders to exert control over the network.
The Future Outlook
Whether EOS’s issues in 2018 will turn out to be early teething trouble, baseless FUD, or fundamental flaws within its design will only become clear with time. There are legitimate concerns surrounding EOS, but there is also a growing ecosystem of DApps. It is likely that usage of these DApps will be the ultimate determiner of EOS’s long-term success.
Much has also been made of the power EOS’s hugely successful ICO has given it over Ethereum. In the run-up to EOS’s main net launch in June, Ethereum developer Justo accused EOS of a coordinated attack on the Ethereum network:
“Every day up until the launch of the EOS platform, which was June 6th, gas prices increased due to “Airdrop” tokens. Thousands of random tokens, with no website, or bootstrapped template websites made in hours. Wasting hundreds of ethereum daily, hundreds of thousands of dollars to drop tokens. This happened up until the launch of EOS, on the 6th, then immediately stopped. In one day, gas prices dropped back to normal.”
EOS founder Dan Larimer has laughed off these accusations, responding:
“I can assure you block one wouldn’t be so stupid to spend our resources attacking eth when all it takes is crypto kitties. There are far smarter and more cost-effective ways at bringing eth down if that were the goal.”
With both Ethereum and EOS seeking to take further steps toward widespread use of their platform, the next year will likely see more drama - and hopefully, concrete answers.