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Take me to your leaders.
MIT Technology Review
Chain
Letter
Blockchains, cryptocurrencies, and why they matter
06.14: Take me to your leaders.

Welcome to Chain Letter! Great to have you. On Thursdays we take a closer look at one key concept in the world of blockchains and cryptocurrencies. Feel free to suggest topics you think we should discuss in the future.

Nothing has embodied the mania around cryptocurrency and initial coin offerings quite like EOS: Its developers raised an eye-popping $4 billion during the past year by selling crypto-tokens for a system that wasn’t even built yet. Now that the network is finally ready to go live, it’s struggling to get its blockchain up and running—and in the process, raising important questions about how best to launch a new blockchain.

What—and who—is EOS? The new blockchain system is supposed to be a much faster and more efficient alternative to Ethereum. Ethereum was designed to not only be a cryptocurrency but also a platform for running blockchain-based computer programs called smart contracts. But it’s slow to process transactions, because every node in the Ethereum network must keep track of every account balance and the state of every smart contract. EOS’s developers say that by delegating the responsibility for processing transactions to just 21 “block producers,” which are to be elected by the community of token holders, the system will be able to achieve thousands of transactions per second (compared with just 15 per second for Ethereum).

A startup called block.one is spearheading the development of EOS’s software. It’s CTO, Dan Larimer, previously created the blockchain-based financial services platform BitShares as well as Steemit, a cryptocurrency-powered publishing platform. Each deployed a novel consensus protocol called “delegated proof of stake,” which Larimer is also deploying with EOS.

No miners: In cryptocurrencies like Bitcoin, nodes called “miners” spend lots of computing power competing for chances to add “blocks” of transactions to the chain in return for digital coins. EOS dispenses with mining in favor of allowing token holders to elect block producers, with voting power corresponding to the amount of tokens an individual or organization holds. The approach should speed up transaction processing, but it has also drawn critics. Ethereum creator Vitalik Buterin has argued that it makes the system vulnerable to vote-buying and consolidation of power over the network.  

Frozen tokens: EOS tokens have been for sale and tradeable on the Ethereum blockchain since June 2017. But they weren’t based on EOS’s blockchain—it hadn’t been built yet, so the tokens were running on the Ethereum network. A couple of weeks ago, Ethereum-based EOS tokens were “frozen” so that their value could be transferred to the real chain. As of this writing, though, they’re still locked up.

That won’t change until the network elects its 21 block producers, which can’t happen until holders “stake” 15 percent of all the tokens in the system  to vote for candidates (the tokens aren’t spent; they’re used as digital chits, but returned once voting is over). At the moment, out of 150 million token-votes needed the network is still nearly 40 million short. Voting requires holders to use their private cryptographic keys, which is technically complicated and risky if people aren’t careful. That could be why it’s taking so long—some holders may lack the technical competency to vote, and others may not have access to their private keys if their tokens are held in exchanges. Another theory is that holders with large quantities of tokens have been waiting to see what others do before casting their votes.

Central questions: Was EOS mistaken to institute token-based voting? Is the process “decentralized” enough, given that the top 100 holders own around 75 percent of the tokens? Perhaps more importantly, will the entire EOS network be decentralized enough once it has chosen its 21 block producers? And will that even matter if it performs as advertised? Compromising decentralization for the sake of speed and efficiency might actually spur mainstream commercial success. First, though, the network will have to figure out how to govern itself. No pressure: its investors only have $4 billion on the line.​

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Loose Change

Fill your pockets with these newsy tidbits.

An SEC official says that ether is not a security since Ethereum is “sufficiently decentralized.” (CNBC)

Ripple execs concede that banks aren’t yet ready to use its blockchain. (Reuters)

A price manipulation scheme may have been behind Bitcoin’s big surge last year. (TR)

Blockchain-based markets for expensive real estate plots in virtual worlds are a thing. (Bloomberg)

A court case involving an obscure cryptocurrency called My Big Coin could set limits on US financial regulators’ authority to police fraud in cryptocurrency markets. (Reuters)

The financial services industry is now spending $1.7 billion annually on blockchain and distributed ledger projects. (Bloomberg)

The Money Quote

It’s disruptive populism.”

Steve Bannon, on cryptocurrencies, to the New York Times.

Mike Orcutt
We hope you enjoyed today's tour of what's new in the world of blockchains and cryptocurrencies. Send us some feedback, or follow me @mike_orcutt

 
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