The Darkest Moment of NEO

This article was published on January 14, 2019, on the Chain Catcher WeChat public account, by author Gong Quanyu.

NEO, once known as the "Ethereum of China," seems to be gradually fading from the public mainstream view.

On one hand, as a public chain project established in 2014 and launched its mainnet in 2016, NEO has not demonstrated better performance, ecosystem, or momentum compared to projects like EOS and TRON, which launched their mainnets in 2018, and has faced criticism for being overly centralized.

On the other hand, NEO has fallen from its peak of about $194 in early 2018 to the current $7.5, with a low of $5.4 during this period. Even from an overall market perspective, NEO's global ranking has dropped from its former 6th place to the current 17th, overtaken by projects like EOS and Stellar.

In the annual report from NGD (NEO Global Development), the term "darkest hour" has become the official description for this year and appears in the title, while another term is "before the dawn."

So, after years of brilliance, what is the progress of NEO's technological research and ecosystem development? What bottlenecks has NEO encountered during its darkest hour? What are their latest strategies? After several days of in-depth research, Chain Catcher (ID: iqklbs) hopes to present the true development status of NEO and its possible future direction to readers through this article.

1. The Path to Rise

NEO, originally named Antshares, was first initiated in June 2014, with investments from seven individuals including Da Hongfei, Wang Guan, Xu Yiji, Dandou Datou, and Chuxia Hu, many of whom later became well-known figures in the cryptocurrency space. However, only Da Hongfei and Wang Guan continued to engage in the subsequent preparation and development of NEO after the investment, while the others were hardly involved.

NEO early investors with Vitalik Buterin, from left to right: Wang Guan, Kaku, Datou, Da Shu, center Vitalik, right one Blue Collar, right two Chuxia Hu, right three Xu Yiji, right four Liu Jialing.

In its early stages, NEO's project concept was actually quite different from the current smart economy. Its original intention was to create a decentralized network protocol based on blockchain technology to digitize assets and rights in the real world, facilitating registration, issuance, transfer transactions, and settlement through a peer-to-peer network, with plans for applications in equity registration, crowdfunding, and P2P lending registration and trading.

NEO early white paper content, produced by the official team.

Using contemporary popular terminology, what NEO aimed to achieve was "asset on-chain" and "decentralized trading," which attracted considerable attention at its inception. In September 2015, the NEO official website and white paper were launched simultaneously, and one month later, the first ICO was initiated, raising a total of 2,100 bitcoins from 186 accounts. According to information released by NEO afterward, the team immediately converted all bitcoins into 4.65 million RMB through exchanges after the first ICO was completed.

With this funding, NEO accelerated its efforts in technology development and community building. On the technical front, the NEO testnet was released in November 2015, and in April 2016, the first original consensus mechanism dBFT was launched in China; in terms of talent recruitment, executives such as Tao Rongqi, Li Jun, Yang Wentao, and Wang Tingting joined the NEO team, expanding from an initial team of four or five to 13 full-time members by May 2016; in community building, NEO established a large community operated by volunteers while also increasing investment in overseas communities. According to official statements, the community grew from 300 members at the end of 2015 to nearly 5,000 by August 2016.

At the same time, NEO's second ICO was launched in August 2016, raising 5,539.19 bitcoins within a month, equivalent to 22.25 million RMB, with 1,360 participants, making it one of the most successful ICOs of 2016.

However, as the NEO mainnet and decentralized exchanges went live, the conflict between NEO's early vision and reality gradually became apparent. Although NEO made significant efforts to promote the digitization of physical assets, due to issues of technical feasibility and regulatory policies, NEO has hardly achieved any registration, issuance, or circulation of physical assets on its platform. The official launch of a smart fund similar to TheDAO, called Nest, also nearly vanished after its release. As a result, the price of NEO has long hovered below the issuance price of the second ICO.

In the face of adversity, NEO initiated its most important transformation in June 2017, upgrading from a digital asset platform to a smart economy platform or public chain, introducing new concepts such as "smart contracts" and "digital identity," emphasizing the need to attract developers to build and extend various applications on the NEO platform. Clearly, these measures bore a strong "Ethereum" imprint, and NEO was subsequently dubbed the "Ethereum of China."

The price surge of NEO began at this point, rising from $0.11 at the beginning of 2017 to $9 in June, $48 in August, and reaching $162 in January 2018, successfully entering the ranks of "thousandfold coins."

With the improvement of various infrastructures and increased visibility, many projects, including Red Pulse, also chose to issue tokens on NEO, most of which achieved good price performance. In terms of organizational structure, the original NEO Council was officially changed to the NEO Foundation in May 2016, with Da Hongfei and Zhang Zhengwen serving as co-chairs, while NGD (NEO Global Development) and NGC (NEO Global Capital) were established. The former focuses on technology research and community operations, while the latter acts as a profit-oriented investment institution to promote quality projects and the development of the NEO ecosystem.

However, a new round of problems gradually emerged, with an increasing number of strong public chain competitors, and NEO, which had a first-mover advantage, did not demonstrate sufficient competitiveness in terms of technical performance and DApp ecosystem, seemingly regressing in the public chain competition.

In interviews with dozens of industry veterans and NEO executives conducted by Chain Catcher (ID: iqklbs), some believe this is mainly due to issues related to NEO's mechanism design and community diversion, while others believe that NEO's development trend is still good, but insufficient publicity and incorrect strategies have led to a failure to convey NEO's true status.

So, is NEO's public perception skewed due to inadequate publicity, or is its technology and ecosystem indeed progressing slowly, causing project obstacles?

2. Technological Development

The technology of public chains generally includes aspects such as consensus mechanisms, smart contracts, virtual machines, and cross-chain capabilities, reflected in TPS levels and developer friendliness.

NEO adopted its self-created dBFT mechanism in 2016, which is a Byzantine fault-tolerant consensus mechanism that achieves large-scale node participation through proxy voting. "At that time, everyone was using PoW mechanisms, and NEO dared to adopt its own newly designed consensus mechanism, which is very commendable," said ArcBlock founder Mao Zhihong.

In the dBFT mechanism, ordinary users vote to decide the accounting nodes based on their token holdings. When consensus is needed, a spokesperson is randomly selected from these accounting nodes to propose a plan. If more than 66% of the nodes agree to the plan, consensus is reached; otherwise, a new spokesperson is selected, and the voting process is repeated.

In terms of TPS performance, Chain Catcher did not find relevant information on the NEO block explorer, but NGD's R&D director Lin Pengtao told Chain Catcher that the NEO mainnet TPS can reach up to 1,000 in laboratory tests, and 300 to 500 in production environments. However, to prevent traffic attacks and other system security issues, NEO currently limits TPS.

The aforementioned mechanism ensures that the NEO system reaches consensus decisions to some extent and prevents negative impacts from forks and malicious nodes. Currently, NEO has a total of seven consensus nodes, but before July 2018, all nodes were controlled by the NEO Foundation, which had long been criticized as a centralized public chain. It was not until the NEO developer community CoZ and Dutch telecom company KPN were elected as consensus nodes for the NEO mainnet in July and October 2018, respectively, that NEO took its first step toward decentralization.

In the view of blockchain expert Dr. Aaron, this is a temporary abandonment of the fundamental attribute of blockchain decentralization in pursuit of efficiency, essentially making it a privately accessible chain with low user participation. "NEO has not empowered the community; there is only distributed operation without decentralization. In this regard, it is even less decentralized than EOS's criticized super nodes, which may be NEO's most prominent community governance issue," Aaron said. A chief scientist from another public chain, who goes by the pseudonym Ou Lin, also believes that NEO's governance model lacks democracy.

At the same time, several developers recognize NEO's approach, stating, "The blockchain is still in its early stages, and complete decentralization would slow down project development. Early centralization is beneficial for project development, as long as the project team maintains its original intention and adheres to blockchain principles, it can mitigate the effects of centralization." commented a public chain developer named Li Li (pseudonym).

There are signs that NEO is accelerating its pace toward decentralization. In addition to the newly added nodes, Swisscom Blockchain has now become a consensus node for the NEO testnet, and the NEO consensus node application system has reopened on the official website after April 2016. The official stated that in 2019, NEO would fully open the election and voting for consensus nodes.

However, since the NEO Foundation itself controls 50% of the NEO tokens, and after the "September 4th" policy, it acquired a large number of NEO tokens, at least more than 50% of the NEO tokens are still under the control of the NEO Foundation, which means that the election results are still largely determined by the NEO Foundation. "Due to NEO's early accumulation, we have launched both on-chain and off-chain governance mechanisms. As long as the other party can demonstrate significant help to the NEO ecosystem, we will vote for them," said NGD's R&D director Lin Pengtao.

On the smart contract front, NEO uses its self-developed NeoVM (NEO Virtual Machine) as the execution environment for its smart contracts, making NEO the second public chain project to launch its own VM. "NEO's most influential technology is its NeoVM, which is relatively advanced in the entire industry," said Lyu Xinhao, co-founder of Wanwu Chain.

According to Chain Catcher (ID: iqklbs), NeoVM already supports various traditional programming languages such as C#, Java, and Python, which provides a considerable advantage in attracting traditional developers. However, NeoVM is not compatible with Ethereum's Solidity programming language like projects such as TRON, creating a certain barrier for Ethereum developers to migrate their DApps.

In 2018, NEO also underwent multiple upgrades to its VM, achieving stack isolation between smart contracts and enhancing the security and reliability of smart contracts while further expanding its applicability, allowing developers to deploy it outside the NEO network.

Since its launch over two years ago, the NEO mainnet has operated stably overall, with almost no public security incidents, but it has been publicly pointed out multiple times by Qihoo 360's core security team, Tencent's Zhanlu Lab, and security auditing firm Red4Sec for vulnerabilities.

In its white paper, NEO also proposed technical highlights such as cross-chain interoperability protocols, quantum-resistant cryptography mechanisms, and distributed storage protocols, but there has been little mention of development progress from NEO officials. "From a conceptual perspective, these technologies have some innovation, but they have not produced revolutionary advancements in existing blockchain technology," Aaron said. "NEO's technology can only be described as average, with no particularly outstanding features."

Lyu Xinhao described NEO's technical level as "solid," believing that the NEO team has no issues in research and development, but lacks in ecosystem implementation.

In July 2018, NEO also introduced the concept of NEO 3.0, redesigning its core modules, including adjusting the dual-token economic model, implementing dynamic sharding, expanding smart contract APIs, and supporting global variables to better serve enterprise-level large-scale applications.

"In fact, no public chain can currently support commercial applications like Taobao or Twitter. The reason NEO wants to reorganize its underlying architecture is to improve its performance and stability," NGD's R&D director Lin Pengtao told Chain Catcher, adding that the consensus mechanism of NEO may also be adjusted in the future, and the main chain may be redeveloped, but currently, all details are still in the proposal discussion stage.

Therefore, it is currently difficult to evaluate the technical framework and details of NEO 3.0, but this adjustment and related statements undoubtedly reflect that the NEO management team realizes that NEO has inherent architectural flaws, and without adjustments, it will be difficult to meet the development needs of enterprise-level and commercial applications in the future.

"When the established strategy and technical direction in the early stages of the project cannot be effectively iterated or adjusted later, the founding team is likely to start anew after the initial project gains traction, which is a form of internal value fork," Aaron said.

3. Ecosystem Construction

Another crucial task for public chains is ecosystem construction, which requires NEO to attract as many developers as possible to build DApps and related infrastructure while also attracting as many ordinary users as possible to use these DApps, enhancing the main chain's activity, and ultimately constructing a complete public chain ecosystem.

The most intuitive achievements in ecosystem construction are reflected in the mainnet data. According to data from the block explorer Tokenview, in the past month, the daily transaction volume on the NEO mainnet has been around 20,000, with daily active addresses ranging from 4,000 to 5,000 and new addresses added daily between 400 and 700, all showing a downward trend.

Trend chart of transaction numbers and active addresses on the NEO mainnet. Source: Tokenview.

At the same time, NEO's competitors, including Ethereum, EOS, and TRON, maintain overall stable or even growing key data, with absolute values in multiple metrics far exceeding those of NEO. Therefore, NEO's somewhat bleak data cannot be primarily attributed to the bear market but may be more related to its own issues.

From the perspective of DApp development, although the block explorer shows that NEO has nearly a hundred asset types, many asset projects have not further developed into mature DApps, and other DApps have failed to enter the mainstream due to practicality issues, resulting in very few users. Whether in the DApp display areas of major wallets or on various DApp listing websites, NEO's DApps are rarely seen. "It's like a large shopping mall with many products for sale but very few customers," Aaron described.

Additionally, NEO has invested heavily in numerous blockchain projects through NGC, initiating at least twenty public investment cases last year, but most projects have yet to achieve substantial collaboration with NEO, contributing little to NEO's DApp ecosystem.

In contrast, competitors like EOS and TRON, although also slow in advancing practical DApps, have gained a large user base by vigorously developing gambling games and marketing, resulting in impressive data performance on their mainnets.

"We are also increasing our investment in the gaming sector, hoping to become the preferred platform for game developers. However, unlike the development of gambling games, we want to attract truly playable games, such as turn-based games or sandbox games," said Zeng Cheng, head of NGD's overseas community operations. "We also plan to provide good solutions and infrastructure for the blockchain gaming industry."

In the past year, NEO has held several blockchain gaming competitions with substantial rewards to attract game developers. According to Zeng Cheng, NEO has already launched three to four game-related DApps, with another twenty to thirty games in development.

NEO partner LAYA.ONE's founder Wang Kuo expressed support for NEO's gaming strategy: "Those Ponzi scheme games are not real games, and they are played by the existing tens of thousands of cryptocurrency holders in the blockchain industry. NEO hopes to attract traditional gamers and bring ordinary players into this market."

However, challenges remain. NEO not only faces competition from public chains like EOS and TRON for developers and users but also the blockchain gaming industry itself faces many unresolved difficulties. "All payment actions in blockchain games are essentially based on digital currency wallet payments, but real players may not have wallets. Therefore, how to build a seamless connection between traditional payment methods and the blockchain world is crucial, and there is currently no good solution for this," said Wang Kuo, founder of LAYA.ONE.

Ou Lin pointed out that blockchain games have high performance requirements for the chain, and NEO may lag in aspects such as block time and throughput.

Another shortcoming in NEO's ecosystem construction is the lack of third-party developers. Currently, many developers come to NEO based on funding, investments, or competition rewards from the NEO Foundation, which indeed plays a significant role but also indicates that NEO does not possess the industry influence of Ethereum or EOS.

Although NEO has long been known for its excellent community building, its community mainly consists of two types: the technical community, which has been more focused on compilers, block explorers, technical documentation, and other mainnet and supporting facilities, or promoting NEO technology through various activities, with little involvement in application development; and the token holder community or enthusiast community, which gathers mainly due to the price surge of NEO tokens or the project's vision, making it difficult to contribute to the ecosystem application layer when NEO itself is not progressing smoothly.

Another serious issue is the significant diversion within the NEO community. At the end of 2017, the Ontology project initiated by Onchain was officially born, and Onchain was a profit-oriented company founded by Da Hongfei, Zhang Zhengwen, and others from the NEO team in early 2016. The official statement at that time claimed that Onchain was the operational entity of Antshares, mainly responsible for the development and operation of the Antshares system while providing blockchain customization services for other financial institutions.

After Ontology was born as a separate public chain, many executives and technical personnel from Onchain joined the Ontology project, including Onchain's chief architect Li Jun and Onchain's VP of business development Yang Wentao. Since most of their previous work revolved around NEO, NEO's talent pool and related business will inevitably be impacted.

At the same time, this project has also attracted many original developers and followers from the NEO community, negatively affecting NEO's community building. Lyu Xinhao believes that the Ontology community is currently even more eye-catching than the NEO community.

In addition, several executives from NEO have left in recent years to create other projects, such as NEO co-founder and current Nebulas co-founder Wang Guan, and former Onchain VP and current PlatON founder Wang Tingting. Former NEO Foundation secretary-general Tao Rongqi became a founding partner of the sub-institution NGC in the second half of 2018 but often appears at major events as the founder of research institution X-Order rather than in the capacity of NGC.

"NEO encourages entrepreneurship internally; some people and many volunteers have formed new teams with new ideas, and Da Shu is very supportive," Wang Tingting told Chain Catcher (ID: iqklbs). However, as more and more senior personnel leave, there is little information about industry leaders joining the NEO team.

Of course, there are also employees from the NEO system who continue to contribute to the NEO ecosystem after leaving, such as Liu Yongxin and Li Jianying. After leaving Onchain, they established the NEL New Economy Laboratory, which, with funding from the NEO Foundation, assists in developing the NEO block explorer, wallet, SDK, and more, while also organizing courses, online discussion forums, and offline meetups, becoming one of the largest developer communities for NEO in China.

However, overall, NEO's ecosystem construction has significantly slowed down due to these influences, with its original value being diverted multiple times, and it has yet to find a breakthrough in its development strategy.

Aaron further pointed out that the deeper reason for the obstacles in NEO's ecosystem construction lies in the fact that power and rights are held by the project team, making third-party development teams unwilling to develop new DApps on such a low-freedom private chain. Therefore, its DApp projects are built for quantity rather than quality, lacking real competitiveness. "If there are no truly valuable products, how can you attract customers?"

"However, NEO still has a lot of sustainable advantages from its first-mover status. NEO has a certain foundation in community and operations, and if it can make changes in openness and freedom in the future, there is still potential for development," Aaron added.

In terms of publicity and marketing, NEO indeed has strategic shortcomings that do not align with its development needs. Several former and current NEO employees have admitted this to Chain Catcher. "NEO has never paid much attention to publicity. When I was there, the budget was very limited, and we could only rely on some old relationships and public relations strategies to increase visibility," Wang Tingting said.

Journalist Zhang Jilai (pseudonym) pointed out that public chain projects like Ethereum, EOS, and TRON have leaders who are good at rallying support and creating publicity, but while Da Hongfei is quite famous and highly regarded in the industry, he rarely speaks on social media or engages with the public, usually only occasionally voicing opinions in communities or events, and his messages often lack strong dissemination. Although this is merely a personal style preference, it has effectively become a disadvantage for NEO.

4. Conclusion

Overall, NEO is experiencing a crisis that is as dangerous as that faced by its predecessor Ethereum, encountering varying degrees of bottlenecks in both technology and ecosystem. "Technology is always evolving and being eliminated. The older generation of public chains started earlier, but the problem is that they paved the way and pointed the direction for the industry. The new generation of competitive public chains can see this and avoid many detours, moving forward more quickly. This is a challenge that all older public chains will face," said He Yu (pseudonym), a founder of a well-known blockchain project, noting that they need to find innovative paths to prove their enduring strength.

NEO 3.0 may become the breakthrough for NEO, but there is still no clear timeline for NEO 3.0. From proposal discussions to determining specific plans for development and then to implementation and launch, this will likely require a lengthy process. In the increasingly competitive public chain industry, this may bring many uncertainties to NEO's future.