How does Neo's self-disruption and upgraded voting governance yield results?

This article is an original piece by Chain Catcher, authored by Hu Tao.

As the release of Ethereum 2.0 approaches, along with the flourishing on-chain ecosystems like DeFi and NFTs, existing established public chains are being compelled to accelerate their "transformation and upgrading." Among them, Chain Catcher has noticed that Neo is making significant innovations compared to many other established public chains, primarily due to major adjustments in its community governance model and underlying technical architecture.

Overall, the upgraded version N3 (Neo 3.0, referred to as N3) retains the current dual-token governance of NEO and GAS. According to estimates, the dual-token governance user voting rewards are expected to yield an annualized return of 37%, while the overall performance of the upgraded N3 is approximately 50 times better than the currently running version.

So how does N3 achieve this leap in performance? How is the high yield from on-chain voting governance realized, and how can we participate? How should we understand the future development space of N3? What insights can it provide for the development of other public chains?

The development of on-chain ecosystems like DeFi and NFTs is forcing public chains into a new round of "transformation and upgrading," and the mainnet of Neo's upgraded version N3 is also set to launch soon.

Public information indicates that N3 is positioned as "the most comprehensive blockchain development platform," with built-in native oracles, decentralized storage module NeoFS, and decentralized identity authentication NeoID, among other functional components. Applications in popular niche markets, including DeFi and NFTs, can almost all be deployed on N3. To achieve this vision, N3 must be a public chain that is secure, efficient, and low-cost to use.

To realize this vision, the development team has made significant adjustments in the community governance model and underlying technical architecture. The governance model continues to use the current dual-token governance of NEO and GAS, introducing a council to participate in governance, where NEO is used for voting and GAS is used to incentivize community members to participate in maintaining network security and developing the ecosystem.

The optimization of the underlying framework includes changing the original UTXO model to a pure account model, reconstructing the virtual machine, and additionally, the N3 mainnet has introduced state root services, upgraded the block synchronization mechanism, and added a data compression mechanism. According to official information, the overall performance is approximately 50 times better than the currently running Neo Legacy. In March of this year, the first version of the N3 testnet was launched, and after multiple rounds of testing, the mainnet will officially go live soon.

1. Dual-Token Governance: User Voting Rewards Expected at an Annualized 37%

Recently, NEO holders have been focused on one question: "When will N3 (Neo 3.0) officially launch?" This directly relates to the interests of every NEO holder.

A relevant person from the N3 development team told Chain Catcher, the dual-token model of N3 aims to separate network governance rights from usage rights, allowing users to not have to use governance rights to obtain usage rights, making community benefit distribution more balanced. More importantly, the dual-token governance model helps reduce network security risks and improve efficiency.

This is thanks to N3 introducing a council to participate in on-chain governance, where NEO holders vote using NEO to elect council members and consensus nodes that manage the N3 blockchain. The primary responsibility of council members is to participate in the governance of the Neo blockchain, with the top 21 candidates based on votes elected as Neo council members every 21 blocks. Among these 21 members, the top 7 are elected as consensus nodes for the N3 blockchain.

Some community members believe that the advantage of this governance model lies in expanding the existing governance nodes while still controlling the number of block-producing nodes to 7, achieving more decentralized governance while improving block confirmation efficiency. Additionally, since block-producing nodes are re-elected based on votes every 21 blocks, it can prevent node malfeasance, solving both efficiency and security issues.

On any public chain, developers and nodes are a minority; only users are the foundation that realizes the value of public chains and DApps. However, in the current public chain community, the distribution of benefits seems to have never considered ordinary users.

In the POW consensus governance model, computing power equals rights, and all newly generated profits belong to the block-producing nodes that control the computing power. The POS consensus governance model, on the other hand, has turned into a situation where those with money can earn more coins.

Moreover, users need to pay high transaction fees when transferring and using on-chain applications. Looking at two typical public chains, Ethereum and EOS, their high usage costs have always troubled users. When transactions are congested on Ethereum, initiating a transfer can cost hundreds of dollars in GAS fees. Although EOS has eliminated GAS fees, users still need to pay EOS to obtain CPU usage rights, which has led some development teams to abandon EOS due to high costs.

In the N3 network, however, each block produces 5 GAS, and 80% of the newly generated GAS will be proportionally distributed to voters. The more votes cast, the more GAS received. Therefore, some users who have understood the N3 voting reward rules are inquiring about how to participate in voting. The answer is that once the N3 mainnet is launched, users can participate in voting and earn GAS rewards simply by registering an account in their wallet.

Wang Lei (pseudonym), a member of the Neo Chinese community, estimates that early participants in voting may not be too many, leading to higher annualized returns. He estimates that if the voting rate is around 20%, voting with 1000 NEO could yield about 31 GAS in a month, translating to an annualized return of approximately 37%. "I am ready to activate it anytime," Wang Lei added.

In addition to voting users, the distribution of GAS in the N3 network also considers NEO holders who do not vote. Even if they do not vote, simply holding NEO gives them a chance to participate in the distribution of 10% of the GAS.

A relevant person from N3 explained that this is to consider that not every NEO holder will vote, and distributing GAS rewards to these individuals allows them to use applications on the N3 network at any time. "If these people do not have GAS, they will need to buy GAS from the market when using applications on N3, and some may be too lazy to do so, which is neither friendly nor conducive to the development of the N3 ecosystem."

According to the currently published rules of N3, the GAS generated from on-chain transactions is divided into two parts, with network fees rewarded to the packing nodes, while system fees are completely burned. This gives GAS a natural deflationary effect; the more prosperous the on-chain ecosystem, the more users use GAS, and the more that is burned, leading to an increase in GAS prices. High expected returns also help encourage NEO holders to actively participate in governance voting.

(N3 GAS distribution rules, source: official materials)

With 80% of voting rewards plus 10% of static rewards, 90% of the GAS generated in the N3 network is distributed to the community, while the remaining 10% is evenly distributed among the 21 council members, ensuring that council members have sufficient incentives to govern and maintain the N3 network.

2. Two Years of Exploration to Build "The Most Comprehensive Blockchain Development Platform"

Compared to the single-token governance model of mainstream public chains in the current market, N3 has achieved a reduction in network usage costs while ensuring network security and improving network efficiency. How to further make N3 more user-friendly for developers and users is equally important, with a simple and complete underlying technical architecture being essential.

Public information from the N3 community shows that significant innovations have also been made in the underlying technical architecture.

Public information indicates that in the N3 network, the original mixed model of UTXO/Account from Neo Legacy has been replaced with a unified account model, and the smart contract system has also been simplified, allowing complex on-chain logic to be applicable to any digital asset. Additionally, the team has reconstructed the NeoVM to enhance instruction speed, added state root services, upgraded the block synchronization mechanism, and introduced a data compression mechanism.

According to official information, these optimizations can enhance the overall performance of N3 by approximately 50 times compared to Neo Legacy, with efficiency rivaling leading public chain projects in the current market. "If the data is as the official claims, then the prosperity of the N3 ecosystem is indeed worth looking forward to," commented an industry insider.

These significant changes also mean that N3 is not compatible with the current Neo Legacy mainnet, so after the launch of the N3 mainnet, users will need to complete the migration of NEO and GAS within a specified time.

Regardless of the disruptive changes in governance models or the optimizations in underlying technology, it ultimately returns to the applications running on the network. What applications developers can build on the N3 network will directly determine the future ecological development direction of the network.

N3 is positioned as "the most comprehensive blockchain development platform on the internet," with the team embedding a full set of functional components into the N3 network, not missing any potentially sustainable and growing niche areas on the blockchain. Developers can call functional components at any time to deploy various DApps. This layout is not a random idea from the N3 development team but is based on continuously capturing user needs in response to market changes during the upgrade of the N3 network.

The N3 upgrade plan has, in fact, been in preparation and implementation for two years. In February 2019, at the Neo annual event DevCon held in Seattle, USA, Neo founder Da Hongfei publicly revealed that the next upgrade of Neo would make it the most developer-friendly blockchain platform by providing high performance, strong ecological support, and compliance solutions.

However, in 2019, the entire cryptocurrency market was still struggling at the end of the bear market of 2018, with market focus shifting to exchange IEOs and derivatives competition, and there was no clear direction for the development of on-chain ecosystems in the entire industry.

At that time, the industry generally believed that gaming and finance would become the breakout points for DApps. Neo focused on gaming applications, with DApp review data showing that there were a total of 31 applications running on the Neo network, of which 11 were games, accounting for more than one-third, while only 6 were in trading and finance, accounting for less than one-fifth.

Subsequent market changes saw the explosive growth of DeFi and NFTs in the second half of 2020, leading to a decline in gaming. At the same time, oracles that support DeFi also became a hot niche, with many public chains claiming to launch oracles for a period. In October last year, the long-delayed IPFS mainnet Filecoin finally went live, making blockchain storage another hot niche.

By this point, it has become clear where applications on public chains can land: DeFi, NFTs, and on-chain storage are essential, and price-feeding oracles that support DeFi are also indispensable applications on public chains. After optimizing governance models and underlying technical architecture, N3 has incorporated development components for these popular niches into the N3 network, with the opportunity to create the most comprehensive blockchain development platform.

3. Internal and External Efforts to Strengthen the Ecosystem and Feed Back to the Neo Community

With the platform set up, a public chain community must have a complete ecosystem to continuously create value for users. Take DeFi as an example; the operation of a protocol requires different modules such as stablecoins, wallets, oracles, and mainstream asset anchors to connect with each other for stable operation.

Currently, these can almost only be realized on Ethereum. For other public chains outside of Ethereum, how to build and improve ecosystems remains a significant challenge. N3 naturally has its own plans, with a general route of providing internal funding and technical support while continuously integrating with other ecosystems to expand resources.

Neo has always been providing financial support to developers. In 2018, the Neo Foundation established the Neo EcoFund to provide comprehensive support for the development of the Neo ecosystem. In 2019, the Neo Foundation launched NeoEcoBoost, with a total investment of $100 million to promote the development of the Neo ecosystem.

A relevant person from N3 told Chain Catcher that Neo EcoFund and Neo EcoBoost will continue to support N3 developers. Additionally, the team has restructured all funding programs aimed at developers, focusing on different directions so that individual and team developers can find suitable plans. A newly designed developer fund will be released soon.

Before N3 officially hits the market, the Neo Foundation has also prepared a special initiative to encourage rapid ecological development called Early Adoption, which aims to attract existing and yet-to-enter projects into the Neo ecosystem on N3 through funding and technical support. The N3 development team will also be on standby to provide support for developers facing technical difficulties when building any applications.

The aforementioned person revealed that the current focus will be on deploying infrastructure applications such as browsers and wallets, while also advancing applications in popular niches like DeFi lending protocols, derivatives, and NFT exchanges.

Externally, N3 is expanding its ecosystem through collaboration with developers from different ecosystems. It is reported that Neo is currently collaborating with IWA members such as Microsoft and Accenture to develop and promote tokenization standards, encouraging enterprises to adopt blockchain technology to empower their businesses, which also helps facilitate cooperation between N3 and traditional enterprises.

Additionally, Neo is collaborating with the interoperability protocol Poly Network to integrate assets and applications from other public chains into the N3 network. As the on-chain ecosystems of DeFi and NFTs continue to thrive, cross-chain transactions have become an inevitable trend. Currently, public chains like Ethereum still use anchored assets to solve cross-chain asset issues. OKLink data shows that as of June 17, the number of BTC anchored assets has reached 250,000.

Currently, PolyNetwork has integrated 10 mainstream blockchain networks, including Bitcoin, Ethereum, Neo, and Ontology. As of the first quarter of 2021, the total transaction volume between member chains has reached $3.3 billion. Once these ecosystems connect with the N3 community, users can almost use applications from the mainstream public chain communities in the current market through N3.

Compared to new public chains, N3 has the advantage of being built on the foundation of Neo. DAppreview shows that there are currently over 30 DApps running on the Neo network, including the DeFi platform Flamingo, decentralized exchanges Switcheo and Nash, wallets O3 and NeoLine, as well as the asset tokenization platform Liquefy, with a market capitalization exceeding $1 billion.

The upgraded N3 has made disruptive innovations in governance models and underlying technical architecture, creating a comprehensive and user-friendly blockchain platform for developers and users. Coincidentally, although the deployment of N3 began two years ago, its birth coincides with a special period when the booming development of on-chain ecosystems like DeFi and NFTs is forcing public chains to undergo a new round of transformation and upgrading. This also places N3 on the same starting line as other emerging public chains, with the opportunity to gain more attention from developers and users.

Perhaps the brand-new N3 is poised for action, armed with the "innovative governance model" and "comprehensive functional components," competing and collaborating with other competitors in the new round of public chain competition, with the chance to seize new high ground advantages.