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Op-Ed

Why do we take EOS seriously when it’s clearly a plutocracy?

Quick Take

  • EOS is a heavily-centralized network controlled by insiders that serves to benefit its creators and early backers
  • The 4th ranked EOS-designated “block producer” has announced that they’ll start sharing the rewards with their constituents
  • The arbitration process prescribed by the EOS Core Arbitration Forum (their equivalent of a judicial branch) is structurally flawed

EOS, the brainchild of seigniorage addict Dan Larimer and noted #1 cryptocurrency project by the Chinese government, has confirmed what we always sort of knew: EOS clearly functions as a plutocracy—governance by the rich, for the rich.

It wasn’t always this way: a company called block.one created EOS in 2017. The team described their mission as providing “end-to-end solutions to bring businesses onto the blockchain from strategic planning to product deployment.”

They initially offered an ERC-20 token on the Ethereum network in a controversial, continuous year-long ‘Not A Token Sale’ where customers bought tokens, booked as revenue by block.one, the administrator of the EOS network. If you’re thinking, “Wait, this thing sounds an awful lot like an ICO,” you would not be wrong. The placeholder tokens were a hot commodity, with block.one selling 1/5 of the total supply for 250,000 ether (~$80m) within the first four days of the sale.

Important to note: the Tokens in EOS’ ‘Not A Token Sale’ did not come with any rights or uses. Despite being offered for trading, per block.one, they were “not an investment, currency, security, commodity or a swap.” Because they told us so.

Though they were just selling tickets to use their future world distributed supercomputer, these tickets were not open to US customers in block.one’s ‘Not A Token Sale’. Despite this, they had some aggressive advertising, including a big sign in Times Square. This seems like a highly appropriate place to advertise—which tourist isn’t thinking about how they want to deploy their distributed applications immediately after visiting the Hershey Store and Madame Tussauds?

Image courtesy of Jeff Ward, via Twitter.

In the EOS distributed computer, “block producers” serve the function of miners in other cryptocurrencies like Bitcoin. There are 21 officially sanctioned block producers (BPs) with another few dozen “stand-by” BPs who don’t have enough votes to rank in the Top 21 which can be elevated by politicking votes from EOS holders. These block producers earn a 0.25% per-block reward (on a pro rata basis) allocated to BPs in exchange for participating in governance activities and operating the servers that EOS-based distributed apps run on, an inflationary tax paid for by users. All block producers, including those on stand-by, also earn a 0.75% per-vote reward on a pro rata basis to the total number of votes they receive.

In today’s version of “cryptocurrency enthusiasts re-learn everything we already knew about capital markets, politics, and securities law”, Starteos, a Chinese group and currently the 4th ranked EOS-designated “block producer” has announced that they’ll start sharing the rewards block producers earn with their constituents. To date, they’ve garnered support in the form of 105,805,706 EOS pledged from 6,432 voters, which represent ~2% of the total votes cast.

They clarified in this week’s post in a largely vacuous, but inspiring message:

“Once, we are part of this revolutionary technology and ecology that can subvert the tradition, change the world. Now, Starteos is still gonna stay with YOU, our most important and best friends! And we gonna share the proceeds with you and make through the difficulties together.”

It’s enough to make one wonder whether a rousing “Hurrah!” rose over Time’s Square upon the release of that purple prose.

But wait, there’s more! Users have two distinct ways through which they can reap the benefits of their bribe to our money-printing overlords in Chengdu: (1) by accepting “stable” mining revenue OR (2) by playing Lucky Fruit Slots Machine, a casino game created by Starteos. That’s not all! They plan on introducing new roulette and horse racing games, in case the teenagers backing them need to diversify their portfolio.

While many EOS users lashed out against the project for what amounted to “buying votes,” these aren’t the first problems we’ve seen with EOS. In the past, we’ve seen allegations that large exchanges were sponsoring block producers with client deposits and that BPs such as Huobi’s mutually voted for each other to cement their pole position.

While this may all sound shocking, it’s important to remember that EOS was always set up to weaponize asymmetries from the start and the continuous year-long nature of their ‘Not A Token Sale’ made self-dealing relatively easy, a fact often pointed out by critics. As the sale of their placeholder tokens was done over a year, block.one or other EOS insiders could have readily recycled capital contributed earlier in the sale to buy tokens later (increasing their relative ownership of the project’s total token supply). To date, it’s unclear how much ether from the EOS crowd-sale was recycled to benefit the founding company, Block.one.

Now, if you’re a large EOS holder and have a lot at stake (read: you own a money printing machine), it only seems logical that you’d defend your holdings by creating an enforcement structure that allows for continued entrenchment of your interests. That’s just Rule By The Rich 101.

In the guise of decentralization, EOS has attempted in the past to ratify a constitution, learning their own unique way that “code is law” sounds better on Medium than in practice. “Let’s create a representative democracy where token holders just vote directly” sounds great in theory till you realize that voting power is proportional to the amount of EOS you own (spoiler: you don’t own any relative to those in power).

Weiss Cryptocurrency Rankings found earlier this year that EOS had a Gini of 97 in what they tastefully described as a “feudal kingdom with indentured servants.” While the Weiss rankings are themselves flawed—as are all attempts to “rank” or grade cryptocurrency projects—the fact that EOS is universally seen as ruled-by-the-rich is incredibly damning.

Earlier this year, EOS saw issues resulting from this supposedly-democratic process when a block producer froze many accounts without going through the arbitration process prescribed by the aforementioned EOS Core Arbitration Forum, controlled again by—you guessed it—insiders.

The idea that EOS has underlying security and trust holes isn’t a novel idea but EOS lacks the Szabo-ian social scalability other networks like Bitcoin and Ethereum cherish dearly. Due to the EOS blockchain’s reliance on human-interpreted constitutions, the trust-minimization in the system is poor. As a result, the system lacks the social scalability present in other public blockchains. Despite the failures of their experiments, the “ever-efficient” crypto markets currently have it firmly as the 6th largest cryptocurrency by market cap.

It’s clear what EOS is not: a decentralized, socially scalable smart control protocol and native internet money. It’s clear what EOS is: a heavily centralized network controlled by insiders that serves to enrich its creators and early backers.

This hints at some core problems: is the end state of blockchains that implement shareholder governance models that they all morph into a plutocracy? Are malicious actions (e.g. vote buying, rule-of-the-rich) desirable outcomes in what was initially billed as an attempt to democratize the architecture of the internet? We wanted open systems that enable us to sever ourselves from large internet monopolies, but it seems like we just swapped out King Zuck for King Dan.

Dan Larimer, EOS founder, is a serial launcher-of-cryptocurrency-networks. His prior art includes Bitshares, a 2014-era stablecoin experiment and Steemit, a social network that ran on its own blockchain. Both of these projects are in a state of disarray, with Dan exiting both projects to build the EOS vision. Recently, news site Steemit announced laying off 70% of their staff given recent price action while token supporters claim that everything is fine.

More recently, Dan announced in what may be a tongue-in-cheek comment (who can really tell at this point), that despite working on the EOS security model, he is interested in creating a hypothetical new token that’s distinctly different from EOS. This new token “would be immutable, non-programmable, and limited to a currency role.” If you ask me, that sounds an awful lot like another token created by some anonymous dude over 10 years ago.

For now, the EOS money printing machine seems to be profitable. Even at $2 EOS, the top BPs can earn in excess of $500k/yr where the server costs and opex (a barebones team) required to keep their systems running are minimal.

I’m not sure what the EOS community can do to rectify the fatal political problems in the ecosystem as this point. Perhaps it’ll be flushed out in this cryptocurrency bear market, but one thing’s for sure: watching cryptocurrency enthusiasts re-discover basic learnings from political science and capital markets will never cease to be fun.

Disclosure: Arjun Balaji is an analyst, engineer, and technical advisor to The Block. He founded Shomei Capital and holds bitcoin.