Neo Staking: How does it work?

NEO was launched in 2014 by Da Hongfei and Erik Zhang by the name Antshare. In June 2017, it became known as NEO, the name we all know it by today. Since then, NEO has made its mark in the crypto space by making it to 17th place in terms of market capitalization. NEO is the first decentralized, open-sourced blockchain and cryptocurrency platform to launch in China. Commonly known by the nickname “Chinese Ethereum” NEO attempts to learn from Ethereums mistakes. In this post, we will be going over the process of NEO mining and how its consensus works.

Neo mining or more correctly: The Proof of Stake Consensus

The NEO cryptocurrency uses a Proof of Stake consensus. In a nutshell, a consensus is a process of trying to maintain a single version of the truth. Over time, we have many transactions that we need to record on the blockchain (the book of truth). As blockchains are run decentralized from all over the world, different transactions are being received at different times, which can cause disagreements about what the actual truth is. The goal is to get a good consensus running by any means. This is because you open yourself up to many risks such as double spending attacks etc if you don’t have one.

Currently, Bitcoin uses the Proof of Work (PoW) consensus mechanism. In order for this to work, miners must use expensive hardware, consuming large amounts of electricity while applying strong processing power in order to complete a computational maths problem. This is the process of mining new blocks (Transactions) and adding them to the blockchain (publishing their version of the truth). Bitcoin takes advantage of economic incentives in order to discourage people from producing different chains. In other words, this would be deviating forked versions of the truth. A problem with this, however, is that Bitcoin’s guarantee isn’t mathematical, it’s economic and probabilistic, slowing it down as a result.

An Alternative Approach

Ethereum is another cryptocurrency that uses the Proof of Work consensus mechanism. However, they are planning on moving to a Proof of Stake consensus called Casper later in the year. Casper is a highly complex consensus, and we believe people should do some research into how it works in detail. Essentially, Ethereum validators (miners) will invest their ETH tokens in this staking process. If it turns out they were trying to cheat, all their ETH tokens will be lost. Ethereum is taking a punishment-focused approached to the Proof of Stake consensus.

Delegated Byzantine Fault Tolerance

In a nutshell, Delegated Byzantine Fault Tolerance (dBFT) is a fancy name for the solution to getting an eventual consensus under a certain set of conditions. The main condition is very simple: So long as 1/3 of bookkeeper nodes are BAD actors, you’re eligible for eventual consensus, and everyone stays happy. This is the most important thing to take note of. I will explain why this is 1/3 instead of 1/4 or any other fraction of nodes.

Painting the Walls

So, the King has decided to paint the walls of his castle. He says it’s either going to become Blue (B) or Red (R). The King doesn’t mind which colour they go with, so long as the colour stays consistent throughout the kingdom. As well as this, he wants all of his daughters and sons to agree on the colour choice. As a result, he calls his four painters over, and sends a signed message to his children:

“To resolve this issue, I want you, my beloved children, to agree on the colour the kingdom will be. Tell my painters and they will paint my walls the desired colour. As soon as one of my painters hears from you and you’re able to prove that 2/3 of my family agree on a colour, they will start painting the Kingdom.”

The children can contact the painters with ease. However, there is a problem. There has been fighting between the family, and the sons and daughters have no direct contact. Instead, they pass messages between one another. They are all connected, just not directly. Some members of the family are evil, and they’d like to get at least one of the painters to paint the wrong colour. As a result, the family discusses and then decides on a protocol.

The Protocol

  1. The oldest family member is elected the speaker
  2. He/she will then communicate their chosen colour with their signature
  3. Everyone will then communicate that colour to everyone else until everyone is informed. They will also include their signature
  4. If 2/3rds of the people have the same colour choice, the painter can be informed of the colour choice.
  5. If not, wait for a while, then re-elect the next oldest member as the speaker and repeat the process.

These signatures are impossible to replicate. They are proof without a doubt that the person signed it.

Proving Consensus Protection

With a protocol like this in place, we are now able to prove that so long as 1/3 of the family is evil, it’s impossible for any of the painters to get a different message. This will stop them from painting the walls of the kingdom inconsistently. The proof works like this:
Imagine that the bad family members belong to a secret cult ‘F’ and have managed to plant themselves between the good family members. This would create a split into 2 groups, ‘R1′ and ‘R2′. Members in ‘R1’ are able to talk to each other and to ‘F’, but they cannot talk directly to R2. These rules apply to R2 also.

In this scenario, members from ‘F’ are in control as they are able to determine what information flows between the R1 group, and the R2 group. In order for them to create chaos, F must get 2/3 of the signatures (including their own) to be Red and Blue. It’s important to note that they can sign for Green and pass that message to one person, then sign Black and give that to another person.

The Maths

After members from F pull that off, it becomes easy. To get 2/3 of the signatures, we need the size of group F and R1 to be >=2/3 of the total people. We also need this to be true for group F and R2. This way, R1 members will think that the colour should be Blue, and the other group will think it’s Red. This will cause everything to go wrong once the painters are informed. However, because group F is smaller than 1/3 (remember, 2/3 of people are trustworthy), it is impossible for BOTH F+R1 and F+R2 to be bigger than 2/3 x N.

The dBFT doesn’t guarantee consensus. This is because it’s possible the messaging network is broken, stopping people from talking to each other. However, it does give a guarantee of protection. If you do reach consensus, you cannot then reach a separate different consensus later. As long as all of the bad actors are less than 1/3 of all bookkeepers on the network, all is well.

Conclusion

NEO, the ‘Chinese Ethereum’ has been making huge strides these last few years, seeing explosive growth.  NEO has strong leadership, an experienced team of developers and a loyal community pushing their platform. In fact, NEO recently formed a cooperation with Microsoft. This has only helped move them into a more favourable position. The adoption of NEO’s software by Microsoft, the software giant, only seems to strengthen NEO’s position in the crypto space. Paired with a consensus that could revolutionise how verifying transactions works, NEO is a promising feat. Will you be trading NEO? If not, why? Let us know your thoughts in the comments below!

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