Neo 3.0: Expanding Neo's Blockchain Capabilities

Neo Network’s dBFT 2.0 Consensus Mechanism

To more fully enable the potential of Neo (NEO), its development community set about creating an updated version of its current Delegated Byzantine Fault Tolerance (dBFT) consensus mechanism. The development of dBFT 2.0 was completed in Q1 of 2019, and is meant to integrate with various other components of the Neo ecosystem to expand the overall capabilities of the network. The dBFT 2.0 update was an essential step in the overall Neo 3.0 blockchain network update cycle. This consensus update entails a variety of enhancements, including an improved smart contract creation framework through the Neo Virtual Machine (NeoVM), Neo File Storage (NeoFS), NeoID, Neo’s in-house oracle system, and a generally streamlined technical architecture.

The Neo blockchain’s dBFT algorithm is similar to many Proof-of-Stake (PoS) models and works by selecting the network's consensus nodes through a proxy voting process. This process relies on a set of consensus nodes to jointly generate and validate blocks. In keeping with their name, these consensus nodes must reach mutual consensus on a block before it is committed to the blockchain. As a result, dBFT 2.0 facilitates single block finality, meaning that all on-chain transactions are essentially irreversible — dramatically mitigating the likelihood of a fork.

Neo’s dBFT 2.0 helps address several inefficiencies that the first version of dBFT struggled with. For instance, dBFT 1.0 was sometimes susceptible to a single block fork, meaning that messaging problems between system nodes could result in network inefficiencies. To fix this problem, dBFT 2.0 changed the messaging request system that allows nodes to communicate with each other by adding a recovery message option, which helps the network’s main consensus nodes more effectively achieve their purpose. Additionally, dBFT 2.0 continuously audits the operations of consensus nodes in order to help increase the network’s trust, security, and scalability. This auditing process minimizes poor network connectivities that could result in network outages or exploitable consensus node vulnerabilities. It also allows consensus nodes to restart on their own or initiate a full network restart in the event of a power outage, hardware failure, or any other system issue.

In 2020, dBFT 2.0 was able to generate new blocks in 15–20 seconds and process transaction throughput blocks at 1,000 transactions per second (TPS). However, Neo’s founders claim that with proper optimization the network can reach 10,000 TPS, which would be more than enough to support most large-scale enterprise usage requirements. While some see Neo’s overall performance and utility as impressive, others have criticized its consensus system for being too centralized (as the network relies on only seven main network consensus nodes). Such debates are fairly common in the crypto industry, as different stakeholders in blockchain have different views on how best to optimize blockchains for speed, security, and scalability.

NeoID

As mentioned, dBFT 2.0 was an initial step in the Neo 3.0 blockchain network overhaul, and opens the door for a variety of additional network functionalities. One such functionality is NeoID. This proprietary digital identity technology allows various assets and node holders to provide proof of their identity through a blockchain-based identification system. As a result, consensus node ownership can now be pegged to specific organizations or individuals for an additional degree of real-world authentication. As a result, if malicious behavior is detected, it is possible to freeze, retrieve, revoke, or inherit node ownership. NeoID’s integration therefore helps ensure the validity of network consensus nodes and their constituents, with the goal of fostering a fairer and more trustworthy system.

NeoID also helps facilitate legal compliance for financial assets on the Neo network. Leveraging Neo’s identity system, network participants can log and exchange a wide variety of assets on the platform. For example, a user can log a physical asset (such as gold) on the blockchain and generate a unique digital representation of that asset, which is registered to the user’s digital identity and recognized by regulatory authorities. This functionality has great potential for use with stablecoins, synthetic assets, security tokens, non-fungible tokens (NFTs), and other decentralized finance (DeFi) applications. As the Neo network ecosystem continues to grow, the use cases for NeoID are also expected to expand to an even wider variety of applications.

Neo Blockchain 3.0: Uses and Ecosystem Development

One of the most important challenges facing blockchain networks is insufficient interoperability between chains. The more that blockchain networks can share data, digital assets, and other information, the greater each network’s overall utility will be for end-users. Neo 3.0 is designed to support this blockchain interoperability movement through continued development of external cross-chain and native on-chain ecosystems, in large part through the establishment of a Neo-built DeFi project, Flamingo Finance, and an interoperability protocol called Poly Network.

Poly Network and Neo achieved a collective transaction value of USD 2.1 billion in 2020 and engaged in interoperability functionalities with several blockchain systems including Ontology, Ethereum, Bitcoin, Cosmos, Binance Smart Chain, and others. Given the growing influence of DeFi in today’s marketplace, Neo’s interoperability represents a potential solution for a variety of DeFi end users — enabling consistent data exchanges with the Neo blockchain protocol. This interoperability can be used with stablecoins, decentralized exchanges (DEXs), credit assessment tools, staking, instant asset swaps, and other recently developed financial applications.

Improved Pricing Model of NEO and GAS Coins

Neo’s economic model makes use of two distinct crypto assets which are responsible for different purposes, specifically neo (NEO) and gas (GAS) coins. For blocks to be validated on the Neo blockchain, Neo makes use of a PoS mechanism whereby coins are deposited into validator and consensus nodes and staked. In return for helping to secure the network and propagate blocks, neo coin stakers receive gas coins. NEO is also used to grant voting rights to help determine on-chain and off-chain ecosystem and governance processes.

GAS is typically used to pay for smart contract execution and transaction fees on the network. Developers building on Neo 2.0 have typically experienced substantial costs in deploying and running smart contracts, hindering overall smart contract development and usage on the Neo crypto platform. Many developers consider Neo 2.0’s pricing model less than optimal for GAS-fueled applications, arguing that the model inhibits not only the consistent growth of Neo decentralized application (dApp) usage but also the overall development on the Neo network. Neo 3.0 is designed to fix this GAS pricing problem by providing increased performance and utility. The upgraded network is designed to offer a drastically enhanced TPS rate in order to significantly reduce the platform’s transaction costs — meaning lower GAS fees and a more effective network pricing model.

Neo Virtual Machine: Neo 3.0’s Smart Contract Creation Engine

As part of the Neo 3.0 updates that build off of the capabilities of dBFT 2.0, the Neo Virtual Machine was designed to help the protocol create, execute, modify, and upgrade smart contracts that interact with the Neo crypto ecosystem and other blockchain networks. NeoVM is a lightweight virtual machine designed with a computationally universal framework that is able to ensure consistent communication through smart contracts and nodes within the system, while also ensuring proper developmental support for software engineers who are building dApps on the Neo blockchain platform.

NeoVM is designed for increased security and scalability, and is built to work in unison with the dBFT consensus mechanism and Neo’s smart contract framework in order to drive the overall growth and value of the Neo ecosystem. Neo’s smart contract protocol, NeoContract, has the ability to execute and manage smart contracts using most of the mainstream programming languages, including industry standards Python, Java, C#, and JavaScript. This means the system can be used by almost any developer and encourages cross-platform functionality. Neo’s multi-language programming functionality contrasts with the programming functionality of smart contract leader Ethereum, which mainly uses its native programming language Solidity (not familiar to the majority of mainstream developers) for creating smart contracts.

Neo Oracles

Decentralized oracles are built to provide off-chain real-world data to smart contracts that operate within a blockchain protocol’s on-chain environment. Oracles are designed to help verify the authenticity of data. They do so by using multi-party verification to store data in blocks on-chain, which allows smart contracts to access the necessary information needed to enable a variety of blockchain-based uses. Neo 3.0’s oracle system is structured to help software developers easily create more complex, situation-specific oracles that further the development of a diverse range of dApps relying on legacy databases and other sources of external data.

Within a blockchain context, oracles are also used to collect price feed data from a large number of independent sources. Oracles aggregate these disparate data streams into a consolidated, real-time price measurement verification system. These master data feeds are critical to enabling the growing number of blockchain-enabled DeFi applications, and Neo oracles help ensure that the Neo blockchain ecosystem plays an active role in the future smart economy.

NeoFS

NeoFS, or Neo File Storage, is Neo 3.0’s distributed, decentralized object storage network. It is designed to facilitate cost-effective and transparent file storage for dApps. The NeoFS platform allows users to rent out storage in exchange for Neo’s gas coins or use GAS to store files on the network. NeoFS is also designed to work with Neo smart contracts to enhance the decentralization of Neo’s dApps. While NeoFS bears some resemblance to other blockchain-enabled file storage platforms such as Storj and Filecoin, the Neo team’s approach to decentralized data storage features a number of unique innovations.

NeoFS is built using zero-knowledge data validation through homomorphic cryptography to help minimize data transfer amounts during computation, in order to increase network scalability and minimize network-related costs. This means that users are able to send data very quickly in an extremely secure environment, which gives NeoFS users enhanced control over how their data is stored and shared. According to the Neo team, NeoFS is also highly scalable and integratable with mainstream computation protocols such as HTTP and S3, which means this tool can be readily applied to a wide range of standardized computer-based environments.

NeoFS can also be used to create private storage systems for small and medium enterprises (SMEs) that use data centers to store large amounts of complex Internet of Things (IoT) data. NeoFS is even being used as a content delivery network (CDN) by several dApps. Generally speaking, CDNs allow different web applications to share online content such as web objects (e.g. text, graphics, and scripts), downloadable objects (e.g. software, media files, and documents), streaming media, and social media websites. As a result, NeoFS helps dApps deliver web-based content to their users while providing a better way for different businesses and individual users to store their essential files.

Neo certainly has its competitors. Smart contract projects, oracle providers, identity verification services, and decentralized file storage systems are increasing in quality and quantity by the day. Nonetheless, Neo 3.0 represents a notably comprehensive ecosystem that incorporates all of the above in an innovative manner to help solve real-world problems. While competition is increasingly heated within the blockchain industry, Neo 3.0 is designed to position the Neo network as a one-stop shop for businesses requiring a wide range of scalable and affordable blockchain services.