EOS and Decentralization

Decentralization is one of the issues at the heart of the crypto community, and some people care deeply about it. Since decentralization was originally a primary feature of Bitcoin and other early blockchain technologies, many people believe that a blockchain network without decentralization would be a step in the wrong direction.

Recently, EOS received a lot of criticism due to concerns that it may not be decentralized or trustless. Many of the points raised in this line of argumentation also apply to platforms like Ethereum and Bitcoin, which are typically considered reasonably decentralized. However, there are a features that are unique to EOS – such as EOS’ delegated proof of stake – that indicate it may be more centralized than other platforms, as argued by Ethereum founder Vitalik Buterin and the blockchain engineering company Whiteblocks in the following video:

Now, a brief analysis of these arguments.

First, EOS allows block producers to freeze accounts and reverse transactions. In their whitepaper, the EOS team asserts that block validators “have the power to select which transactions are included in blocks which gives them the ability to freeze accounts. A blockchain using EOS.IO software formalizes this authority by subjecting the process of freezing an account to a 15/21 vote of active producers.” EOS block validators are chosen democratically by the community, however there are still concerns that they may not act in a way that reflects the community’s wishes.

For example, in June 2018, EOS ‘froze’ seven accounts under suspicion of having been compromised through phishing scams. Shortly after, EOS Block Producers (BP) reportedly received a separate emergency order to stop the processing of transactions for 27 accounts, leading to twitter backlash. Although this decision may have been beneficial, it was only discussed by a small group of people without consulting the larger community. This calls into question the trustlessness of using the network and runs contrary to other decentralized networks like Bitcoin or Ethereum where every node operator can either accept or reject network upgrades/decisions and anyone can be a node operator.

Additionally, the election of block producers may not be fully democratic. Mainnet EOS coins were distributed in proportion to those who held ETH contract EOS token. From this webpage, we can see that the top 25 holders owned over 50% of EOS tokens (note that some of these top addresses are probably exchanges and exchanges may not vote on behalf of their users). Because each EOS token is a vote and 25 addresses own half of the votes, it’s very possible for a small number of people to determine the voting outcome. You can imagine that block producers are actually voted in by an incredibly small minority of the overall community.

On top of this, it is very lucrative to be an EOS block producer. The total amount given to block producers will be about 1% of inflation. That means that if EOS is worth $20, an average block producer could be making $7MM in net revenue – at $2 per EOS, this could be approximately $700,000 per year. EOS nodes earn much more than miners in other networks like BTC or ETH. Therefore, a very small number of EOS holders will be able to influence who becomes a block producer and who will be earning large amounts of money. It’s not clear that this could lead to any sort of corruption, but it does indicate that EOS governance is somewhat centralized and that governance decisions carry large financial stakes. Whether or not it’s more centralized than Ethereum or Bitcoin is another debate, as discussed by EOS founder, Dan Larimer.

Finally, EOS block validators do not have visible source code, so it is not possible for a third party to verify honest behavior. In the report EOS: An Architectural, Performance and Economic Analysis, the research team for Whiteblock, a blockchain engineering company, asserted the following:

The EOS Core Network is comprised of non-transparent servers that do not share the source code that is being processed due to firewalls and insulation of the network. Given this structure, algorithmic or cryptographic proof implemented to validate that the block producers are actually running the same software or client presented within the publicly available EOS repository.

According to Whiteblock’s analysis, EOS cannot be fully audited and some information is not publicly available. This raises serious concerns about its trustlessness.

The above critiques indicate that EOS could be susceptible to centralization and governance issues, but it is still up for debate whether or not it actually is. For example, it’s clear that very few people make active decisions about how to govern EOS, but this doesn’t definitively mean that EOS is centralized (especially since decentralized networks like Bitcoin also experience governance issues). Still, EOS’ lack of open source validators and account freezes might indicate that users are placing their trust in the hands of humans, rather than a truly decentralized network.

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Joe Delistraty
Technology Researcher