EOS (usually pronounced ee-oss) is in the category of “protocol-level blockchains”. EOS is the name of the blockchain itself and the token that powers it.
Blockchains in this category are like foundations on which people can build applications, write smart contracts and issue other tokens. Ethereum, for example, is in the same category.
And similar to Ethereum, the EOS coin itself is used to run applications on the network and is necessary for people who want to start using the EOS blockchain.
But EOS is overall very different to Ethereum. While Ethereum’s end goal is to create a completely decentralised, immutable and tamper-proof foundation, EOS tries to actively bring in a human element, to operate as a social blockchain. The EOS blockchain is run as a malleable democracy rather than as an immutable framework.
As the reasoning goes, you can’t completely remove the human element from blockchains anyway, so why not embrace it? This unusual characteristic is one of the reasons EOS is a very controversial project.
Imagine being asked to design a house without knowing whether it’s going to be built on sand, concrete, stone or water. Your design would probably end up being a solid block. It wouldn’t be very pretty or nice to live in, but it would be ready for anything.
Now imagine designing a house that you know will be standing on a solid concrete foundation. It’s obviously much prettier and nicer, but it’s useless unless it’s built on that concrete foundation.
This is like the difference between EOS and other blockchains like Bitcoin and Ethereum.
Bitcoin, Ethereum and many other blockchains are designed like the first house, where you don’t know what to expect so you have to be ready for anything. Anyone can join in to start mining blocks and processing transactions, anyone can build applications and if something goes wrong, there’s usually no one who can fix it. This is what gives them those blockchain qualities of being theoretically immutable and tamper-proof.
But EOS is like that second house. In order to make it much nicer – in the form of faster transactions and a greater degree of flexibility – it’s been specifically designed to stand on that concrete foundation.
In EOS this concrete foundation takes the form of a democratic voting system where people elect 21 “block producers” to control the entire network, with a system called “delegated proof of stake”. These block producers essentially control the entire system. They are responsible for processing transactions and get the final say in network governance matters.
This predictable framework gives EOS the benefit of much higher throughput than other blockchains. It’s simply much easier to design for 21 presumably trustworthy nodes than it is to design a network for an unknown, constantly changing number of potentially hostile nodes.
The downside is that you give complete control to those 21 nodes and need to have complete faith in those block producers and the democratic system by which they are elected. In this way, EOS’s governance mechanisms, and the democratic system by which block producers are elected, are the concrete foundation of the entire EOS network.
As such, understanding EOS is much more about understanding its social dynamics rather than technical jargon.
EOS democracy and block producers explained
EOS’s foundation is a democracy where anyone who holds EOS tokens can vote for block producer candidates, with each EOS token counting as one vote.
Voting is a continuous process. Rather than just lodging a vote once, EOS holders stake their tokens on the candidates of their choice. Users can vote for up to 30 candidates at a time.
The idea is that if one of the top 21 block producers misbehaves or stops acting in the best interests of the network, EOS users will be able to quickly withdraw their votes for that candidate and a more reliable candidate from the standby block producers will step up.
The top 21 candidates with the most votes at any given time become the block producers. The perks of being a block producer are:
Control over decision-making power on the network
A constant stream of income
The block producer income stream comes from EOS’s 1% per year inflation rate. As of September 2019, assuming EOS prices of $3, that 1% per year is equivalent to US$28 million.
This US$28 million per year is distributed daily, divided as follows:
25% goes directly to the top 21 EOS block producer candidates, proportionate to the number of blocks they produce.
75% is distributed to block producers proportionate to the number of votes they have. If someone doesn’t have enough votes to get 100 EOS tokens per day from rewards, they don’t get any.
Assuming US$28 million per year reward and using the distribution of votes as of September 2019, you have a situation where the top 21 block producers are getting roughly US$20 million of EOS per year, while the remainder are dividing roughly US$8 million of EOS between them.
So, income for the block producers and the number of votes they have can be visualised as such:
The different coloured lines in the chart above show how the balance of votes has shifted over time. The green and yellow lines are prior to August 2019 while the black and blue lines are August and September 2019.
As you can see, votes are rapidly consolidating among the top 21 positions.
This is a natural consequence of how the EOS democracy is designed. It’s built as a system where voting power is directly tied to wealth, but most revenue from the system goes to the people who already have the most wealth and votes.
The EOS democracy isn’t a complete free-for-all though – in theory.
Initially it was governed by the EOS Core Arbitration Forum (ECAF), established following a 15 out of 21 majority vote from the block producers at the time. Decisions would come before the ECAF, the block producers would vote on them and the will of ECAF would be carried out.
The EOS constitution experienced a similar fate. It’s a non-binding, non-legal document which can’t be enforced by anyone except the block producers, so they simply started ignoring it. Today vote-swap arrangements are the norm on EOS.
How vote buying works on EOS
As a former block producer explains, the vote buying arrangement mostly takes the form of a simple swapping arrangement, based on the fact that you can vote with your full token holdings on up to 30 different block producers at once.
So a group of 30 entities gets together and all agree to vote for each other. If every person in this arrangement has a million EOS tokens, that gives each of them 30 million votes for free.
This system provides an enormous advantage for block producers who buy and sell votes, and means the only way to climb the ranks of block producers is to start buying and selling votes yourself.
It also helps consolidate power even further among the top 30 token holders, because they can create a lucrative voting bloc which constantly self-reinforces by earning the lion’s share of the EOS mining rewards.
Today, cryptocurrency exchanges make up an outsized portion of the top 30 voting bloc, as they get an extra advantage by being able to vote with their customers’ EOS holdings
EOS developers are making efforts to solve the vote buying problem, but these efforts are stymied by the fact that changes can only go through when approved by block producers, and the limitations of the democratic framework around which EOS is built.
Disclosure: At the time of writing the author holds BTC, BNB.
Disclaimer: Cryptocurrencies are speculative, complex and involve significant risks – they are highly
volatile and sensitive to secondary activity. Performance is unpredictable and past performance is no guarantee of
future performance. Consider your own circumstances, and obtain your own advice, before relying on this information.
You should also verify the nature of any product or service (including its legal status and relevant regulatory
requirements) and consult the relevant Regulators' websites before making any decision. Finder, or the author, may
have holdings in the cryptocurrencies discussed.
Tim Falk is a freelance writer for Finder, writing across a diverse range of topics. Over the course of his 15-year writing career, Tim has reported on everything from travel and personal finance to pets and TV soap operas. When he’s not staring at his computer, you can usually find him exploring the great outdoors.
How likely would you be to recommend finder to a friend or colleague?
Very UnlikelyExtremely Likely
Thank you for your feedback.
Our goal is to create the best possible product, and your thoughts, ideas and suggestions play a major role in helping us identify opportunities to improve.
finder.com is an independent comparison platform and information service that aims to provide you with the tools you need to make better decisions. While we are independent, the offers that appear on this site are from companies from which finder.com receives compensation. We may receive compensation from our partners for placement of their products or services. We may also receive compensation if you click on certain links posted on our site. While compensation arrangements may affect the order, position or placement of product information, it doesn't influence our assessment of those products. Please don't interpret the order in which products appear on our Site as any endorsement or recommendation from us. finder.com compares a wide range of products, providers and services but we don't provide information on all available products, providers or services. Please appreciate that there may be other options available to you than the products, providers or services covered by our service.