Neo, an Ethereum alternative and one of China’s oldest blockchain protocols, is starting to roll out a third version of its public blockchain infrastructure, dubbed N3. 

Why it matters: N3 is a make-it-or-break-it moment for one of China’s most promising and globally recognized blockchain projects. The team has been working on the update for years. On paper, N3 hits all the right notes for becoming a widely used blockchain protocol. But it will need to stand out from an increasingly competitive crowd. 

  • The upgrade comes at an opportune time: The Ethereum network is facing critical capacity challenges, meanwhile the Chinese government highlighted blockchain as a strategically important technology in the latest Five-Year Plan. 
  • Founded in 2013, Neo is one of many Ethereum alternatives looking to attract developers to build decentralized applications on its blockchain. 

READ MOREBlockchain, fintech get name checks in 14th Five-Year Plan

Details: The original planned launch date for Neo’s third iteration was in 2020, but it was pushed back to Q1 2021 because the system wasn’t ready, Da Hongfei, co-founder of Neo, told TechNode. It is difficult to predict a specific time for a community-driven project, Da said. Like most public blockchains, the code was developed by a small team of core developers and a wider global developer community. 

  • N3 will increase transaction speed on the network from 1,000 per second to 5,000 and reduce transaction charges, known as “gas fees,” by 100 times, according to a Neo press release emailed to TechNode.
  • Cheap gas is strategically important to compete with the Ethereum network, whose rocketing transaction fees have sent developers looking for greener pastures. 
  • The new version of the chain will also include oracle integration, a decentralized file storage solution similar to Filecoin’s IPFS, and a new governance mechanism.
  • Oracles like Chainlink and decentralized storage like Filecoin are relatively new, viable blockchain features. When Chainlink and Filecoin broke out with their solutions in 2020, their coin prices soared.

Just like a car needs gasoline to run, the Ethereum virtual machine needs gas.

Gas fees are essentially transaction fees that users pay to miners to include their transactions in blocks, which make up the ever-growing blockchain ledger.

Ethereum miners can pick which transactions to execute, so the higher the demand for execution—reflecting an increase in the number of people wanting to use the network—the higher the gas fees.

  • Neo’s focus is digital assets, so the co-founder said the community is “encouraged” to build fundamental infrastructure for decentralized finance, such as landing and swap protocols. 
  • Oracles are key to DeFi because they connect the real world to blockchains. Da also sees N3 as a good place to build non-fungible tokens (NFTs), due to the decentralized file storage feature. 
  • Da said that because developers were waiting for the network upgrade, they hadn’t been building many dapps on Neo. 

Migration: The migration of Neo tokens to the new network will take place using a consortium interoperability protocol Poly Network developed by the team behind Neo. 

  • Exchanges and wallets take care of token migration, the process by which old tokens are converted into new tokens on the new chain, using smart contracts. 
  • Radical changes to the blockchain protocol such as the ones N3 will implement usually take place through a so-called hardfork: The chain splits in two parts, and the change is implemented in one.  
  • Instead of a hardfork, Neo will use an interoperability protocol, a type of chain that enables the transfer of information from one blockchain to another, to create a completely new chain. 
  • “We will be the first blockchain in the world to do a completely new chain through an interoperability protocol,” Da said.
  • These protocols are at the frontier of blockchain development and crucial for mass adoption: They promise to connect chains that currently exist as islands to create an internet of blockchains. 
  • The N3 migration will test whether Poly Network can be used to create a blockchain from scratch and correctly transfer all the data from the existing chain. 

The Ethereum challenges: The Ethereum network has been facing significant challenges in the last few months, and developers are scrambling to find alternatives for their dapps. Gas fees have been hitting record highs as the network becomes congested

Da Hongfei, Neo’s co-founder (Image credit: Neo)
  • Ethereum “has reached its maximum capacity,” Da said. Transactions per day have plateaued at around 1.2 million to 1.3 million since August, while alternatives like Binance Smart Chain are reaching record-high transaction volumes. 
  • The update to Ethereum 2.0 would likely solve some of these problems, but has been continuously put off. Da thinks we won’t be seeing it for a few years: “It’s difficult to deal with different interest groups,” particularly miners, he said. The upgrade will hurt their bottom line by drastically changing how they are rewarded. 
  • “At the end of the day, Ethereum is one blockhain but everyone needs to maintain a ledger. The capacity growth of the Ethereum ledger will not outpace the growth of demand,” so there is room for many different protocols to grow, Da said. 

Government tailwinds: Blockchain’s inclusion in the 2021-2025 Five-Year Plan will “definitely” bring more investment to the technology, Da said. 

  • Authorities are looking for projects that can develop blockchain fundamentals like smart contracts, consensus algorithms, and encryption, the plan said. 
  • “It is in China’s national interest to have our own [intellectual property] in those areas,” Da said, adding that it is “dangerous” for China’s blockchain industry to rely on US-made technology, particularly in encryption. 
  • Neo is not exactly what they are looking for. It is a public chain, which doesn’t impose any checks on the flow of information or network participants. 
  • The company is also working on permissioned blockchains, including a permissioned version of interoperability protocol Poly Network which has been integrated in the state-backed Blockchain Services Network
  • Da is “not concerned that [Neo] will conflict with regulations in China,” because it doesn’t “live in one jurisdiction: If everyone in this office in China disappeared tomorrow, Neo will live and it will overcome this setback and it will grow again.”

Eliza was TechNode's blockchain and fintech reporter until July 2021, when she moved to CoinDesk to cover crypto in Asia. Get in touch with her via email or Twitter.