What Is Neo (NEO)? A Simple Explanation

What Is Neo (NEO)?

Neo is an open-source Layer 1 blockchain where developers can build applications and smart contracts. Smart contracts are programs on a blockchain that can automatically carry out preset rules.

The Neo network uses two native tokens: NEO and GAS.

NEO is the network's governance token. NEO holders can vote for candidates for the Neo Committee. This committee helps govern the network and adjust certain network parameters. The seven committee members with the most votes also serve as consensus nodes.

GAS is used to pay for using the network. For example, you pay GAS for transactions and for running and deploying smart contracts.

Neo also offers different services for applications. For example, Neo N3 has a built-in oracle and its own domain name system, Neo Name Service. An oracle can make information from outside the blockchain available to smart contracts.

Within the broader Neo ecosystem, there is also NeoFS, a decentralized storage system that applications can use to store data.

The current main version of the Neo blockchain is called Neo N3.

Key Takeaways

• Neo is a Layer 1 blockchain for apps and smart contracts.
• NEO is the governance token that holders can use to vote.
• GAS is used for transactions and running smart contracts.
• Neo N3 is the current mainnet and is separate from the older Neo Legacy.
• Neo uses dBFT, where elected consensus nodes confirm blocks.

How Does Neo Work?

Neo works with an account model. Simply put, the blockchain keeps track of how many tokens each account has and what the current state of smart contracts is. It's similar to an overview that tracks balances and program data.

Smart contracts run on NeoVM. This is a virtual machine, an environment where smart contract code is executed. The important idea is that different nodes reach the same outcome with the same input. That way, they can check whether everything is following the network's rules.

Developers can write smart contracts in C#, Python, Go, Java, and TypeScript, among other languages. That code is then converted into instructions that NeoVM can execute.

You pay GAS for transactions and for using smart contracts. Neo normally produces a new block about every 15 seconds.

Through dBFT, the consensus nodes decide which transactions are included in a block and when that block is permanently added to the blockchain.

Neo (NEO) Overview

What Is Neo N3?

Neo N3 is a major new version of Neo. It's not just a regular software update, but was launched as a separate blockchain alongside the earlier Neo Legacy network.

The Neo N3 mainnet went live in August 2021.

Because of that, NEO and GAS had to be migrated from Neo Legacy to N3. The two networks were not compatible in important ways, which meant tokens on Neo Legacy were not automatically available on Neo N3 too.

N3 introduced a new governance model, among other things. NEO holders can vote for candidates for the Neo Committee. The 21 candidates with the most votes become committee members. The seven committee members with the highest votes also serve as consensus nodes.

The committee can vote on certain network parameters, while consensus nodes are responsible for proposing and confirming new blocks.

Neo N3 also offers different services for applications, including a built-in oracle and Neo Name Service. Within the broader Neo ecosystem, NeoFS can also be used for decentralized storage.

How Do NEO and GAS Work Together?

NEO and GAS are both part of Neo N3, but they have different functions.

NEO is the governance token. NEO holders can vote for candidates for the Neo Committee and receive GAS according to the protocol rules.

GAS is used to pay for network usage. You need GAS for transactions and for running or deploying smart contracts. So just owning NEO is not enough for that.

Neo makes a distinction between system fees and network fees. System fees are created, for example, when smart contracts are executed, and they are burned. That removes that GAS from the supply.

Network fees are paid for processing and including transactions in a block. These fees go to the consensus node that produces the block.

In addition, new GAS is generated according to the protocol rules. Part of it goes to NEO holders, part to the committee and consensus nodes, and the largest part to NEO holders who vote for elected committee members.

Accumulated GAS is automatically claimed when the native NEO contract is called, for example when you send NEO or cast a vote.

What Is Delegated Byzantine Fault Tolerance in Neo?

Neo uses delegated Byzantine Fault Tolerance, or dBFT for short, to reach agreement on new blocks. This is Neo's consensus mechanism.

NEO holders vote for candidates. The 21 candidates with the most votes become members of the Neo Committee. The seven candidates with the most votes also become consensus nodes.

These consensus nodes produce and review new blocks. For each block, one consensus node is chosen to make a proposal. The other consensus nodes check that proposal and vote on it.

A block is only confirmed when more than two-thirds of the consensus nodes agree. Because of that, the protocol is designed to keep reaching consensus as long as no more than one-third of the consensus nodes act incorrectly or maliciously.

dBFT does not use mining. Instead, actual block production is handled by the elected consensus nodes. NEO plays a role in electing those nodes, but the blocks themselves are confirmed through dBFT.

One important feature of dBFT is immediate finality. Once enough consensus nodes have confirmed a block and it has been added to the blockchain, it is considered final. So there is no need to wait for several more blocks to get extra certainty.

What Is the Difference Between Neo and Bitcoin?

Neo and Bitcoin are both blockchains, but they were designed for different core purposes. Neo is a platform for decentralized applications and smart contracts. Bitcoin is basically meant to be a peer-to-peer electronic cash system.

A few important differences:

How Did Neo Start?

Neo was founded in 2014 by Da Hongfei and Erik Zhang, back when it was still called Antshares. The original source code for Antshares was published in July 2015.

The Antshares mainnet went live in October 2016. In 2017, Antshares changed its name to Neo. Around that time, the project also introduced Smart Contracts 2.0.

Later, Neo N3 was developed as a major new version of the network. The Neo N3 mainnet went live in August 2021. Users had to migrate their NEO and GAS from Neo Legacy to use the tokens on N3.

What Are the Benefits of Neo?

Neo has a few important features:

• Multiple programming languages: Developers can write smart contracts in C#, Python, Go, Java, and TypeScript, among other languages. That means developers can use existing programming knowledge.

• Immediate finality: Once a block has been confirmed through dBFT by enough consensus nodes, it is considered final. So there is no need to wait for several more blocks for extra certainty.

• Built-in services: Neo N3 offers an oracle and Neo Name Service, among other things. Within the broader Neo ecosystem, NeoFS can be used for decentralized storage.

• Clear split between NEO and GAS: NEO is used for governance, while GAS is used for transaction fees and running smart contracts.

What Are the Downsides of Neo?

Neo also has a few important points to keep in mind:

• Small group of consensus nodes: The seven candidates with the most votes within the Neo Committee serve as consensus nodes. That means direct block production is handled by a relatively small group of elected nodes.

• Voting power depends on NEO holdings: The number of votes a NEO holder has is tied to how much NEO the account holds. Larger NEO holdings therefore have more influence on electing committee members and consensus nodes.

• Dependence on consensus nodes: dBFT is designed to keep working well as long as no more than one-third of the consensus nodes act incorrectly or maliciously.

• NEO is not divisible: The smallest unit is 1 NEO. So you cannot send or use a fraction of a NEO to vote.

Conclusion

Neo is a Layer 1 blockchain for applications and smart contracts. The network's current version is Neo N3.

Neo uses two native tokens with different functions. NEO is used for governance and to vote for candidates for the Neo Committee, while GAS is used for transaction fees and running smart contracts.

For consensus, Neo uses delegated Byzantine Fault Tolerance (dBFT). The seven highest-voted committee members serve as consensus nodes and propose and confirm blocks. Once enough consensus nodes have confirmed a block, the block is final.

Neo also stands out for supporting multiple programming languages and services like an oracle and Neo Name Service. One important trade-off is that direct block production is handled by only seven elected consensus nodes and that voting power in governance is tied to the amount of NEO.