Most recent update: [July 22nd, 2022]
No securities regulatory authority has expressed an opinion about the Crypto Contracts or EOS, made available on the VirgoCX Platform, including an opinion that EOS is not itself a security and/or derivative.
What Is EOS?
EOSIO is the software created by Block. One which runs the EOS protocol. EOS is a layer one blockchain protocol that supports the creation of decentralized applications. It competes with the likes of Ethereum, Cardano, Polkadot, and other layer one blockchain protocols. EOS offers free transactions, high transaction throughput that enables millions of transactions per second (TPS), and has a consensus algorithm called Byzantine Fault Tolerance Delegated Proof-Of-Stake or BFT-DPOS for short. Much like Ethereum, EOS supports decentralized applications (dApps) and allows other projects to build on top of its protocol. EOS nodes adhere to a constitution that binds the nodes on the blockchain, and it is run by the community. EOS was created to improve the deficiencies of the Ethereum and Bitcoin Blockchains, mainly scalability and feeless transactions.
The EOS token is the native cryptocurrency of the EOS network. Developers and projects looking to build on the EOS blockchain need to hold EOS tokens to use the network resources to build and run dApps on the network.
It’s important to note that EOSIO, is not the same as EOS. The EOS blockchain is just one of many other blockchains running on the EOSIO software, including Telos, Worldwide Asset Exchange (WAX) and others.
How Does It Work?
EOS uses a Byzantine Fault Tolerance Delegated Proof-Of-Stake or BFT-DPOS consensus mechanism to find and add new blocks to its blockchain. Some consider this to be the only decentralized consensus algorithm that is capable of meeting dApp performance requirements on a blockchain.
Under a DPOS model, EOS token holders who adopt the EOS.IO software can select different block producers through a voter approval system. Anyone can choose to be a block producer and will be given an opportunity to do so, if they can persuade the token holders on the network to vote for them. A single new block is produced every 0.5 seconds without overlap and if a block fails to be produced, then it’s skipped, and the time gap increases by 0.5 seconds for each skipped block until a new block is produced.
Block production on the EOS network occurs in rounds of 126. There are 21 block producers based on votes cast by token holders, and 6 blocks each per producer, which are all then scheduled in an agreed upon order by at least 15 of the block producers. If a voted block producer does not produce any block in a 24-hour period, they will be removed from block production consideration until they notify the blockchain using the EOS.IO software of their intention to start producing blocks again.
The BFT or Byzantine Fault Tolerance is an added feature of the DPOS consensus mechanism that allows the EOS network to reach consensus, even when some of the network nodes fail to respond or respond with incorrect information to come to a consensus and add new blocks to the blockchain. This feature also allows block producers to sign a single block with a single timestamp and block height. Once 15 of the 21 producers sign a block, the block is deemed immutable.
What Is TAPOS?
The EOS software was created so that every transaction on the network needs to have the recent hash of the most recent block header, or what some call Transaction as Proof of Stake (TAPOS).
This features signals to the entire network that a user and their EOS token stake are on a particular EOS code fork, it prevents malicious acts by validators on other chains, and it prevents replays attacks.
Who Are the Founders and What Is the History of EOS?
EOS.IO was founded by a private company based in the Cayman Islands called Block.One, which was founded by Brendan Blumer and Daniel Larimer. The network was released in 2018 as an open-source software based on the original whitepaper, which was published back in 2017.
Daniel Latimer was born in Colorado and grew up in Virginia, where he went to get an engineering degree from Virginia Tech. He is considered a serial entrepreneur. Prior to becoming CTO of Block.one, the founding firm behind EOS, Latimer was the co-founder of Bitshares (which he co-founded with Charles Hoskinson, the founder of Cardano) and founded Steemit (which was later sold to Justin Sun, the founder of Tron). In January 2021 Latimer left his role as CTO of Block.One.
Brendan Blumer was born and raised in Cedar Rapids, Iowa. He is also a serial entrepreneur who has been building disruptive tech companies since 2001, when he started GaMEcliff at the age of 15. Prior to becoming the CEO of Block.One, Blumer launched The Accounts Network, Okay.com, and an enterprise data sharing platform in Asia for real estate brokers. Blumer currently serves as the CEO of Block.One.
Block.one conducted a token sale to raise capital to build the EOS network in June 2018. There were 1 billion EOS tokens initially issued, and it raised north of USD $4 billion dollars. The fundraising was done in ETH, as it launched as an ERC-20 token prior to building out the EOS protocol. The EOS token is a utility token.
What Makes EOS Unique and What Gives It Value?
As a competing base layer (layer one) protocol EOS was built more around familiarity, while addressing the drawbacks of other platforms like throughput on Ethereum. EOS.IO also allows developers to build decentralized applications using WebAssembly languages like Python, Java, and C++ instead of learning a new blockchain specific language.
EOS was created to support scalability and be able to support millions of users to help decentralization applications go mainstream.
It was also created as a platform that should be free to use without developers or users having to pay transaction fees making it free to interact with dApps.
The network focuses on low latency and high throughput so that it allows Dapps to run smoothly.
EOS was unique in creation as it has high throughput, is free to use, and allows smart contracts to be used to create dApps on the network. It was created to be a base layer protocol that improved the deficiencies of layer one Ethereum network.
Since EOS does not charge transaction fees to users on the platform (no gas-type fees) the EOS model requires dApp developers to stake EOS tokens to reserve resources such as CPU, NET, and RAM to be used for their dApp transactions.
The EOS token provides token holders with the ability to vote for block producers, vote on protocol upgrades, and is also necessary for dApp developers to hold and stake for computing power on the network. These are primary value drivers for the EOS token.
What Is the EOS Token Supply?
The EOS token is a utility token used for governance of the EOS protocol. The current total supply is 1,031,796,016 with a total circulating supply closer to 955.7 million. There is no max supply limit of EOS tokens. The token inflation rate was 5% annually until February 2020, when block producers (BPs) voted to burn over 34 million EOS tokens held in the EOSIO savings account. The inflation rate has since dropped to 1% annually.
What Are Some Risks or Drawbacks of the EOS network? The EOS protocol, like other layer 1 protocols, is not without its flaws.
A notable drawback is that dApp developers need to pay for transaction bandwidth on the network with EOS tokens. This may deter some dApp developers from building on the network based on EOS token prices.
A second concern has to do with spam transactions on the network. Given that EOS does not have a throughput or transactions per second (TPS) problem and can handle millions of transactions, it does have another issue that is like high gas fees on Ethereum when the network is congested. On EOS, when there is a high number of network transactions occurring, it exploits the EOS economic model around CPU and RAM reservations for developers. At times it could become expensive for developers given this issue, but EOS block producers and developers have been in talks to create a solution in a network upgrade if it proves to be troublesome. As of now, dApp developers have chosen to stay on the platform as it does not seem to be a frequent enough issue to cause concern.
Thirdly, the network is considered to be more centralized than others, as it puts the power in a few block producers' hands as there are only 21 producers each round. Some have proposed to increase this to 43 in referendums to create more decentralization of block production. That being said, even though the BFT-DPoS model allows EOS token holders to have a voting voice in governance, block producers have allegedly been accused of vote collusion, vote-buying and other corrupt practices. However, this is also being addressed by the community as reforms for alternative voting systems have been proposed as viable long-term solutions as the ecosystem grows and the industry matures.
Lastly, there is a risk of low voter participation, which in turn, also makes the network more centralized as fewer voters are taking part in the governance responsibility of being a token holder.
Due Diligence Prior to listing EOS on the VirgoCX Platform, VirgoCX performed due diligence on EOS and determined that EOS is unlikely to be a security or derivative under Canadian securities legislation. VirgoCX’s analysis including reviewing publicly available information on the following:
- The creation, governance, and location of EOS and/or its primary development team;
- The supply, demand, maturity and liquidity of EOS; and
- Legal and regulatory risks associated with EOS.
Statutory Rights under Securities Legislation
VirgoCX is offering Crypto Contracts on crypto assets in reliance on a prospectus exemption contained in the exemptive relief decision Re VirgoCX Inc. dated May 30, 2022 (the Decision). Please be aware that the statutory rights in section 130.1 of the Securities Act (Ontario), and, if applicable, similar statutory rights under the securities legislation of each other province and territory in Canada, do not apply in respect of the Crypto Fact Sheet to the extent a Crypto Contract is distributed under the prospectus relief in the Decision.