How legitimate is Steemit com

Tron controls Steem. Appropriate response - or takeover?

Steem. Image from BeatingBetting.co.uk via flickr.com. License: Creative Commons

After Tron bought Steemit, there was a blockchain war for control of the Steem blockchain. The previous validators want to protect their power with a soft fork, Tron and some exchanges respond with a hard fork and bring the blockchain under their control. Does Steem still have a future?

Steemit is the heart of the Steem blockchain. The platform for blogging and videos did something wonderful: it makes the upvotes on the page part of the consensus mechanism of the Steem blockchain. A “like” is free for the reader, but brings the author income. Every blockchain creates money “out of hot air”, but at Steem some of that goes to bloggers on Steemit.

This is an extremely exciting concept that has developed a certain dynamic, but in the end it also comes up against the problem that the income cannot be scaled, but ends up in a zero-sum game among authors.

Tron on a shopping spree

The Tron Foundation recently bought Steemit Inc, the publisher of the blogging platform.

If you don't know Tron: This is Justin Sun's blockchain, it is, as I understand it, a clone of Ethereum with the DPoS consensus mechanism, similar to the one that Steemit also uses. We'll get to that later. Tron was a medium to large-scale 2017 ICO that raised Sun $ 60-70 million. Since then, Tron has been marketed as a cheaper alternative to Ethereum for smart contracts, is home to many DeFis and DApps, but without really getting started. The interesting things continue to happen with Ethereum.

Justin Sun used his proceeds from the ICO to set up the Tron Foundation, which has since attracted attention through collaborations and purchases. In addition to the initial investment, the Tron Foundation still holds a large proportion of the Tron tokens, which should mean that it should hold several billion dollars in its portfolio. With this war chest, Justin Sun bought BitTorrent Inc, the company behind the decentralized file-sharing protocol, to bring BitTorrent to the Tron blockchain, as well as the Poloniex exchange from New York. Furthermore, through collaborations, he managed to ensure that the dollar stable coins Tether also use the Tron blockchain, and it was only recently announced that Blockstream will also bring Tron to its liquid sidechain.

Instead of convincing companies to use Tron, Justin Sun just buys them. So now Steemit Inc, the company that operates the Steemit website and is therefore the center of Steem. Its founder sold it to Sun's Tron Foundation for an undisclosed amount. Presumably he ran out of money after the bear market hit Steem so badly that the company had to lay off numerous employees.

Part of the contract is apparently to migrate Steem to the Tron blockchain, both the website and the protocol, which is no longer to run on its own blockchain, but is to become a token of the Tron chain.

A fork to freeze them

Afterwards, a drama arose in the Steem community that dovetailed politics and technology in a way that is only conceivable with blockchains.

Steem is a DPoS blockchain. This stands for "Distributed Proof of Stake" and means that there are two types of consensus-relevant nodes: On the one hand, the stakers, i.e. those who hold the coins and thus have voting rights. With these voting rights, however, they do not generate blocks themselves, as happens in a pure proof-of-stake system, but choose a certain number of “validators”, also known as “witnesses”. These form the blocks of the Steem blockchain.

One problem is that Steemit Inc holds a huge amount of Steem tokens. The company received around 65 million Steem tokens through a premining - they mined it before Steem officially went live. There are currently around 360 million Steem tokens, only a small proportion of which actively vote. If Steemit "leveled" their tokens, i.e. used them for staking, the company could enforce most, if not all, of the decisions in the system. However, Steemit abstains from this right, which is an unwritten, but well-known and assumed agreement with Steem. Instead of Steemit, the “community” chooses the validators.

The Steemit company has been trusted to abide by the agreement. But the Tron Foundation? Because the Steem community - or the currently active validators and their constituents - don't trust Justin Sun, they decided to take a radical step: they unceremoniously withdraw the voting rights from Steemit's tokens. Because, so the argument goes, there is a social consensus that these tokens do not vote, and this must be retained even after the sale to the Tron Foundation. Therefore, a soft fork was programmed that puts Steemit's tokens on a blacklist.

Damage to property by changing the protocol

That's a tough piece. The validators invalidate the tokens that Tron acquires with the purchase of Steemit Inc. These 65 million Steem tokens from Tron are no longer fungible with the other Steem tokens, as they are obviously less valuable due to the lack of the staking function. They may not even move anymore. This is how the soft fork becomes a kind of property damage, as Justin Sun notes:

(1/9) On Feb 22, some malicious hackers froze 65 million #STEEM legally owned by Steemit, the core STEEM developers. When we found out, the hackers already hijacked STEEM & threatened to nullify the existing STEEM. We had a difficult choice.

- Justin Sun (@justinsuntron) March 3, 2020

According to Sun, a hacker tried to freeze 65 million Steem, the legal owner of which is Steemit. After consulting with lawyers, he was convinced that this was a criminal act. The Steemit company finds even clearer words:

“Softfork 22.2 was maliciously structured with the intention of freezing a handful of very specific accounts and depriving them of their right to own and use their own assets. It is illegal and criminal. The group behind her can carry out this attack on any member of the Steem community however they please. They even threatened a hard fork that will delete all existing Steem tokens ... "

A hard fork as a counter blow

Of course, Steemit and Tron didn't accept that. The validators wanted to play with dirty methods, and the Tron founder replied with the same.

Justin took advantage of his relationships with exchanges and, according to the current rumor mill, offered them $ 100,000 if they use the Steem tokens they hold on their platforms to vote for Tron's validators. The background here is that the majority of Steem tokens are on exchanges, but are usually not used there to vote on something. Some exchanges, notably Binance, Poloniex and Huobi, have now used their customers' Steem tokens to help Tron get through a hard fork.

A soft fork like the one introduced by the Steem community adds a new rule to the log. It is thus backwards compatible as long as this rule is not incompatible with old rules. If I allow everybody to drive 120 kilometers per hour, then it is legitimate for trucks to only be allowed to drive 80 kilometers. This makes it very easy to set new rules with a soft fork, such as a blacklist that determines that certain coins can no longer be part of a transaction. A soft fork is difficult to stop because nodes that do not support it still consider the new blocks to be valid.

The only way to stop a soft fork is to eradicate the new rule using a hard fork. A hard fork cancels rules such as that trucks are only allowed to drive 80 items or that the Steem tokens of the Tron Foundation are allowed to participate in the selection of the validators. This makes a hard fork "hard" because it is incompatible with old nodes that no longer recognize the new blocks as valid.

Nevertheless, the Tron Foundation managed to punch through the hard fork with the help of 42 million tokens on the exchanges. This again authorizes Steem's tokens to choose validators. The Tron Foundation has thus managed to defend the Steem protocol against a change.

The aftermath

Of course, the outcry in the Steem community was great, and most of the crypto media are following the story of the honest community and the evil Justin Sun, who is taking over the Steem blockchain with the help of the exchanges. How dare you Of course, the Tron Foundation gained some control over Steem by train, and of course it is highly doubtful that the exchanges are simply using their customers' tokens to conduct politics.

However, a bit of self-reflection would also be appropriate. Perhaps it wasn't quite right to expropriate Tron by changing the protocol after all? And maybe Tron acted completely correctly within the framework of the rules defined in the Steem protocol? When users leave their coins on exchanges, they entrust them with the tokens, including the voting rights associated with them. The fact that the exchanges are now using them without asking customers is not the best way, but it is likely that they are not violating a contract or the rules of protocol.

As is so often the case, however, there are undesirable consequences when a blockchain protocol is misused for power games. Steem tokens that are used for elections have to rest for 13 weeks before they can become normal, transferable Steem tokens again. This “power down” phase is of course uncomfortable for the exchanges because they can no longer pay out their customers' Steem tokens. With a further hard fork, this phase is now to be reduced to one to three days.

The Steemit website is currently unavailable. The price of the Steem tokens did not drop significantly during the drama. Justin Sun explains that there will be a transition period of four to six weeks during which the Tron Foundation will control the development of Steem. Then he will return the consensus finding back to the community.