This post first appeared Thursday in our investor newsletter. Sign up for the email, here; or, go to tokenreport.com for our listing of all current and upcoming initial coin offerings (ICOs)

A problem with cryptocurrency emerged in the public eye in June 2016, when Ethereum hard-forked in order to reimburse investors in The DAO, a decentralized venture capital fund that collapsed due to a catastrophic security flaw. The fork compromised Ethereum’s decentralization. Should a powerful group be able to change the protocol? Surely not.

One year later, both Ethereum and Bitcoin face a similar conundrum: How to make proposed protocol changes to handle higher and higher transaction fees, slower processing rates and uncertainty over security. Proposed solutions to this problem require miners and developers to commit to a new protocol that is incompatible with the old, a so-called “hard fork.” However, Bitcoin miners’ profit incentive is not necessarily aligned with the interests of users and developers. To avoid this problem, many believe it is necessary to adopt a new kind of decentralized governance.

Consensus is growing behind so-called “proof-of-stake” (PoS), which distributes votes based on ownership. It would replace “proof-of-work” (PoW), used by Bitcoin founder Satoshi Nakamoto, which distributes votes based on computing power contributed to the network. If PoW is “one CPU, one vote,” then PoS is “one coin, one vote.” If PoS enables more nimble adaptation, it may be the key to supplanting Bitcoin as the most valuable cryptocurrency in the world.

Ethereum may be moving away from its PoW protocol and toward PoS with Casper, possibly in late 2017 or early 2018. Casper will shift power to ether holders, but it won’t prevent hard forks, which Ethereum core developers openly embrace. Before Casper is to be deployed, two new blockchains, Tezos and EOS, are emerging to compete:

Tezos proposes to replace Ethereum’s reliance on a broad community of application developers with a protocol that can adapt to meet new use cases
EOS proposes a protocol that can handle a great deal more transaction volume than others

Both EOS and Tezos are built upon a Delegated PoS (DPoS) protocol, in which stakeholders (token holders) vote in the block creators who validate transactions, and therefore have power to vote on proposed changes to the protocol itself.

Tezos

A self-amending public blockchain running on a PoS consensus algorithm, Tezos implements several innovations in blockchain technology.

One is formal verification: The Tezos developers are building a protocol designed to support this emerging technology, which can be used to prevent vulnerabilities like the one that took down the DAO.

Another is more fundamental: While Ethereum is designed to encourage anyone to build applications on top of its crypto protocol, Tezos emphasizes changes to the protocol layer itself.

Tezos’ Delegated PoS structure allows every Tez token holder to assign delegates to produce blocks and validate transactions on their behalf. There are incentives here: Block producers are given newly minted tokens as rewards for the work they put into creating blocks and validating transactions. Security is maintained through bonds and rewards. Block producers buy a one-year security deposit, which they can lose if they don’t play fair.

Upgrading the protocol in Tezos

Any changes are implemented after a majority vote by stakeholders. Tezos therefore touts its ability to deploy protocol upgrades on-chain, without hard forks. In Tezos’ vision, these on-chain updates would replace the innovation entrepreneurs now achieve by minting new coins on top of Ethereum. “Innovation within a ledger preserves value through protecting the network effect giving the currency its value,” the developers write in their position paper.

Here are two updates the developers are considering:

Tezos’ developers have discussed implementing a so-called futarchy, a governing principle developed by economists, in which, as Tezos’ overview documentation puts it, “values are best captured by a majoritarian consensus while choice of policies conducive to realizing those values are best left to a prediction market.” At the core: “Vote values, but bet beliefs.” Tezos’ futarchy plan is still under development.
Tezos’ developers look at privacy-preserving transactions as “one of the most pressing protocol updates,” according to their documentation. One yet-to-be-implemented idea is Non Interactive Zero-Knowledge Proofs of Knowledge (NIZKPK), in which a single proof, verifiable only to the two parties in a transaction, shows that the blockchain has been validated from the genesis hash.

The Tezos token sale

Tezos’ token sale begins July 1 and continues for a period of 2,000 Bitcoin blocks, or approximately two weeks. It will be uncapped — for wide token distribution, the developers say. Contributions are to be accepted in bitcoins and ether as well as through Bitcoin Suisse, which accepts fiat and other digital currencies.

Ethereum’s Casper

Ethereum’s blockchain network has grown rapidly to a №2 position in cryptocurrency, buoyed by its use as a platform for application development. Some predict it will soon replace Bitcoin, an event dubbed “the flippening.” Like Bitcoin, Ethereum is governed through PoW, in which proposals are put forth by a team of developers, with miners holding sway in any potential hard forks.

Upgrading the protocol in Casper

Since its inception, Ethereum has introduced a series of hard forks. Casper, a PoS set-up that uses security deposits rather than mining, is just a part of one of the future forks it has planned. As of now, miners must approve these protocol upgrades by updating their software. If some of them don’t, Ethereum could split in two, again. That’s already happened once: last July, a small percentage of miners rejected Ethereum’s post-DAO hard fork and remained on the old blockchain, calling their currency Ethereum Classic (ETC).

In a 2015 post, Ethereum co-founder Vitalik Buterin detailed the Serenity hard fork which will house Casper, the plan to switch to what Buterin calls a hybrid PoW-PoS consensus protocol. Unlike the EOS and Tezos proposals, Ethereum embraces hard forks: “We’re going to have a whole series of hard forks,” core developer Vlad Zamfir said in January. In Casper, there is no proposal to elegantly do away with hard forks using stakeholder votes and on-chain upgrades.

Casper will require a different consensus protocol than what already exists on Ethereum. Under Casper, anyone who holds ether can validate transactions on the network and earn rewards. The only requirement is that they be long ETH. Operating on a kind of “consensus by bet,” miners commit deposits of ether, held for a minimum of four months. They can lose their funds if they don’t play by the consensus rules. Casper proposes “slashing conditions” to ensure adversaries are punished: If two blocks are finalized and incompatible with each other, the validator’s entire deposit is wiped out, making it next to impossible to revert blocks that have been finalized. In this situation, active validators vote by betting on the consensus outcome, earning rewards for correctly predicting which block draws a two-thirds majority. Ethereum developers’ hard-fork plans ultimately depend on these validators to upgrade to the new protocols.

EOS

EOS is developed by a company called block.one. Developers say the network they are building will scale to millions of transactions per second with zero user fees (documentation). Anyone who owns tokens on a blockchain that adopts the EOS software will be able to select block producers through a continuous approval voting system. Block producers’ opportunity to produce blocks and claim rewards is proportional to the votes they receive. Like Tezos, EOS rewards block producers with newly minted tokens.

In EOS’ Delegated PoS (DPoS) system, block producers must approve protocol changes. Their approval power depends on token holders. If producers don’t do what token holders want or are caught producing blocks on two forks simultaneously, they can be voted out.

EOS places more power in the hands of the token holders who delegate power to block producers. The block producers therefore have a checked authority over changes to protocol.

Upgrading the protocol in EOS

EOS’ proposals for protocol upgrade governance are more detailed than the other two networks. Users of the blockchain sign a terms of agreement, or a “constitution,” which every transaction on the network must incorporate the hash of. When a change to the constitution is proposed, block producers must get a 17/21 approval. When this is maintained for 30 consecutive days, everyone must sign transactions with the hash of the new constitution. Block producers then change the source code to reflect the change in the constitution. Once another 30 days pass with producers maintaining 17/21 approval, the code changes one week later. Any nodes that do not upgrade to the new code are automatically shut down.

The EOS token sale

EOS’ token sale opened on June 26 and is slated to remain open for 341 days. The tokens (EOS) are distributed on the Ethereum blockchain and the developers take pains to disclaim any functionality on the EOS platform. Apparently, these tokens are purely to raise funds and incentivize participation in the network, on the assumption that their value will rise with the network’s growth. U.S. buyers are prohibited.

The developers are issuing 900 million EOS tokens in stages, with 200 million tokens in the first phase, ending on July 1, and the remaining 700 million tokens split evenly over 350 consecutive 23-hour sale periods. Buyers in each period will receive tokens pro rata, based on their share of the total contributions in the period. As of Wednesday morning, EOS reported it had raised a total of 235,908 ETH for the 200 million tokens in its first round, or 70.8 million USD at the current $300 exchange rate posted by CryptoCompare.

Thanks for reading Token Report. Please comment to tell us what you think, follow us, sign up for our newsletter and help us hire your friends on AngelList.

Token Report is an independent financial information service founded by Galen Moore and Peter Vessenes. Galen is a financial journalist with a background in startups, venture capital and launching news sites. Peter is a co-founder of the Bitcoin Foundation, and launched the first VC-backed Bitcoin company in 2011. He is managing director at New Alchemy, a boutique consulting and investment group based in Seattle, Wash., that is making a pre-seed investment in Token Report.

Nothing contained in Token Report materials or posted at tokenreport.com constitutes an offer or a solicitation of an offer to buy or sell a security, financial instrument, or other category of asset, or investment advice or recommendation of a security, financial instrument or other category of asset. Tokens involve risk and are not suitable assets for everyone. Token Report believes its information was obtained from reliable sources but does not guarantee its accuracy or completeness and accepts no liability for losses arising from the publishing of this information. The information provided by Token Report is not a substitute for financial, legal and other professional advice. Each individual should always consult his or her own financial, legal or other professional advisors and discuss the facts and circumstances that apply to the individual.

Tezos v. Casper v. EOS: Who forks best?