Introduction
The purpose of this report is to cover the LTO Network.
For those that have not heard about this project, it has received a fairly significant amount of buzz in the cryptocurrency community as of late.
In specific, its price trajectory since launch has been a significant source of attention since its launch as well.
However, this report will not provide a price analysis. Instead, this report will seek to answer the following questions about the LTO Network:
- What are they?
- Who are they?
- What does it do?
- How does it do it?
- Can it work?
Transparency/Disclosure and Background Information
Much of the background information for LTO Network can be found on Messari.
The link is provided below for convenience:
LTO Network submitted their information to be posted publicly on Messari via the ‘Messari Disclosures Registry’ program (which was created by Messari recently).
What is the ‘Messari Disclosures Registry’?
Source: https://messari.io/registry
So, this shows that the project is at least attempting to be transparent, which is fair enough.
What Does the Messari Disclosure for LTO Network Say?
Below are some basic details that are included within, such as:
- The fact the “LTO Network” was created in 2014.
- It began as a “reg tech startup in the Netherlands focusing on company incorporation and quickly grew to account for over 10% of the entire Dutch market”. The author is not sure what market in specific they mean when they allude to the ‘Dutch market’.
- “In 2015, the team realized there was a growing demand for workflow automation, and continued building centralized software for Euronext, Heineken, Deloitte, etc.” ← — — — Name dropping some major clients. That’s worth paying attention to and independently verifying in the near future.
They state their company/project’s value offering as well:
“This so-called ‘silo effect’ is still the top barrier for organizations to reach the next level of efficiency of their business process automation. Then along came the blockchain, which had the potential to solve this problem without compromising productivity and data security. This has been LTO Network’s focus since 2017 — utilizing the blockchain technology to solve the needs of B2B clients and making adoption happen today.”
The Roadmap for the Project is Also Included:
They also post the team’s wallet addresses where funds have been received; this is pretty big when it comes to transparency because very few projects take this step.
See the screenshots below:
There is a transparency report too that is worth noting (posted by the LTO Network Team):
Transparency report: over 7.85% burned 🔥 The 7 days of Bridge Troll.
There’s also information about the ‘supply curve’ of this project:
Preliminary Information About the Token Sale
- “In December 2017 LTO Network raised the seed round of $1.4M among supportive European community members and early adopters. There was an average of 40% bonus in the seed round, and it was almost fully raised in fiat.”
- “ After working for a year, developing the product and getting clients, LTO Network raised private sale in December 2018. The bonus was between 15–30%, raising $1.7M.”
- “ The last sale round was the crowd sale, in January 2019. The smart contract was open for 60 hours, during January 14–16. In total, 7990 ETH (990,000 USD) was raised, and remaining unsold tokens were burned, which was over 50% of the crowd sale supply.”
An important note about this = “ Crowd sale participants received ERC-20 tokens, which are directly tradable — while private sale and seed received mainnet tokens, which are not directly tradable.”
Explanation of this Mainnet <-> ERC20
- “There is a bridge between Mainnet <-> ERC-20 which makes it possible to travel from one side to another. These are the same LTO tokens, but simply exist on different blockchains (1:1) — the total supply is simply being split into two different sides.”
Initial Author Thoughts: Why would there be a difference between the ‘mainnet’ and ‘ERC-20’ tokens? Why not just issue straight mainnet tokens? Was this for the purposes of creating an easier crowdsale? If it was, then that sort of undermines the idea that their project will be best suited to perform the B2B tasks that it claims it will fulfil.
**Answer:**According to the ‘Token Paper’, the reason for a partition of ERC-20 tokens and Mainnet Tokens are to assist with the reduction of price volatility in order to make the costs of using the network more predictable.
Since the mainnet tokens are not tradable on the open market, the ERC-20 token version of LTO serves as the ‘entry point’ for all those that are looking to join the network that have not done so already.
- “A bridge troll in-between manages the flow of tokens and punishes early sell-offs. It protects the community during the first 6 months (up until July 2019) and burns the tokens, according to a dynamic fee 55*exp(-0.5*t) once someone goes from mainnet to ERC20, and gives 100 LTO to mainnet nodes if someone goes from ERC20 to mainnet.”
Noteworthy Takeaway: So, in essence, 100 LTO are given to mainnet nodes (assuming that they’re split evenly) once someone crosses from ERC-20 over to the mainnet.
“Sales Round”
This is the final part of the Messari Disclosure Report that this paper will cover. Essentially, this is just information about how much the team obtained through each phase of their sale process.
LTO Network — Token Paper Review
This portion of the report will not be annotated in the same manner as the above section.
For this document, in particular, we will take a deep look at all of the information contained within and objectively analyze and review the merits of each constituent element.
This ‘Token Paper’ was released by the team in November 2018. In the paper, they state that its purpose is to, “Take one step further and zoom into one aspect of modern blockchain solutions: their token economies.”
Overview of Their ‘Initial’ Idea
According to the ‘Token Paper’, LTO’s initial idea was to harness the latent potential of blockchain to create an immutable record of the documents that they were storing for their clients. They claim that their initial efforts “Led to the design of a distributed business process management engine with ad-hoc private blockchains following the Finite State Machine logic.”
The paper then goes on to state that LTO’s initial strategy to harness the blockchain’s capabilities was severely flawed. Specifically, LTO states that they “Set up the token functionality in the form of tokenized licenses”. The purpose of this set up was to grant clients with a legitimate license ‘secure access’ to the LTO blockchain.
LTO established the tokens in a way where, “A certain predefined number of tokens locked in your wallet would represent such a license.”
The paper states that this idea failed for numerous reasons, which include:
- Their setup forced them to rely on a public ledger and, due to this fact, the business incurred transaction fees constantly.
- As a result, the “token did not really capture the value of the solution”.
- The token paper also states that LTO believes this setup inhibited ‘ecosystem growth’.
Creation of a Public Chain
According to the Token Paper, once the team realized the aforementioned shortcomings in their initial token idea, they decided to shift strategies entirely by launching a token from their own public chain.
LTO states that the creation of an independent, public blockchain allowed them:
A) To expand the properties of the network in a way that they could not do on other public blockchains
B) To ‘experiment’ with alternative tokenomic systems and create an exclusive ‘monetary system’ for LTO.
Proof of Stake (PoS) Reward Mechanism
The next part of the paper digs into the PoS aspect of the LTO Network Mainnet.
The LTO team begins by explaining the general ‘software as a service’ model. The way that this model works is fairly simple and its a tried-and-true formula to this day.
Someone wants to use software (let’s say Microsoft Word), but they cannot ‘purchase’ it in the same way that they could purchase a physical item like a television. Therefore, users purchase something called a ‘license’ from Microsoft. Sometimes this license extends forever, but in other cases, this license may be limited to a time frame (i.e., 2 years). Once the license agreement has expired, the purchaser will be revoked access to the related software.
LTO’s Proposed Revision
In the token paper, LTO states that the inefficiency in the above software-licensing model is that users must pay a flat fee for the software regardless of their usage.
Specifically they state:
“[..]You get tied down for a fixed amount of time, paying fees regardless of your actual use. The LTO Network takes a different approach. We make use of the network voluntary. We allow users to discontinue their use whenever they choose and to relieve them from their payment obligations during such time. Hence, we have managed to use token economics and incentivization to create an efficient and flexible user model for our network.”
What LTO Network describes above could be both beneficial and detrimental to customers, depending on the situation that they are in.
Breaking down the positives and benefits of such a system:
- If a customer that purchases a license is a very heavy user of that product, then they benefit from paying a one-time fee to license it versus a pay-by-use model. Thus, if the LTO Network is used frequently by a client, then they will find the costs to be exponentially higher under this model than they otherwise would have been under the ‘standard’ software-licensing model.
- If a customer that purchases a license rarely uses that product, then they more than likely will not receive their ‘money’s worth’ from that license. Thus, if the LTO Network is used infrequently by a client, then they will find this model to be very preferable to the ‘standard’ software-licensing model.
The above bullet points present a slight quandary for the team as they explore an economic solution that best serves their customers.
How Will LTO Implement This ‘License-As-You-Go’ Model?
According to the paper, the team decided to implement the Proof-of-Stake (PoS) consensus mechanism for their public blockchain because they felt that it would be the best way of enabling their ‘license-as-you-go’ structure.
Specifically, the paper states:
“In order to achieve this, we decided to implement the PoS concept in our reward mechanism model, letting it control new entries by companies into the network. This was our ‘internal breakthrough’.”
and
“According to the PoS reward mechanism, the chance of a validator to be chosen is proportionate to the size of his stake relative to the total number of staked tokens. In case his stake amounts to 5% of the total of staked tokens, there is a 5% probability that he will be chosen to validate the block. This would, however, mean that a user would be awarded solely for holding tokens, and not necessarily for using them. This is why we added the ‘Proof of Importance’ concept, which rewards actual use of the tokens.”
The paper goes on to state that the integration of this ‘Proof of Importance’ concept has allowed the team to create a system whereby ‘participants’ in the network can estimate their network usage and increase their stake to the extent where they can offset all fees.
In order to assess the validity of this statement or the veracity of this claim, more information about the network must be gleaned — which is covered at a later point in the ‘Token Paper’ (we’ll also review it at that point as well).
Types of Users in the Network
The paper provides four categories that the LTO Network team uses to sort their network users.
They are as follows:
The paper further defines these categories in relation to the ecosystem in the following ways:
Takeaways From This Categorization System
Below, are some takeaways from this categorization system:
- The idea that there is any entity in this system that is interacting with the LTO Network for a reason that does not involve objectively enriching said entity in some way is implausible. Therefore, the way that ‘Passive Stakers’ are defined seems very limited in scope.
- The paper does not specific what it means in the ‘Figure 2’ diagram where there is a bullet point leading from the ‘Strong passive stakers’ that’s attached to a note saying: “Keep at minimum”
Fulfilling this goal would require undermining the idea of LTO being a public, permissionless blockchain as they have stated they are trying to build in the ‘Token Paper’.
- Two sub-categories of users on the protocol are “Non-clients” and “Clients generating transactions”. This is a bit confusing because the LTO Network is responsible for the initial distribution of their token. Thus, in one way or another, all individuals in their ecosystem should be deemed as ‘clients’.
- The team states, “As [all users] are [part] of the network, they have a direct incentive to care for its stability and functionality. Therefore, we aim for a token distribution in the maturity phase of about ~80% held by Participants.” ← These two statements are contradictory to one another. If all users have a direct incentive to care for the network’s stability and functionality, then why is there a targeted preference for how much of the circulating tokens the participants will hold? (80%)
Reward Mechanism: From LPOS to LPol
In this section of the ‘token paper’, the following is stated:
The above excerpt makes sense. However, the only qualm that the other has is with the last sentence, which states, “Thus we wanted to avoid that and actually push forward better incentives for Joint Business Builders and economically discourage strong passive stakers as they add no value to the network.”
Yet, in the previous section, the ‘Token Paper’ states that “Strong passive stakers have a large percentage of overall stake in the paltform, yet do not generate transactions. They run a node to validate transactions, and in turn receive transaction rewards.”
Given the definition of ‘strong passive stakers’, it is hard to imagine that they “add no value to the network”. This characterization of the ‘strong passive stakers’ makes their role a bit more confusing than it otherwise should be.
The paper then goes on to state:
In order to get a better idea of how this merge was performed, this report will take a closer look at ‘WAVES’s Leased Proof of Stake (“LPOS”) and NEM’s Proof of Importance (“PoI”).
What is ‘Leased Proof of Stake’?
One can find a full Medium article from the WAVES team regarding ‘Leased Proof of Stake’ here:
Blockchain Leasing For Proof Of Stake
To summarize, LPoS works in a similar way to ‘loaning hashpower’, which is a common practice that Bitcoin mining pools engage in.
Except, instead of mining power being leased, coins themselves on the protocol are ‘leased’.
The WAVES article provides the following example:
“If example, if a pool has a total size of 100,000 coins, a holder who leases 1,000 coins may receive 1% of rewards (subject to the terms stated by the pool owner).
When leasing a balance, the coins are locked but remain in full control of the owner. They are not transferred to the pool but stay in the same address — just remaining unspendable until the lease is cancelled. Leasing and cancelling a lease can typically be done from an ordinary wallet, with no additional technical expertise needed.”
What is NEM’s ‘Proof of Importance’ Concept?
Per ‘Mycryptopedia’:
“Proof of Importance can be regarded as a novel consensus algorithm because, unlike existing consensus mechanisms such as proof of stake, it seeks to take into account one’s overall support of the network. For example with proof of stake, an argument can be made that it rewards coin hoarders. Under the proof of stake model, nodes are limited to ‘mining’ a percentage of transactions that is reflective of their stake in a cryptocurrency. For example, a proof of stake miner who owns 10% of a cryptocurrency would be able to mine 10% of blocks on the network. The limitation with this consensus model is that it incentivizes nodes on the network to save their coins, instead of spending them. It also produces a scenario in which ‘the rich get richer’, as large coin holders are able to mine a larger percentage of blocks on the network.
Proof of Importance looks to overcome the problems that can be found in the proof of stake model by identifying an account’s overall support of the network.”
Integrating LPoS and LoI Into LTO’s System
When taking the above definitions of ‘LPoS’ and ‘LoI’ into account, it seems that they would both be integrated into LTO Network in the following ways:
- LPoS would allow for greater flexibility on the part of businesses (Joint Business Builders) that can lease their share of tokens to clients or other businesses that may need them at a time the Joint Business Builder does not them. This obviously would enhance the monetization capabilities of the LTO network.
- LoI would help significantly with incentivizing users of the LTO Network to actually use the token rather than ‘hoarding’ them for the purposes of acquiring a higher stake in order to win more rewards through the platform.
Of course, in terms of PoI, the only way to really assess the effectiveness of its implementation would be to see how heavily the constituent factors are weighted on the protocol (i.e., transactions, stake, etc.).
Fortunately, this information is provided in the ‘Token Paper’.
It is posted below as well for convenience:
In addition to the PoI formula described above, there is also a ‘raffle factor’ that is attached to the consensus algorithm.
In examining the third figure posted above, it appears that preference is given to those that maintain the ‘net zero’ goal that was discussed in the beginning of the ‘Token Paper’.
Thus, one’s chances of successfully being elected to submit the next block in the network is determined by their ability to maintain an even ratio of staked tokens as a percentage of all tokens to transactions completed as a percentage of all transactions, rather than those that are able to gain a larger allocation of tokens.
So, for example, if a node is responsible for 20% of all transactions and they also hold a 20% stake of all tokens on the protocol, then that node will receive a higher ‘raffle factor’ than a node that holds 40% of the token allocation while being responsible for 20% of all transactions.
Given the above, it would be in the latter party’s best interest to actually sell/distribute their tokens in order to match their transaction percentage of transactions on the network in order to garner a higher raffle value.
Possible Flaws/Exploits in This System
The most obvious flaw/exploit that critics of the system will point out is that the meaningfulness of the transaction is not factored into the PoI formula. Therefore, from what has been described above, it seems that one would be able to ‘game’ the system by simply automating transactions between users on the protocol for no economically beneficial reason in order to satisfy the transaction % portion of the PoI formula.
LTO Network’s Answer to ‘Spam’ Transactions
According to the Token Paper, the LTO Network Team was cognizant of this possible exploit and thus, created the infrastructure of the blockchain in such a way that it would deter meaningless transactions.
Below is an excerpt of the formula that the team developed as a ‘proof’ that ‘gaming’ the consensus algorithm would not be profitable for bad actors:
According to the ‘Token Paper’, the above formula, “Proves that it’s impossible to gain directly from spam transactions, with a maximum raffle factor of less than two. A raffle factor close to 2 would make spam transactions nearly free. Increasing the importance on the network for little to no costs is undesirable, as it could aid an attacker trying to undermine the network with a 51% attack.”
LTO Network’s Desired Structure
According to the ‘Token Paper’, the reason for a partition of ERC-20 tokens and Mainnet Tokens are to assist with the reduction of price volatility in order to make the costs of using the network more predictable.
Since the mainnet tokens are not tradeable on the open market, the ERC-20 token version of $LTO serves as the ‘entry point’ for all those that are looking to join the network that have not done so already.
Specifically, the process of transferring tokens to and from the Mainnet and ERC-20 sides of the ‘bridge’ are as follows:
Conclusion
Although much was covered in this report, there is still a lot of information about the LTO Network that has not yet been reviewed.
In specific, the ‘Tech Paper’, ‘SAFT Agreement #2’, ‘Terms and Conditions (pre-burning), and other relevant project documentation has not been covered yet as of this point.
In addition, there was an extensive code review performed by renowned expert and Zerononcense-contributor, Andre Cronje.
The code review/audit can be found here:
Ivan Shill - Andre Cronje - Medium
Author’s Concluding Thoughts
Is $LTO a Scam?
Is $LTO a scam of any sort? Absolutely not from what has been seen so far.
There are some questions about the primary exchange that it is listed on at the time of writing (BitMax) and that is due to its inclusion of transaction mining.
Transaction mining was originally introduced to the crypto world in the back half of 2018 when FCoin, an Asia-based cryptocurrency exchange, introduced the concept.
Essentially transaction mining is the practice of compensating customers for trading. The obvious criticism that stemmed from this was that such a system that incentivizes wash trading for the sake of gaining ‘rewards’ through the transaction mining program. As a result, the exchange benefits from heightened trade volume, which pushes them up the rankings on CMC, attracts more customers, and leads to more profits.
Is $LTO a Good Investment?
The purpose of this piece is not to state whether or not $LTO is a good investment. That’s a decision that each respective reader must make independently based on what they’ve seen in this report among other sources that have been referenced.
The author makes no claims on whether $LTO will yield profits or losses for those that are looking to acquire this asset.
What Does $LTO Get ‘Right’?
There are a few bright spots with this project:
- It embraces the BaaS model, which is a welcome shift from the endless flood of tokens in the cryptocurrency space that don’t seem to have a legitimate business model behind it.
- The idea itself is not implausible and it does not appear that $LTO is attempting to tackle an over-ambitious objective like ‘becoming the next Bitcoin’ or ‘revolutionizing the computing industry’.
- The project’s transparency is a major breath of fresh air. From posting the wallets where assets are held to posting regular financial reports, there is nothing that appears to be ‘hidden’ underneath the seams for this project. Anything and everything, good or ugly, is disclosed by the project through their official channels.
What Does $LTO Get ‘Wrong’?
- When researching $LTO, the main gripe that the author had (privately) was that $LTO does not need to be decentralized. That may seem like a blasphemous statement, but the idea would make an excellent consortium chain. Cryptocurrency exchanges are a tremendous example of centralized entities that have been extremely profitable in the cryptocurrency space. And despite the space’s assumed fidelity to decentralization, exchanges are still a pillar of the entire industry and they hold the vast majority of most tokens — which shows that they are still widely used. Similarly, the author believes that $LTO would be consistently used even if they were an openly centralized service.
- The ERC-20 tokens teeter on the line of being a security, in the author’s opinion. The fact that the ERC-20 tokens themselves are used as an ‘entry point’ for the mainnet tokens, which have a specific use, provide some level of reconciliation with this potential setback. However, having a public ICO for a tradeable asset, in any context, has been deemed by the SEC in the past as a ‘security’. This issue, of course, will not destroy $LTO regardless of the result, but it would be an undesired setback if the SEC were to initiate any type of punitive enforcement measures against the token.
- The bridge troll, ERC-20 tokens, mainnet tokens, and general system surrounding $LTO can be a bit overwhelming for those that are not entirely familiar to crypto. While it is not necessarily dense in a technical manner, it is complex to a certain extent in a way that could deter potential investment into the project.
Author’s Overall Take on the Project
This project is solid. There’s nothing about the project to suggest that it has received undue or unjust praise. Again, the transparency behind this project makes it exponentially easier to assess than the vast majority of the existing crypto space.
The system seems straightforward. There are certain facets of the project that one could legitimate qualms with as well. However, none of those qualms should extend to the point of saying that the project is ‘fraudulent’ in any way.
From the outside looking in, this appears to be a project whose success will be dictated by its leadership. Its put together pretty professionally, there’s plenty of documentation and its received good exposure. From this point forward, it appears that its viability will rely on how adept the team is at adapting to the ever-evolving blockchain space as well as their business acumen as it relates to their ability to bring bigger, more substantive clients on to their platform.
Disclaimer: The author did receive $LTO ‘mainnet’ tokens in exchange for curating this report. These tokens were not given for the promotion of a specific narrative, but rather for taking the time and effort to perform the review. Those mainnet tokens were subsequently converted to ERC20 tokens via the ‘bridge toll’, then liquidated. At the time of publication, the author does not possess any $LTO tokens and thus, will not be affected, positively or adversely, from the community’s reaction to the article’s release. The author will not receive any additional tokens from the LTO team as a result of this report’s impact, positive or negative. At the time of writing, the author is not currently holding any cryptocurrency for investment/speculative purposes. Bitcoin is the only asset owned by the author currently for living purposes (i.e., shopping, transportation, etc.).