Crypto Analysis Series - Part 7: New Economy Movement

in #nem4 years ago (edited)

In continuation to the ongoing Crypto Analysis Series, here is our write up and personal opinion on the NEM Blockchain. Links to all previous posts can be found below.

“NEM is the Smart Asset blockchain. It’s more than a cryptocurrency, it’s a platform for managing data. It’s the easiest and most cost-effective way to bring blockchain technology to your business.”
nem.io

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Brief Overview

Launched in March 2015, the New Economy Movement (NEM) was created by user UthopianFuture on the bitcointalk forum who based it on the cryptocurrency NXT. It didn’t take long for like-minded persons to join the stride. The long-standing​ goal of NEM, keeping aside all differences in opinion, was to create a protocol from starch based on the values of the community, focusing itself on the real and virtual assets. The protocol also created its own cryptocurrency with the ticker symbol XEM, pre-mining all the coins to be in circulation.

Technical details:

Ticker Symbol: XEM
Max Market Supply: 8,999,999,999
Current Supply: 8,999,999,999
Blocktime: 1 minute
Block reward: Based on Vested Stake (minimum 3 million of XEM stake)
Inflation rate: Nil
Consensus Algorithm: Proof-of-Importance and Delegated Harvesting

Simple Breakdown

Blockchains are, in a strict business sense, cost-saving data and value infrastructures that allow for open-source participation and immutable affirmation. They allow businesses to build and improve on their existing architecture and reduce costs and efficiency in the long run by simplifying internal and external processes such as accountability, information transfer, etc., and bringing in new features like immutability, peer-to-peer security and transparency.

NEM envisions a blockchain that allows many ledgers of information and value co-existing on the same blockchain. Simply put, it tries to function as a library of ledgers, instead of just one common ledger, based on the needs of the operating body. Any data that has a value linked to it, be it transaction information or asset transfer or notarization or real estate contracts can be stored and propagated on the NEM Blockchain in any manner as customized by the operating authority.

Looking at the Protocol through a Microscope

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Other than the generic blockchain capabilities that exist in almost all projects like immutability, transparency, p2p, censorship-resistant and the others, NEM lures its ‘customers’ in by providing a ground zero for operations and applications to be built on top of it. To make sure a clear description is available, we looked at NEM with utmost neutrality and scrutiny.

1. EigenTrust ++

EigenTrust is a reputation management algorithm, derived from other previous algorithms, which proclaims to solve the problem of reputation management algorithm in general. The main problem with general algorithms calculating the reputation of different identities is that they fail to consider the game theoretic incentive structures of any entity willing to spend enough time and resources to increase their reputation score.

For e.g., say Alice wants to increase her reputation score on the network that rewards any person who is an active participant on the network and constantly engages with the users. Assuming Alice is motivated enough, she can conjure online bots and take the help of her friends to show on paper that she has constantly been active on the community by engaging in transfer and data exchange on the network. This type of activity wouldn’t be detected by the algorithm and thus encourage similar behavior. The algorithm is open, anonymous, and non-accountable. Something that has to be discouraged when incentives are on the line.

EigenTrust proclaims to have solved this problem of inauthentic and malicious representation of the reputation score. In P2P simulations, it has been shown that EigenTrust significantly decreases the number of downloading inauthentic files on the network by using the global trust values to bias avoiding downloads from potential malicious peers.

In simple words, EigenTrust compares the history of a single entity with the entire history of the blockchain, while at the same time, minimizing run time so as not to have an effect on latency.

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2. Proof-of-Importance

Proof-of-Importance (PoI) and Delegated Harvesting can be considered as NEM’s most standout innovation. PoI, as a reward structure is different from Proof-of-Work and Proof-of-Stake as it removes all the perceived drawbacks that both the algorithms carry, such as mining monopolies and large stake hoarders. PoI algorithm calculates the weight​ of an address’s contribution to the Network, i.e., the stake, transactional history and amount of time spent on the network. Each transaction (above a minimum size) contributes to the POI score and increases the chances of harvesting a block and collecting rewards. **To relegate the risk of artificially increasing transactions and importance score by going back and forth between the same wallets, only net transfers are taken into account by the algorithm. **

Say ABC is a registered user on the NEM blockchain, has more than 10,000 vested tokens (the amount which has been unspent and unmoved for a few weeks) transacts on the network. The Proof-of Importance algorithm ranks ABC based on his vest and traffic contributed to the network, using it to delegate the process of computing transaction, verifying the ​block and collecting rewards called Delegated Harvesting. The importance attained by ABC also allows him to push his transactions and messages ahead of accounts that have lower importance scores, meaning that PoI can also be used as a reputation metric.

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Each account has a Proof of Importance (POI) score that determines its chances of harvesting a block. With delegated harvesting, ABC is lending his POI score to a remote node, increasing its chances of harvesting a block on its behalf.

PoI along with the help of EigenTrust forms the backbone of the NEM network.

3. Distribution of Pre-mined Token

Most blockchain projects have some or the other incentive structure that distributes tokens as a ​reward for participating in enhancing the security of the network and propagating growth. The mechanism usually involves some form of token generating by either staking or computing. But with respect to NEM, its token XEM was fully pre-mined when developed. The 8,999,999,999 XEM were​ distributed between a thousand odd developers and supporters of the protocol and are the only ones that will ever be in supply. This gathered immense criticism as most people pointed out that pre-mining was the sign of a scam.

Also, when looking at the percentage of holding among big players, the richest 500 XEM holders together have 76% of the total token supply, while the top 100 make up 63%, with one account holding as much as a billion XEM. It is definitely controversial as to how the tokens were issued and even more suspicious when you see that most of the high balance account holders have vested their balance to supernodes, effectively removing them from the ​supply. This is not taken as a good sign in the decentralized space. As any pro-decentralized person understands, the ​concentration of vested power ultimately and non-linearly leads to centralization.

Known Use Cases

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1. Mijin

Mijin is a BaaS (Blockchain as a service) built on the NEM blockchain the leverages the capabilities of NEM to provide commercial services. It is currently being tested by financial institutions in Japan (for now). Mijin shows signs of improving efficiency in transactions among corporation and government bodies. It is a base-layer infrastructure developed to allow interoperability between companies, corporation, consortiums, governments or any group that wishes to share data or value. As advertised on their website, the major feature of Mijin include: Authentication metrics, Permanent/Semi-permanent records, ​and Assets Ledgering.

2. NameSpaces

Namespaces, a domain naming service inspired from the ICANN (Internet Corporation for Assigned Names and Numbers), is embedded on the NEM blockchain to link digital assets to domains. A person/entity can create multiple subdomain addresses under one domain to separate fake digital assets bearing the same name from the legitimate one. Domains and sub-domains allow and an asset to function just like an e-commerce​ website on the blockchain. NameSapces gives assets an identity on the Internet, with a voice of their own.

To put it into perspective, say Bob is a real estate builder who just finished constructing his biggest apartment yet. Assuming he is experimental enough and that the apartment he built is fully mechanized with IoT devices and motion sensors, Bob can link the apartment to a domain on the web with NameSpaces. Effectively, the apartment now has its own website on the blockchain, allowing it to show all the details in real time. It is easy to imagine that any person willing to rent one of the flats in the apartment can do so online with the website, and have the keys linked to his mobile immediately. Any discrepancy on the rent an also be handled easily by Bob, and in extreme cases, can have the flat closed until payment is received, and so on.

To easily understand the architecture, here is a link to a very intuitive explanation we found on Medium.com by Lexy Jeong former assistant to Jeff McDonald, the VP of NEM Foundation.

In Conculsion

On Paper, the New Economy Movement is one of the most thought-out protocols out there. Its incentive structure discourages centralization, the reputation metrics provide a fool-proof and manipulation free environment for quantifying identity, and its tase of development attracts scores of developers to start experimenting and building on top of the platform.

But looking at it through the market’s perspective, NEM has seen a ​considerable amount of backlash. After reaching the all-time​ high market cap of about $20 billion, NEM has seen a fall of 95% of its market value. Investors seem skeptical of its future, which clearly reflects on the current price. One reason for this could be ​the ​ineffectiveness of NEM’s marketing team. When compared to other projects, NEM hasn’t gained much public attraction and institutions aren’t aware of its prospects as well.

It remains to be seen what the future holds for NEM, how the community of developers push it forwards and how well the audience appreciates its contribution. But what’s evident is that NEM has huge potential for adoption once it starts moving forward with convincing institutions to experiment and develop on the platform. Until then, its just another investment vehicle for traders to speculate on.

Any discussion or questions regarding your thoughts on the platform are welcome.

Information Sources

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What you laid out here is why I was excited about NEM a while ago, and used to hold it. You have left out a very important part of the story here though, which is that the previous NEM government council badly mismanaged funds, did not keep council members accountable for how they were using funds to "promote" NEM, and in many cases outright embezzled funds that were intended for advertising/promoting NEM and instead were used for yacht trips, etc. The NEM foundation used to work by a "regional head" model and there was little to no accountability for how the regional heads were spending the funds allocated them. By January of 2019 NEM was down to one month operating capital for the NEM foundation! The new council seems to be doing a bit better job, but this part of the story is certainly important to explain the drop in price relative to btc given the importance of investor confidence in the management team of a cryptocurrency. Some links (and in particular, read the comments from community members to get the unvarnished/unwhitewashed version):

https://forum.nem.io/t/nem-foundation-message-to-the-community/21753

https://forum.nem.io/t/nem-foundation-update-january-2019-part-ii/21643

@carlgnash, yes, you are right that the misuse of the funds is an important part of the story. Certainly it has had an impact on the price of NEM.

Among the interesting projects that runs on NEM Blockchain is PundiX, which I thought will shine but seems to be not doing so well at the moment.

Hello @carlgnash

Excited were all of us, seeing NEM jump towards astronomical amounts. But since all bull runs end, NEM wasn’t any different.

Thanks for pointing out the discrepancy that has happened. I had a chance to look into the links you provided and was intrigued to know the details about the apparent scandal. But it’s good that it didn’t bring down the whole organisation.

Let’s wait and see what the future holds, and if the new people in charge are more accountable than the rest.

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About two years ago when I first started looking into cryptocurrencies, what you summed up here is about what I remember reading. I'm not from a tech background by any means, but it all seemed like a wonderful token with a great potential. Another thing I remember being mentioned is the Catapult meaning that the entire code was to be translated from ... here I'm not positive... html to C++ was it? Anyway, once Catapult would be launched, a price surge was predicted. I have no idea if it ever was launched, but I suppose in any case the price surge never happened. Still, I'm hodling my NEM, as I believe it to be a good coin. Thank you for verifying my belief in this post.

Hi @stortebeker

Yes, when I was looking into NEM, what seems like ages ago, I found huge potential in its capabilities. It’s direction towards business architecture was hugely attractive. But since the bull run, it seems the attention has died out.

Catapult was supposed to be a game changing introduction, but as you said, nothing seems to have gone their way. Maybe it’s the whole cryptocurrency market in general. We’ll have to wait and find out.

P.S. I’m still holding my XEM too

Cheers.

Hi @reverseacid. Thanks for this great article. It seems that NEM has some good technical features to be a competitive blockchain. I'm not sure if it is an undervalued token. I'm afraid of its poor marketing and lack of transparency of founders. In some cases, premined tokens are not good signs for me.

Hello @danielfs

That’s a good take away from our article. Premined tokens in general are a sign of non-transparency. It’s seen by crypto investors as a sign of under the table dealings.

But in this case, one can be skeptical about NEM as it has shown considerable potential. Barring its apparent undervaluation, it has huge implications for the blockchain ecosystem.
Good day to you.

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Nicely written and a well organised article. You have provided very interesting and important information to us. Thanks for your contribution. NEM had done a great job and it seems that its future is bright. But, there are so many projects running currently in blockchain world that it is not sure what will be the future of such projects.

Thank you @akdx

It is our standing goal to provide concise and real ENT information to people who are not really exposed to it. With NEM, our goal was to make sure we are able to provide a brief overview of all the features without trying to explode anyone’s brain with information overload.

The future of NEM does look bright, only and only if NEM is able to sustain in the long run with timely updates and considerable number of collaborations.

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Okay, it seems like a lot of blockchain/ cryptocurrency tokens are popping up with various uses and specialization.And NEM is one of them. I just want to know: is it sustainable? on the long term, will it be practical considering that there are people out there who are continously developing their own block chain system? will it be adapted by the mass? if so, how will it be done?

Hello @nurseanne

You put forward some really good questions. Questions I should’ve addressed in the post myself.

On paper, the only things stopping NEM from sustainable growth is its ability to market and advertise itself. In the past, NEM has been seen to not be up to the mark, when compared to other competitors.

And when talking about adoption, I’m sure NEM will find it’s away in some use case or the other as we live in an era of capitalism. Nothing works without competition. And in that sense, completion is good.

Thanks for the valid questions.

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Good article, thank you share !

Thanks for the support @cloudblade

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Dear @reverseacid

I just had a pleasure to read your publication. It's not very "fresh" post and I wonder if you're still even checking comments ...

Anyway, solid read buddy. I must admit that I never heard about NEM before.

ps. Wouldn't you consider making your publications shorter? I really think that majority of people won't spent more than 5min reading (300-400 words). Your post is almost like a BIBLE :)

upvote on the way ...

Cheers,
Piotr

Hello @crypto.piotr

Thanks for the read buddy. Always a pleasure to hear your thoughtful comments.

About the freshness of the post, I apologise if it seems we aren’t interacting enough, but please do note that @ReverseAcid is a venture that the authors collaborate on, apart from their daily workload and personal commitments. It’s a hobby we enjoy doing. Since it’s not our full time gig (yet), we aren’t as engaging as we’d like to be.

Actually, this is the shortest I tried to make. My goal was to provide a concise and to the point post about the features of NEM, that is simple and understandable, without overloading with unwanted technical information. If I had made it any shorter, I would’ve missed out on a lot of info. And as some of the readers pointed out, I have already missed out a lot.

I’m sorry if it seemed long. Next time I’ll consider doing a TL;DR.

Thank you 🙏🏽 😊

You’re welcome @originalathena

Posted using Partiko iOS

First time coming across

Crypto Analysis Series

Keep up the good work

It’s been running for 8 months now, @nathanmars. All links are provided.

Thanks for taking the time to reach out.

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Hello @reverseacid

It's a shame that from a market perspective, this project has gone down so much. People will probably recognize in the future that it is a good project and again gain followers and investors.

BTW...

In Conculsion

Fix this

Cheers


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Thanks for the analysis. I am very interested in the future of blockchain reputation and identity management. Voice and Facebook are not the only ones dedicated to employing KYC for a popular app. I see reputations as falling right in line with all this.