NEM — New Economy Movement

05.12.2018

Nowa Huta - Socialist utopia east of Cracow. Sounded good, turned out to work poorly.

TL;DR. Ecology:4. Technology:4. Decentralization:3. Valuation:3. Rating:3/10

The Utopian Beginning

NEM (XEM) was introduced on bitcointalk.org by user UtopianFuture as far back as January 2014 and is today among the largest cryptocurrencies in existence. The code base is novel and was initially written in Java and JavaScript. As consensus mechanism, NEM applies what they call Proof of Importance (PoI), where, unlike PoS, the total amount of tokens is only one factor that determines the probability of finding the next block (in this case also known as harvesting). Other factors are the number of incoming and outgoing transactions as well as the importance of accounts transacted with. 9 billion XEM tokens were released in the genesis block to around 1 500 addresses and the network is constructed in a a way that prohibits any new issuance at all, meaning harvesting is only for collecting transaction fees.

In its early history, NEM set up a very peculiar funding campaign before mainnet launched. In the spirit of egalitarianism, stake slots called NEMStake tokens were assigned to bitcointalk.org users in the order that they commented on the official BCT thread. The idea was to allocate NEMStake tokens equally to all and not based on contributions. The first 20 pages on the forum reserved NEMStake tokens for free, while for every 10 pages thereafter, a small fee had to be paid as well. Initial plans were laid out to make NEM a fork of NXT, a popular cryptocurrency back then. The plan originated from the opinion that NXT had a solid code base but bad tokens distribution resulting in centralization. But all those plans were eventually abandoned, mainly due to the traps planted in the NXT code base by its developer team as well as the perceived code quality in general.

After some controversy where even NEM team member UtopianFuture used sockpuppets in order to try to receive more tokens at mainnet launch, a new, moderated BCT thread was initiated while UtopianFuture resigned from the project. Around this time, NEMStake token proxies started trading on the NXT Asset Exchange. On the 25th of June 2014, the NEM alpha was released to the public.

On the 4th of October 2014, the first phase of the redemption process was initiated. This meant that bitcointalk.org users could redeem their NEMStake for a genesis block allocation. Later on in October, the beta was released, and so was the second redemption process which handled the NEMStake tokens represented as assets on the NXT Asset Exchange. Everyone prepared mainnet launch.

Launching A New Economy

"Completely Fair Distribution - Equal Shares for ALL". It turned out that even official NEM team members tried to cheat in order to receive a non-equal portion of all shares.

In the end of March 2015, NEM mainnet launched with 8 999 999 999 XEM allocated in the genesis block, where a large portion of those (result of unclaimed NEMStake tokens) were allocated to different team/community controlled funds. By this time, the NEM team consisted of a large number of people, including multiple PhD holders. On the 19th of April, the last parts of NCC, the NEM Community Client wallet, were open sourced. The network ran throughout 2015 without major technical problems and multiple new versions of the NCC were released. Worth mentioning is that many BCT users during this period complained about the fact that their NEMStakes had been confiscated on suspicion of the use of sockpuppet accounts. In 2015, plans were also established for an on-chain asset/token issuance system named Mosaic, and a domain name system called Namespace. A permissioned NEM blockchain called Mijin was also introduced by the company Tech Bureau. It was to facilitate blockchain solutions to financial institutions that did not want to operate on the slower public blockchain. Mijin was to be lightly tied to the NEM main chain.

In January 2016, the NEM Supernode Rewards Program was initiated. Full nodes with more than 3 million XEM bonded could earn block rewards consisting of XEM set aside (211 million of them) at the genesis block. In February 2016, beta versions of an Android and iOS NEM app were released. On the 4th of July, some clarifications regarding Mijin and the Catapult project was posted on the official blog. Catapult was a re-write of the Mijin NEM code base in to C++, and promised more than 1000 transactions per second even for a geographically diverse network. Funded by Tech Bureau, a pubic Catapult client was also made the set goal for the main NEM blockchain with aimed release for 2018.

On the 7th of July 2016, the NEM team officially suggested to allocate community funds to a new legal entity for better governance over the fortune. In this announcement, the legal entity was defined as a 'hybrid', but it was initially not clear what that meant. The proposal was put up for a week-long vote, where all XEM owners could vote in proportion to importance in the sense of PoI algorithm score. The voters decided for the idea, and a non-profit Company Limited by Guarantee was setup in Singapore. In November 2016, a push to replace the NCC with the Nano Wallet occurred. NEM Apostille, a notarization service, was also introduced. Soon thereafter, the NEM Android wallet was released for mainnet.

A Meteoric Rise and Fall

NEM boasted grand plans, but it was quickly tainted by hypocrisy and greed. 

2017 started with the completion of the founding of NEM.io Foundation Ltd, lead by Lon Wong. The team continued in silence with developing the different software and proceeded with releasing multiple new version of the Nano Wallet. The year ended with insane price appreciation of the XEM token while the hardware wallet company Trezor added support for XEM. The future looked bright and people who had got their NEMStake tokens for free could realize a multi-million dollar profit.

2018 started of with an enormous hack of the large Japanese cryptocurrency exchange Coincheck. USD 530M worth of XEM was apparently stolen and for some time information floated around blaming it on the NEM blockchain. This was however not the case. On the 25th of March 2018, the first beta of Catapult (also known as Mijin 2.0) was finally released after 2.5 years of development. The client boasted a large number of features like ICO's, voting, notarization, digital assets etc. Around this time, Lon Wong, NEM.io Foundation founding president, stepped down from his role and was replaced by Kristof Van de Reck. There seems to have been accusations of conflict of interest as he was launching a side venture built on NEM as a Mosaic token. Jeff McDonald left the foundation as well. On the 14th of May, Tech Bureau released the permissioned version of Catapult, with the public version scheduled for the later half of 2018.

In the end of August 2018, a proposal of a new legal entity was put up for a vote. This time, a venture capital firm named NEM Ventures, was proposed to after creation obtain control of the funds from the NEM Community Fund. In October 2018, Kind Heaven, an entertainment experience venture in Las Vegas, chose NEM as the public blockchain to utilize for certain services. Soon thereafter, the Japanese startup Engate announced that they were going to use the NEM blockchain as well. In November 2018, NEM core developer Jaguar0625 posted a damning summary of the NEM.io Foundation's work for the last two years. Apparently the work on the public Catapult software had stalled mainly due to the foundation's inability to hire developers, and most local foundation units had not even bothered to understand the technical roadmap. At time of writing, new elections for positions in the NEM.io Foundation are being held.

Ecology

It is the opinion of BD Ratings that the whole genesis block allocation fiasco really hurt the project. The NEM team centrally black-listed users that they thought had cheated and signed up for more than one NEMStake token. Not only did team members act unethically in that regard - they also engaged in what may be considered criminal acts when a regular user's XEM was used by developer kodtycoon to try to hack an exchange. A Bittrex representative confirmed this unethical behavior and the reason the whole thing seems to have been forgotten is because no funds were in the end stolen from any exchange.

During NEM's early years, the team encouraged users to spread the word in a respectable manner. What they really meant was that BCT users ought to bring up NEM in other BCT threads as much as possible, as seen in the goals for what they call the 'Conquer bitcointalk challenge'. NEM, still at time of writing, makes use of multiple marketing bounties. This encourages spam and attracts the worst kind of token holders and accompanying token price volatility. There is absolutely no reason why an old project like NEM should have to use community funds (which the team self-allocated from the genesis block by the way) for this.

Moving on to the NEM.io Foundation inactivity issue raised by core developers (that are not part of the foundation), BD Ratings conclude that it does not give confidence in the project when individuals can siphon off funds from the ecosystem while doing little nothing. It is worth remembering that the funds come from initial investors and contributors.

What about the facilitation of economic activity on the NEM blockchain? The Mosaic and Namespace features opens up for a wide array of useful functions, with ICO's being one obvious usecase. It remains to be seen if Catapult features can increase the utility even more, and if they do, BD Ratings will review this Ecology rating.

The NEM subreddit is not active at all, and there are almost zero discussions going on for anything other than XEM price. More discussions occur on the official NEM forum. When looking at the number of on-chain transactions it seems NEM averages around 10 000 during the last month. This is not a bad number considering the cryptocurrency climate at the moment, but it is not very good either. All in all, this blockchain has enough controversy in the past to probably deflect businesses activity considerably.

Grade: 4

Reasons: Some on-chain activity. History riddled with bad decisions.

Technology

The fact that the network has zero issuance from the start is a bit troubling but not critical due to the PoI algorithm. A public blockchain is strong if it has a wide distribution of full nodes all over the world, and a zero issuance policy lowers the incentives to operate such full nodes considerably. The only economic incentive left is transaction fees which arguably seems to have been enough for all the years the NEM blockchain has operated. The NEM team seems to have realized this after a while with the introduction of the Supernode program. These node operator subsidies will eventually run out however, and when they do, the NEM network must pray for some continuous transaction fees. At time of writing, more than 500 super nodes are active around the world.

Moving on to the Proof of Importance algorithm, BD Ratings conclude that it is constructed in a way that likely makes the system 'gameable'. As with Proof of Stake, the number of tokens directly affect the probabilities of creating the next block, but so does the number of transactions to and from a specific account. This opens up for the practice of sending and receiving tokens to yourself (or engage in more complicated schemes as the team seeks to adjust for such 'exploits') in an attempt to increase the chances of claiming future block rewards in the form of collected transaction fees or other subsidies. On top of this, one indirect effect of the above is that the unnecessary transactions are forced upon all full nodes that store the blockchain. Finally, one listed advantage of PoI is that it discourages hoarding. This is philosophically really bad because it pressures account owners to spend instead of letting them make their own decision with regards to money and time preferences.

In yet another example of completely failing to spot unintended consequences, the fund raising was constructed in a way that encouraged users to create fake BCT accounts in order to receive more tokens. It is obvious that a form of Sybil attack on the token allocation process must have occurred due to the exceptionally bad setup of the whole funding process. This seems to have dawned upon the project team as well. Later on, it turned out that even team members had made use of sock puppets to receive more staking slots. If this is the level of game theory knowledge within the team, there might be gameable aspects of the blockchain as well, like the PoI issue already brought up in this article.

It has to be said however that through years of battle testing, the unique code base has proven resilient enough and has not had any large failures. This is, in terms of a Technology rating, what matters in the end. BD Ratings will follow up on NEM during the coming years and will look for more evidence of strong core technology. When Catapult is released, probably in 2019, there will be more data on network stability and security.

Looking at certain GitHub repositories, we can see that some (open) development has stalled. The Nano Wallet has no commit since 16th of July 2018. The Android App has no commit since January. This decline in activity is seen on CoinGecko as well. It may be the case that all resources have been pointed at Catapult put that repository is not yet public.

Grade: 4

Reasons: Somewhat battle tested network. Bad decisions in terms of certain incentives. Stalled public code activity.

Decentralization

As the project community funds were suggested to fall under the control of a legal entity in 2016, the NEM team put the thing up for a public vote. This vote however had a deadline in just a week, which seems far to short to decide over such a large sum of money. The vote passed and the NEM.io Foundation was formed.

Around two years later, the very same foundation seems to have been co-opted to a degree that should worry NEM holders. Apparently, the community may vote in foundation members with regular intervals, but lately this voting is looking extremely shady. Not only does it seem that a government ID has to be provided to vote, but the PoI score has been ditched as well, leaving the voting process open for Sybil attack fro prepared parties. To counter these Sybil attacks, the foundation decided to exercise even more central control over the voting process. It will be interesting to see if for example Alexandra Tinsman manages to get elected president. She is one of the few that openly calls for more foundation transparency and accountability. Worth adding is the fact that core developers remain anonymous, which is strange considering the ID requirement to participate in governance.

Another example of centralization is the creation of NEM Ventures. This was yet another consolidation of central power over what was initially unclaimed NEMStake tokens. It will not come as a surprise if more funds are squandered away on wages and conferences - funds that was never allocated for this purpose as the whole project launched. BD Ratings' critique of the whole NEM.io Foundation and NEM Ventures is not really about the entities themselves, but rather of the fact that they were formed after people had already contributed to the project.

Grade: 3

Reasons: Large sum of XEM allocated to funds under the control of a few people. Centralized NEM.io Foundation.

Valuation

One Valuation aspect that needs to be considered is the fact that NEM from the very beginning was constructed to have no new issuance. Later on with the introduction of light wallets, the project introduced full node subsidies in the form of tokens confiscated/reserved in the genesis block. Wealth stored on this blockchain is theoretically in danger of future dilution if this subsidies reserve run out and remaining incentives to operate full nodes get too low. With centralized power, this is something that a NEM Foundation or core team theoretically can pull off.

All XEM in existence is at time of writing worth more than USD 684M. This makes the project the 15th most valued cryptocurrency in the world and is too high considering the problems it has with both ecology, core protocol incentives, and centralization. The initial sockpuppet wrongdoings with NEMStake tokens really soiled the launch of the project. The continuous centralization by NEM stakeholders in central positions, first through spontaneously reserving unclaimed genesis block tokens and then by incorporating these under legal entities that exercises too much control, is a problem that casts a shadow over the public blockchain as a whole.

Grade: 3

Reasons: NEM has strong and weak points on all different sub-ratings, but on the whole it does not warrant a #15 on coinmarketcap.com.