ICO Analysis of NEON Exchange (NEX) — NEO’s first decentralised exchange

5 min readNov 29, 2017

This report has been published by Tower Rock Research, an independent research group focused on blockchain startups and initial coin offerings (ICO).

NEON Exchange is a decentralized exchange, offering trusted off-chain trade matching with on-chain security and payment services.

Over $8 billion in daily trade volume has been exchanged this month, with the majority being traded through centralised exchanges. Though the very nature of blockchain technology is decentralised and trustless, investors and cryptographers have been forced to assume added risk by using these central party exchanges, which are vulnerable to internal fraud and hacks such as Mt. Gox, Shapeshift and Bitfinex. To elevate risk from exchanges that operated under one single entity, a number of decentralised exchanges, run through smart contracts, have been in development. These are believed to be the future of cryptocurrency trade and payment, providing stronger security guarantees to end users, since there is no longer a central party which can be hacked, run away with customer funds or be subjected to government regulations.

The trade-off for complete security comes with reduced speed however. As trades are executed by smart contracts, they are at the mercy of on-chain orderbook and on-chain order generation/cancelation latency of the public blockchain. One example is EtherDelta, where their on-chain platform is secure but it is slow and cumbersome, putting off most investors.

NEON Exchange, built on the NEO blockchain, proposes a combination of off-chain trade matching, smart contract execution and a global asset cross-chain payment service, combining the performance of centralised exchanges with the trust and security properties of decentralised exchanges. This will be accomplished by their provable fair off-chain matching scheme, providing publicly specified deterministic algorithm. By combining this knowledge with a public ledger of the order in which trades have been sent to the exchange and fulfilled on the blockchain, any user can verify that the exchange is operating fairly.

Token Sale Details

NEON Exchange is issuing a fixed supply of 50 million tokens called NEX. 50% of the supply will be going to the public sale, 20% will be going to the founders with a vesting period of 2 years, 15% will go to the NEO Council, 10% to partnerships, 5% to the company fund and 1% to ESOP (employee stock ownership plan).

The hard-cap target is $25 million, however, a breakdown on how that will be spent has yet to be released.

Token Usage

NEX tokens will allow holders to generate fees via a Proof of Stake method, similar to NEO and GAS, from a proportion of exchange and payment service fees of the NEON Exchange.

Road Map

NEX plans to have trading of NEO tokens operational in mid-2018. Notable milestones include:

Q4 2017: Smart contract examples for payment service and decentralized exchange, demo of profit distribution mechanism on TestNet
Q1 2018: NEX token sale and release of open source platform for token sales on NEO
Q2 2018: Payment service launch on MainNet for NEO and GAS. Also, matching engine launch on TestNet, supported by accompanying CLI
Q2 2018: Smart wallet and API for integration with tethered tokens in MainNet
Q3 2018: Trading interface and matching engine launch on MainNet: begin trading NEO, GAS, and NEX. Also, cross-chain demo on ETH and NEO TestNets
Q4 2018: Cross-chain launch to support trading of ETH and ETH tokens. Also, support for margin trading on MainNet
2019+: Decentralized banking: smart contract asset management across chains

Notable Team Members

Fabio Canesin, Co-founder and Developer — Holds a MSc in computational mechanics and variational multi-scale modelling. Previous researcher in the Oil+Gas space, handling billion-dollar projects. Co-founder and visionary of City of Zion (NEO’s open-source development community).

Fabian Wahle, Co-founder and Developer — PhD in machine learning and AI from ETH Zurich. Previous co-founder and CTO of award winning med-tech company Altoida. Co-founding member of City of Zion.

Ethan Fast, Co-founder and Developer — PhD in HCI and AI from Stanford. Led more than 10 projects to publication in prestigious venues such as CHI, UIST, EMNLP, and AAAI, where they have won multiple awards. Previously founded a Y Combinator backed startup, Proxino. Co-founding member of City of Zion and creator of NEON Wallet.

Prominent advisors include Da Hongfei, founder of NEO and a member of the NEO Council and Erik Zhang, CTO of Onchain and member of the NEO Council.

Opportunities

Excellent team and advisors who know and understand the NEO blockchain better than anyone
The project will follow the Guidelines for Responsible Token Sales which ensures a project has a demo / proof-of-concept, core technology expertise, transparent team and a public audit of the smart contract used for token sale
The recent NEO dApp competition should help foster innovation within the NEO blockchain and the wider community. More tokens on the NEO blockchain, the more fees NEX can generate
Though Aphelion (competing decentralised NEO exchange) has the first mover advantage, NEX is backed by NEO founder Da Hongfei, potentially making it the official exchange for NEO investors
NEO’s consensus model allows for much higher theoretical transaction (up to 10,000 tps compared to Ethereum’s 15 tps) which is hugely beneficial for decentralised exchanges

Potential Obstacles

Due to the token being NEP-5 (NEO blockchain), the token may not be immediately available to trade (considering Red Pulse has yet to be listed on a tier one exchange) which could put off very short-term investors
For the project to be successful, there needs to be a lot more NEP-5 tokens on the market to exchange. Although cross-chain support is being developed, it will be significantly behind other Ethereum DEXs once launched
As NEO has yet to reach mass adoption within the market, there is a risk that it could be replaced or made redundant by the Chinese government’s regulations around cryptocurrency, removing the need for NEX in the first place

Conclusion

The cryptocurrency market shows no sign of slowing down with average daily trade volume of over $15 billion, with NEO alone reaching volumes of $80 million a day. Centralised exchanges are receiving most of the volume but as more issues arise eg Bitfinex’s tether audit, investors are looking to decentralised exchanges to provide the performance they expect but with safety that one-party controlled exchanges cannot. The excitement of the NEO project, a team that has contributed so much to its success and the promising future of decentralised exchanges puts the NEON exchange in a favourable place, especially when it comes to the much-coveted Chinese market. Having said that, relatively speaking, NEO is still in its infancy and so provides a greater risk as the success of NEX is linked directly with the adoption of the NEO’s Smart Economy ecosystem. However, we believe that the excitement of NEO’s second ICO backed by Da Hongfei could see a short-term increase once it hits an exchange but the long-term success of NEX may not be clear until Mainnet launch in mid-2018. We consequently recommend a Strong Buy short-term and a Speculative Buy long-term.