zk Capital Protocol Analysis on New Economy Movement (nem)

We are excited to share with the community our first public analysis. This analysis is one of many other reports that we are enthusiastically working on. Our utmost priority is to present comprehensive and in-depth research. We leverage the most qualified expertise to deliver to our readers the highest quality of work.

The full version of the report can be accessed here.

In our first analysis, we study the New Economy Movement (NEM) project. We take a deep dive and present a technical background on NEM, detailed economic valuation of its coin, XEM, an in-depth market adoption analysis of the project, and how it compares to other competing projects. Below, we’ve highlighted the major takeaways of our analysis.

New Economy Movement (NEM) was launched in March 2015 with the vision to improve scalability by implementing a new code base. After three years of the project launch, NEM maintains a stable position among the top 15 cryptoassets by market cap.

We begin this analysis by disecting NEM from a technical perspective:

• One of the major innovations seen in NEM is the Proof of Importance (PoI) consensus mechanism. In this mechanism, users possess importance scores based on their stakes and economic activity. Higher importance scores result in a higher probability of harvesting the next block of the blockchain and collecting the associated rewards.
• The PoI consensus was intended as an improvement over proof of stake (PoS). However, PoI may be less resistant to Sybil attacks than PoS. Using the simulations presented in NEM’s technical reference, we argue a case where users with higher stakes may split their holdings into multiple accounts to obtain higher importance scores. In addition, we find that the NEM delegated harvesting feature, where users can delegate harvesting to other users, may compromise the network security as more nodes disconnect from the network.
• From a network prospective, the NEM network consists of two types of nodes: full nodes and supernodes, both of which can perform harvesting and are responsible for securing the network. Currently, about 500 supernodes keep the NEM network in operation. Running a supernode for the NEM network requires a very high XEM balance and they must provide a minimum computing power in return for a daily reward. These rewards are granted from a special fund. The supernode reward fund started with a balance of 211MM XEM and is expected to be depleted by the year 2020. This situation creates an open question about the stability of the NEM network in the future.

We then take a look at the economic valuation of NEM and the future outlook for mass adoption:

• NEM is positioned as a platform for creating and managing cryptoassets with XEM as the native platform token. Through smart assets and the use of Application Program Interfaces (APIs), NEM administers a set of built-in features that allow users to customize their own blockchains to satisfy their unique business models.
• NEM is expected to host multiple projects that handle different use cases. However, those that currently exist, for example Dimcoin, have failed to significantly contribute to NEM’s economic activity. Even the use of the NEM platform for the issuance of the Venezuelan controversial Petro coin is not likely to contribute significantly to the NEM economic activity.
• Some economic valuation models, like John Pfeffer’s model, are not bullish on the value of platform tokens like XEM as the cost of computing resources declines. The issue can be more critical for protocols like NEM where there is no mechanism to separate the computing cost from the token value.
• As a platform, NEM has only achieved limited success when compared to other competing protocols like Ethereum. At the time of this analysis, about 30 projects are planning to utilize the NEM platform.
• The current economic activity of the NEM (including the activity of the projects built on it) is very weak. On average, NEM processes less than 2 transactions per block. The average daily collected fee is about 5000 XEM shared between all harvesting nodes. This makes harvesting unprofitable and disincentivizes users to run full nodes. There is little adoption of the XEM token. Low levels of economic activity may threaten the network stability and security in the future.
• NEM has tried to provide some governance rights to XEM holders. However, these rights are kept at a minimum. The NEM foundation has full authority to decide what protocol changes to accept. Regular users may only provide an initial vote to support or oppose project funding. However, this vote can be overridden by the NEM foundation making the governance feature of XEM essentially broken.
• NEM does not provide solutions to enhance user privacy. Using simple techniques, attackers may be able to trace the entire transaction history of users. These issues are critical for many use cases, hence, detracting from massive adoption of NEM.
• For XEM token velocity, The high vested balance requirement to run a supernode (3MM XEM) may help reduce the XEM token velocity. About 30% of the total XEM tokens are estimated to be locked down having a zero velocity. A low token velocity is essential for improving the future token value.

Disclaimer: This article and the complete analysis is for informational purposes only and does not in any way constitute investment advice.

Thanks to Joey Zhou and Arthur Gervais for their feedback on the analysis.

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