The Ethereum Challengers, ep. 5: NEM (XEM)

Smart assets for businesses with easy-to-use templates, public and private blockchain support, and a growing ecosystem.

Peter Keay
May 23, 2018 · 13 min read

Do your own research. This article is explanation & opinion, not financial advice.

Public and Private Blockchain NEMjas battle for dominance. (Video version: youtu.be/XlvVrMXMcpw)

We’ve been investigating decentralized application platforms that might challenge Ethereum’s future market share.

So far, our Ethereum Challengers series has covered RSK (Rootstock), EOS, Cardano, and NEO.

We have many more to cover: Qtum, Ethereum Classic, Lisk, Stratis, Waves, Komodo, Counterparty, and finally, a post defending the chances of Ethereum itself.

By now, you should know I like dApp platforms.

Today, we’re looking at the NEM (pronounced “nem”), a smart asset platform whose native cryptocurrency is XEM (pronounced “zem”).

0.000001 XEM is called a makoto, and the first block of the NEM blockchain is called — I kid you not — the nemesis block.

NEM (formerly New Economy Movement), with native asset XEM

Quick refresher: Turing completeness has a formal mathematical definition, but in this context, it means that a system can do basically anything that a general-purpose computer can do.

This means that some platforms such as Ripple and Stellar will likely not be added to the series, as they focus on more limited use cases.

NEM isn’t Turing complete, but it still could challenge Ethereum.

Ethereum stores smart contracts compiled into bytecode on the blockchain iteslf. But on NEM, businesses do not need to place a custom-written smart contract on the blockchain.

Instead, businesses can write any application code they need elsewhere and use NEM’s pre-built templates to interact with the NEM blockchain.

Note that some third-party solutions, such as Crowd Machine, are also in the works to offer template-like features on Ethereum.

Despite this difference, since the templates NEM offers provide for the vast majority of use cases we’re seeing on Ethereum — and since more templates will likely be added in the future if holes in functionality are found — I’m letting NEM into the series.

After all, Ethereum isn’t 100% Turing complete, anyway, and NEM claims that 95% of the apps on Ethereum can run with the same functionality on NEM.

Plus, the introduction to the NEM whitepaper starts with a quote from my favorite modern fiction author. This is from Kafka on the Shore. True to the genre, it has a translation typo. True to Kafka, it doesn’t matter.

NEM Presence and Protester at Consensus 2018

There was even an unwitting NEM promoter posted outside.

I took a pic, but not a pick.

I have used protesting as a means of communication a number of times — though usually without sleeping on the front lines.

So while I had seen John Fenley before, I wanted to hear his story in person. I did a quick interview with him on video amidst the Consensus crowds. Several others stopped to listen.

Some of the Twitter NEM community knew much more about the saga then I did, though, and pointed me to several resources, including whoispontifier.wordpress.com.

Responses from the @nemofficial Twitter account appeared and were soon deleted, but the actual evidence seems to be clearly in favor of NEM.

And since we live in a time where “no publicity is bad publicity,” Fenley’s presence may have only served to increase interest in NEM. I am sure we will see him at the next major area convention where NEM is present.

The NEM ecosystem’s room was packed with projects at Consensus 2018.

NEM: Providing Blockchain for Businesses

Many businesses want to try out blockchain technology these days.

Like this famous blockchain tech company.

But most businesses looking to add the advantages of blockchain to their network already have established systems. Redesigning their entire infrastructure to integrate blockchain would be an enormous expense.

That’s why NEM is focused on enabling easy integration for businesses.

This includes easy-to-configure templated smart asset control for businesses, Mijin’s commercial blockchain services with private blockchains for businesses, human-readable namespaces, and more.

Smart Assets and Mosaics in NEM

Smart assets are also the focus on NEM — defining them, issuing them, transacting with them. NEM smart assets are called Mosaics — analogous to the kinds of digital assets that were once called colored coins and today are commonly called tokens.

Colored Coins: We’ll talk about this more when we get to Counterparty, but a “colored coin” in its original context is a bitcoin (or fraction of a bitcoin) that has some set of attributes layered on top of it, like painting (coloring) a physical coin to convey some kind of information. Thus transferring the colored bitcoin between addresses can represent more than just the transfer of financial value.

But as I mentioned at the start, NEM smart assets are not controlled with smart contracts actually located on the NEM blockchain. Instead, they can be controlled by off-chain code which interacts with the NEM API via various templates.

Sometimes NEM refers to its templating system as “off-chain smart contracts,” but it is really just an assortment of API calls that can be assembled to interact with the NEM blockchain in the way a given business needs.

API (Application Programming Interface): Just in case you’re in the space and you still don’t know what this is, an API allows programs to talk (interface) among one another.

NEM, for example, publishes a dictionary of sorts that tells other developers what exactly their API understands, and other developers can build into their programs “API calls” — requests for the NEM blockchain to provide some information or take some action — using the dictionary NEM has provided as their reference.

A number of blockchains other than NEM allow for API access, as well.

NEM’s template system results in the code itself being less decentralized — but also easily upgradeable, and much safer on the blockchain side since the templates are standard. NEM has not suffered a major bug such as Ethereum’s DAO hack or Parity wallet freeze.

The widely publicized CoinCheck hack of early 2018, which NEM tried to mitigate by tagging and tracking the stolen 530 million XEM, was not a fault of NEM’s but a breach of the CoinCheck exchange itself.

Old NEM logo, old NEM legos.

Businesses hoping to interact with NEM can access its blockchain by using the NEM API from their already-existing system — without having to redesign everything in order to experiment with integrating blockchain technology into their business.

Covering Your Assets

But businesses can also run on a private blockchain using NEM tech.

You have to have the sound turned on for this one.

This union of public and private tech is again reminiscent of NEO — whose partner OnChain helps businesses build their own blockchains plugged into the NEO Smart Economy. Businesses working with NEM can use Mijin to build private (permissioned) NEM-tech blockchains with support for multiple assets, multi-signature accounts, and smart contracts.

Mijin, whose version 2 is named Catapult and is currently the subject of most NEM news, is developed by the Japanese company Tech Bureau.

Hiring a blockchain developer is not a requirement, since Mijin offers a JSON API that it claims is simple and easy to use. Businesses can communicate with this API using any common programming language they prefer.

Financial institutions, similarly, can build on NEM tech via NEM partner Dragonfly.

The NEM Ecosystem

Another example of a NEM project is Prover, which aspires to achieve what projects like Kinesense are also working on: authentication that video is unmodified. This ultimately has applications for combating fake news, proving copyright, and establishing evidence.

ICOs on NEM

There have been exceptions, such as loyalcoin.io, which concluded its ICO in February 2018. I expect that we will see more ICOs on NEM soon as Catapult launches and the ecosystem grows.

Speaking of Catapult…

Catapult

While Mijin v1 was an extension of the NEM public blockchain, Catapult is an extension of the Mijin private chain back into the NEM public chain.

Catapult brings several significant features, including:

  • Trustless decentralized swaps. Buyers can purchase from exchanges without needing to custody their assets with the exchanges. For example, if I want to buy the deed to a house listed on an exchange for 1,000,000 XEM, Catapult can send the 1,000,000 XEM from me to the seller, the deed from the exchange to me, and the 600 or so XEM exchange fee to the exchange. The exchange itself never holds my keys or my XEM tokens.
  • Automatic fee payment. If I want to send someone $50 in U.S. dollars using a Catapult app, but I don’t have XEM to pay for the transaction fee, Catapult can easily convert a tiny portion of the USD (probably less than 1 cent, in this case) to pay the fee. Users on Catapult apps may never even be aware that they are running on NEM and that XEM transaction fees are required.
  • Multi-faceted transactions. Perhaps the exchange listed in example 1 is throwing a special deal: buy any property, get free tickets to a concert in town. Catapult can handle all three transfers: the property price to the seller, the property to the buyer, and the free tickets to the buyer.
  • Multi-level multi-signature transactions with AND/OR logic. These allow for fraud detection, account recovery, supply chain management and more. This is a very useful feature for security. In the example below, I can give my hardware wallet key the rights to control my XEM without any other signature needed. But I can also give my less-secure phone wallet the rights to control my XEM — but only when transactions are also signed by another key, such as my 2FA device or a Fraud Detection API.
An example of multi-level multi-sig. Check out this article about Catapult or the Catapult whitepaper to read more.

NEM Consensus: Proof of Importance

NEM’s consensus method doesn’t involve Proof of Work, which has limited the speed and scalability of the Bitcoin and Ethereum networks, among others. NEM achieves thousands of transactions per second by using Proof of Importance.

Proof of Importance determines the “importance” — according to NEM, the quality of work done — of each node staking at least 10,000 XEM. Observers in the network determine the “importance” of nodes validating transactions. This is similar to but different from proof of stake. Sybil (51%) and loop attacks are both mitigated by the way the system is built.

As a NEM user, your importance is determined by several factors including:

  • How much XEM is in your wallet
  • How long the XEM has been in your wallet
  • The number and quality of your transactions on NEM

The higher a node’s importance, the more likely it is to be pseudorandomly selected to validate transactions.

Vesting XEM

When a wallet sends XEM, the amount sent is taken from both the vested and unvested XEM in a way that maintains the wallet’s current proportion of vested XEM. However, sending XEM is one of the most significant ways for a node to increase its reputation, or importance, on the network and thus to have a higher chance of harvesting some XEM as a reward.

NEM nodes with at least 10,000 vested XEM become harvesters on the NEM network. Like miners, but without Proof of Work, harvesters help the network verify transactions and are in turn rewarded some XEM.

Harvesters connect to NEM supernode harvesting slots. Supernodes serve as hubs for harvesters and can be created by staking 3,000,000 vested XEM. Unlike many masternode coins, XEM provides relatively modest rewards of a few percentage points annually to supernodes.

Harvester revenue depends on importance and tends to be quite low, as NEM fees are very low. Some users report only a few XEM in months of harvesting.

Harvesting XEM without Exposing Private Keys

If I want to run a NEM node but am not able to keep my computer online all day, I can make a Virtual Private Server. This is common practice for people setting up masternodes for other cryptocurrencies.

However, since my VPS is maintained by a web hosting company and connectable to via SSH, I may believe it is a security risk to place my wallet there and unlock my private keys on the VPS. Importance transfers allow me to keep my XEM and the private keys to it secure while using the importance that account generates to harvest from a different machine.

For more details see Section 7 of the NEM whitepaper equivalent, the “Technical Reference.”

NEM vs. Ethereum

1. Scalability

2. Governance

3. Development Complexity

4. Timeline

5. Adoptability

To be fair, both of these user-friendly features are in the works for Ethereum, though not on the core protocol layer but as third-party additions.

6. Generalized Features

NEM estimates that 95% of current Ethereum dApps can be easily built on NEM with all the features they need.

7. Market Position

I don’t know whether time will show that Proof of Importance has the security that NEM claims, or whether the ecosystem will continue to grow before larger competitors become too dominant.

But I am excited to follow NEM as it grows. The strength of the community, and innovations both in the core protocol and by the businesses running on NEM, continue to capture my attention.

The blockchain space moves at breakneck speed, with developments often undocumented and old materials still propagated, so it is difficult to write an article that is not out of date the moment it is published. If you have any updates to what I’ve written here, please let me know.

And make sure you come back soon for the next installment: Qtum, another challenger from China.

The Ethereum Challengers

Down-to-earth explanations of the tech and other important aspects of dapp/smart contract platforms, with direct comparisons to Ethereum.

Peter Keay

Written by

Full-stack dApp developer || LiquidApps || Host, Crypto Philosophy Podcast (bitgenste.in) || Host, Everything EOS Dev Series || Writer

The Ethereum Challengers

Down-to-earth explanations of the tech and other important aspects of dapp/smart contract platforms, with direct comparisons to Ethereum.

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