NEM Digital Asset Report: Introduction
NEM blockchain platform was launched on March 31, 2015. Connecting through the API interface, users could build on NEM a variety of applications for ICO, supply management, document notarization, fintech systems, and much more.
Due to its functionality, the project gained a lot of attention in 2017. Offering both public and private blockchain deployment options, NEM became a building platform for some crypto-startups, as well as being tested by several governments. However, with the overall market downturn in 2018, the project has lost its positions, falling out of the top-10 on the Coinmarketcap chart. The price has suffered due to many reasons: poor management, weak development, the Coincheck cryptocurrency exchange hack (523 million XEM coins worth $500 million were stolen), and the overall low adoption in the blockchain space.
Part One: The Business Case
NEM Market Opportunities
NEM has been active in a multitude of markets, such as enterprise blockchain solutions, the ICO/STO market, and distributed applications.
NEM entered the enterprise blockchain market through its private blockchain solution Mijin, which is already working with Hitachi and several other companies. Enterprise blockchains should help businesses save on operational costs and make the operations more efficient. In fact, the market is already realizing these benefits. According to the report from Tractica, increasing adoption of enterprise blockchains will drive the global market size from $4.6 billion in 2018 to $20.3 billion in 2025.
As a smart assets system, NEM enables users to quickly and easily create custom assets (tokens), which can serve different purposes, depending on business needs. Users can run an ICO/STO on NEM, or build a loyalty points program. Although the ICO market is in a downturn, the STO market is expected to grow to $2-$3 billion in value in 2019. These numbers could be even higher, if we were to witness a change in market sentiments and subsequent bullish reversal.
NEM has also been active in the dApp space. Its applications serve different business purposes: voting, asset transferring, land registry, KYC, etc. In fact, the enterprise application market size is expected to grow to $259.51 billion by 2022.
As a developer of public and private blockchain solutions, NEM is facing stiff competition from both crypto and traditional companies.
In the dApp space, NEM’s main competitors are Ethereum and EOS, large and established public networks. Both of these companies control significant market shares in the dApp market. NEM has also been trying to promote its platform amongst outside dApp developers. However, while both Ethereum and EOS experience growth of their dApp ecosystems, NEM lags behind.
There are a few reasons for that. Unlike Ethereum, which developed Solidity, NEM allows interfacing with the blockchain only through an API, which is more secure, but lacking in functionality. The developers can only use what is available, and the existing API might not always meet their needs. [blue]
Also, NEM takes smart contracts off-chain, which adds to the overall scalability but reduces decentralization, since users have to trust that the dApp creator is not compromised. This is an important limiting factor for the dApps ecosystem, given the overall trend for decentralization in the developer community.
NEM has also been trying to compete with Ethereum as an ICO launch platform, by introducing technologies for easy and inexpensive token issuance. However, making the platform more user-friendly and less expensive for ICO projects was not enough to compete with Ethereum’s network effects. The investors were not ready to switch to NEM because of the stronger prevalence of ETH as a funding currency, and projects did not want to risk losing investors from switching barriers.
In terms of the competition with Waves, in 2018 both projects were competing mainly as ICO launch platforms. However, Waves was more successful, with a market share of 2.15%, while NEM’s market share was only 0.14%.
Moreover, Waves is also developing the Vostok private blockchain solution, which could be a competitor to Mijjin. Still, the main problem behind this type of private blockchain project is that it does not require the use of the native token. In fact, Mijin clients do not use XEM (NEM’s native token) while transacting on the blockchain. As with Vostok, the private blockchain solution is expected to provide synergies between the two projects. Currently though, the benefits are negligible, while future prospects are somewhat blurry.
In terms of the competition in the public blockchain space, NEM is losing positions to both Ethereum and EOS, while the outcome of the competition with Waves is difficult to quantify, as both private blockchains do not use the native tokens, and the information regarding their adoption phase is not disclosed to the public.
Competition in the Blockchain Space
However, the NVT comparison reveals that NEM transactions are generally priced higher than the rest of the competition. This shows that NEM is comparatively overpriced, given the fact that in general, it lags behind its blockchain rivals.
The competition in the traditional space is coming from established companies. Similarly to NEM, they offer blockchain enterprise solutions to different businesses.
Currently, the leader in enterprise solutions is IBM. The company is already working with hundreds of enterprises, implementing blockchain in their businesses. According to Juniper Research survey (Sep. 2018), 65% of companies say they would choose IBM to deploy the technology in their own business.
Another competitor is R3. The company is working with over 300 members and partners across multiple industries to develop Corda, an open-source blockchain platform, and Corda Enterprise, a commercial version for enterprise usage. The Corda platform is already being used in industries ranging from financial services to healthcare, shipping, insurance and more.
Competition in the Traditional Space
NEM stands for New Economic Movement. Its network utilizes the Proof of Importance (POI) consensus algorithm, with a mining concept called Delegated Harvesting. Harvesting is necessary to keep the network online and to confirm transactions. In order to start harvesting an account has to maintain at least 10,000 or more vested XEM on the balance. “Vested” means that the XEM have remained in the account for a certain number of days. Vesting happens gradually at a rate of 10% per day of the remaining unvested XEM amount on the balance.
The benefit of POI is that it encourages the use of the network by rewarding Harvesters, not only for staking coins but also for transacting and using the network. It can also be used for community voting. A higher POI score gives its user a higher weight when the community decides on a funding proposal or any other issue that is important for the overall ecosystem.
At the same time, unlike PoW, POI is far more scalable, with more than 3000 tps, and unlike PoS, it rewards the use of the network. Such scalability is achieved due to NEM’s two-layer infrastructure:
- The first layer – supernodes are high-performance blockchain nodes which form the backbone of the NEM blockchain network. In order to operate a supernode, accounts have to hold 3,000,000 or more XEM and are required to be up and running 24 hours per day, processing all transactions.
- The second layer – different wallets and third-party apps that directly connect to supernodes without the need to download or process the entire blockchain.
At the infrastructural level, NEM was able to achieve a good amount of decentralization with more than 450 active nodes on the network. However, token concentration still hints at centralization, with the top-10 addresses holding 49% of NEM tokens. Most of these addresses are either controlled by exchanges or are associated with the NEM development funds.
NEM was able to establish a solid technological foundation for its ecosystem but has faltered in its adoption efforts.
NEM Foundation, the main driver behind the adoption of NEM, was focusing on regional marketing activities without working on the development of the actual product. This stalled the on-chain development and the project faced problems attracting outside developers to build on NEM.
The Foundation is a non-profit organization founded in Singapore with the main purpose of promoting the use of the NEM blockchain internationally. Members of the foundation are working in almost 20 countries around the globe.
The foundation spent roughly 80 million XEM between December 2017 (1 XEM ~1$) and January 2019 (1 XEM ~$0.05), primarily on marketing. However, the strategy of building up hype by investing vast sums into marketing proved ineffective in 2018.
The Foundation also faced a lot of criticism from the community and from the Core Developers team for “spending a lot of time opening blockchain centers and traveling to conferences. No ROI of such investments have been provided.”
The problem was only acknowledged in 2019 with the newly elected Foundation president Alex Tinsman. She plans to restructure the organization and make it product-focused, hire developers, and work on increasing adoption, instead of marketing.
Due to the above issues, the project has also shown mixed results attracting outside dApp developers and ecosystem partners.
Currently, there are only 20 or so community applications that are using NEM blockchain, including Apostille – blockchain notarizing system, Landstead – uses the NEM blockchain to create a registry of land and property and NEM Vote – a voting platform that allows anybody to create and vote on polls stored on the NEM blockchain. Such a small number of applications is discouraging, given the fact that the project has been around since 2015.
NEM has tried to change the situation by introducing a Community Fund, which was later restructured to NEM Ventures. Approximately 300 million XEM were allocated to the promotion of the development of the NEM ecosystem. However, the supported projects are still in the early stages of their development and currently they add little value to the adoption of NEM.
NEM has also been tested by Ukrainian election officials, who launched a voting trial on the NEM blockchain. However, since August 2018 no news have been provided about the success of these trials. At the same time, the NEM blockchain was also used for the issuance of the Venezuela’s Petro (PTR) oil-backed cryptocurrency. However, the sale was massively disorganized and there is still confusion in the community about whether Petro was issued on NEM or Ethereum. Nevertheless, these trials indicate that NEM can actually provide some interesting and comprehensible tools for governments. The company should further capitalize on these use cases, trying to push for wider adoption.
From the community standpoint, NEM is demonstrating below average results. Its numbers are much lower than Ethereum’s, despite both projects being launched in 2015. Compared to EOS and Waves, NEM is leading in terms of Twitter followers. However, its community on Reddit is substantially lower, indicating less interest from more active and involved users.
Community Involvement Comparison
The number of active addresses did not significantly increase during the past 2 years, which indicates that the project is not moving forward with in terms of adoption.
The NEM ecosystem is currently lacking adoption. While the Foundation is trying to reorganize itself into NEM Foundation 2.0, the team should put a lot of effort on developing working products for a wide audience. Low level of valuable enterprise integrations will continue to hinder the development of the company.
XEM is the native currency of the NEM blockchain. It is used to pay for transactions on the public blockchain. NEM utilizes the Proof of Importance consensus algorithm which rewards participants with XEM based on their stake and level of participation in the network.
Harvesting (staking) – any account that holds a minimum of 10,000 vested XEM can participate in harvesting. Current harvesting reward is equal to around 3.65% XEM per year. However, it is not distributed uniformly, and depends on the amount vested, transaction partners, the number and amount transacted.
Supernodes – are high-performance servers that are essential for the NEM blockchain. In order to run a supernode account must hold 3,000,000 or more XEM and is required to be up and running 24 hours per day, processing all transactions. Supernodes are also rewarded with XEM from the Supernode’s Fund. Initially, there was 211 million XEM set aside in order to reward supernodes. The current Supernode rewards payout is 140,000 XEM in total for all supernodes, which is equal to about 313 XEM for each (there are around 413 active supernodes) or $14.45 per day. Supernodes are also able to participate in harvesting.
Fees – current transaction fees are equal to 0.05 XEM per 10,000 XEM transferred. However, fees are capped at 1.25 XEM. So, for a transaction of e.g. 10,000,000 XEM to another account, the fee would not be more than 1.25 XEM. This type of fee is only applied to simple XEM transactions, while there are a variety of transactions that can be sent through the NEM blockchain, and all of them are priced differently. For example, multi-signature transactions include an additional 0.15 XEM fee.
Speculation – XEM is traded on many popular crypto-exchanges.
Governance – community voting on various proposals is based on POI score.
XEM is a non-inflationary token. There are 8,999,999,999 XEM in existence. This amount is fixed, with NEM not planning to issue or burn tokens.
Originally in 2014, NEM planned to distribute a total of 2840 stakes (each stake contained 2.5 mill XEM tokens) between active participants on the Bitcointalk forum:
The original community distribution was neither an ICO nor a pre-sale, nor was there any contract. It was a call for participation that required more than simply contributing around .05BTC/450NXT and forgetting about it.
However, some stakes were not claimed, while some people were accused of creating sockpuppet accounts. In the end, 1500 stakes were distributed between initial investors and participants.
Although NEM gave its initial contributors almost eight months in order to claim their stakes, some contributors did not do so, subsequently raising complaints and accusing NEM of having scammed them. One of the most popular cases is that of Pontifier. He appeared in 2018 after XEM broke $1 (which made one stake equal to $2.5 mil) and followed the company everywhere, going as far as appearing in New York during the Consensus event.
Pontifier was far from the only person whose stake remained unclaimed. Eventually, the remainder was put into the Sustainability Fund (totaling 2,354,280,307 XEM).
In fact, there is a large amount of XEM that is controlled by the Foundation and the developers. Unfortunately, there is little information on how NEM is spending this money and how the funds are managed.
The company has also faced problems with one of the exchanges that traded its tokens. In January 2018, Japanese cryptocurrency exchange Coincheck was hacked. The hackers were able to steal over 500,000,000 XEM (worth almost $530 mil). Although NEM is tracking the addresses that contain these stolen funds, there were reports that 40% of these funds have already been laundered through the dark web markets, resulting in a downward pressure on the token price.
The main force behind the adoption of NEM is the NEM Foundation. The Foundation is represented by Executive Committee, Council, Global Team and Country Leaders. There are also Founders that currently are not members of the Executive Committee or Council.
Alexandra Tinsman – Alexandra is the president of NEM Foundation. Previously she was the Regional Head of North America (with the approval of the Council and the developers) which includes the United States and Canada. She has 20+ years consumer and B2B product marketing experience with top brands in software, hi-tech, gaming, entertainment, and online services.
Jeff McDonald – Jeff is a NEM Cofounder, currently serving as Council Member. Previously he was a Vice President of NEM Foundation. He also worked as an assistant professor at Keimyung University, Korea. Currently, he is also Cofounder of LuxTag, a company that uses blockchain addresses to represent real-life assets.
NEM Executive Committee and Council members are elected every 2 years. The last election happened in December 2018, meaning that the current Foundation members’ term will last until December 2020.
During 2018, the Foundation received a lot of criticism from the community. The Core Developers (who were not members of the Foundation) accused it of not contributing to the Catapult update.
At the same time, during 2018 both President (Lon Wong) and Vice President (Jeff McDonald) left their posts at NEM. Jeff McDonald was elected as a Council member for the current term. However, the sudden stepping down of Lon Wong raised a lot of questions. He was accused of launching his own company ProximaX while serving as a President of the NEM Foundation, which was considered unethical. Some members of the community believe that Lon Wong was forced to step down because he was caught using NEM resources and employees for his own company.
The recent election also faced a lot of criticism from the community. The previous foundation members rejected POI voting (voting based on the POI score) for the upcoming 2019-2020 term. This also raised a lot of questions, since every previous community vote was using POI. There was no reason for it to be not used for the election. The foundation chose instead to allow voting based on membership fees, which looked like an attempt to influence the upcoming election results. Some members of the community reported that hundreds of people who were not involved in NEM had been signed up to vote. [RED]
The newly elected foundation team released the proposal, asking for additional funding from the community. Since the last team almost drained the initial Foundation funding, in 2019 the Foundation was left with 20 mil XEM in reserves, which was deemed insufficient to continue operations.
The NEM Foundation requested an additional 210 mil XEM (~$8 mil) to operate from February 20, 2019 – February 20, 2020.
Funding Request Breakdown
Although the funding request was approved by the community, and it is an improvement over what was offered to the community before, it does not go into details about how the Foundation is planning to target the project’s problems. There is a plan to hire a number of people, reorganize the organizational structure, and work on development, but there are no dates, no goals, and whether this will work out is unknown.
It is likely that in a year we will witness the completion of the technological updates, but the lack of adoption will continue to hinder the project, and the team will ask for money once again. This situation is concerning, given the fact that NEM’s competitors are much better organized, and are already several steps ahead.
Part Two: The Technology Case
The NEM blockchain utilizes the Proof of Importance (POI) consensus algorithm. In some ways, it is similar to PoS, but it takes a different approach to the process of choosing and rewarding its validators. Accounts that participate in the consensus receive rewards based on their POI score, which depends on three factors:
- Vested Stake – POI only counts coins that have been in the account for a number of days. It takes a minimum of 10,000 vested coins to participate in the consensus. 10% of the current unvested amount vests each day
- Transaction Partners – POI rewards users who make transactions with others in the network. Each node is assigned an importance score based on transaction behavior.
- Number and Size of Transactions in the last 30 days – Each transaction (above a minimum size) contributes to the POI score and increases the chances of harvesting a block and collecting its rewards (similar to mining coins in other cryptocurrencies).
Harvesting accounts pass on their POI score to the supernode’s POI, increasing its chance of completing a block. The advantages of POI over a proof-of-work algorithm are that it does not require special hardware, it’s environmentally friendly and inexpensive, and it rewards the use of the blockchain.
The NEM blockchain, in turn, is built using four closely connected parts:
Personalized Namespaces – lets users create a unique place for their business and their assets on the NEM blockchain. Namespaces can be compared to website domains. Just like website domains, namespaces can have sub-namespaces.
Mosaics – are fixed assets on the NEM blockchain. They are stored under unique namespaces on the NEM blockchain and can represent a built-in token, or a set of more specialized assets like reward points, shares of stock, signatures, status flags, votes or even other currencies. In fact, XEM (NEM’s main token) is considered a Mosaic on the NEM network. Each Mosaic is defined by a variety of attributes such as name, description, quantity, divisibility, transferability and more.
Address “Container” Smart Assets – NEM Addresses contain Mosaics. An Address can represent an account with coins, or it can represent a package to be shipped, a deed to a house, a document to be notarized, etc. Ownership of an address can be shared in a variety of different ways through the multi-signatory control.
Transactions – allow the transfer of different Mosaics between Addresses.
NEM is also known as a “Smart Assets System” which enables the customization of the blockchain. Unlike Ethereum, where developers build smart contracts from scratch, NEM gives direct API access to a specialized set of tested on-blockchain features. The API supports many popular languages including Python, Java, C# etc.
The benefit of such a system is that it provides better security for the network, since there are no on-chain changes. It also enables easier updates and faster execution – dApps can be created and updated off-chain without interacting with the main chain.
NEM claims that “95% of the time it is easier and cheaper to build on NEM” (compared to Ethereum). However, the developers are not migrating to NEM, and the dApp ecosystem is not growing on par with Ethereum or EOS.
There are a number of reasons why this may be happening. Ethereum and EOS provide a broader base and higher functionality for the creation of custom dApps, while NEM developers have to stick with predefined API feature sets. Also, NEM smart contracts operate off-chain, therefore users have to trust the dApp developer before using it, which is not in the spirit of the distributed world. Both of these factors negatively affect the user base and the number of outside developers that are willing to use the platform for dApp development.
The negligence towards on-chain development from the NEM Foundation is partially explained by the fact that, NEM’s update was developed in parallel by the private company Tech Bureau. The company owns Mijin and is working on an update called Catapult, that would upgrade both platforms.
In fact, up to this point Catapult was almost entirely funded by Tech Bureau, while NEM was minimally contributing to the development. However, the Tech Bureau faced its own problems. Its cryptocurrency exchange Zaif had been hacked, with losses estimated at about 6.7 billion yen ($59.67 million). These issues might explain why Catapult was announced in 2016 and is still under development.
Nevertheless, Catapult should bring additional functionality to the NEM blockchain, including trusted decentralized swaps, multi-faceted transactions, multi-level multi-signature transactions, automatic fee payment and more. However, the update was announced in 2016, was expected in 2018, but is still in development.
In fact, the last commit to the GitHub repository on Catapult was made in February 2019. However, it is unclear when development will be finalized and applied to the main chain.
The absence of technological updates has negatively affected the platform. The project has not been keeping up with the technological trends of the industry. This scares away outside ecosystem developers, who would rather build on a platform that aims to continuously improve and keep up with business needs.
Compared to its rivals, NEM has not been significantly updated since 2016. However, from the perspective of scalability, the project still shows good results. The transaction speed is much higher when compared to Ethereum or Waves, and similar to EOS. High transaction throughput is largely available due to the high-speed supernodes and the fact that smart contracts and dApps are executed off-chain.
From the technological point of view, NEM appears to have been well formulated at the beginning. However, after the release and through the hype of 2017, the development stalled. The long-awaited Catapult is still under the development, while GitHub has little activity for the past year. The company is also lagging behind with dApp development on its blockchain.
The previous Foundation team was not particularly transparent and did not provide a roadmap.
Catapult – the latest update of NEM technology. Its release was expected in 2018. However, as for right now, there is no roadmap of Catapult and no transparency about when it is going to be released
Governance – NEM is planning to change the governance function to become a product-focused organization. There will be key “product” areas: Technology, Product Management, Finance, Business Development, Operations, Marketing, and Revenue. The operational level personnel will own the Key Performance Indicators (KPIs) and will be accountable to the council and community. The change of the governance role was needed for the project, and appears to be a good plan for the future.
Sustainability – the company is also planning to put a number of policies to clarify their role and provide transparency to the community.
The current Foundation team was elected in December 2018. While the new roadmap is still under development, it seems that the new team is planning to completely change the way the organization is working. They are planning to focus on the development, which has been stalled for a significant amount of time.
Part Three: The Investment Case
NEM (XEM) 18th largest cryptocurrency by market capitalization. The company has lost its positions during 2018, falling out of the top-10 cryptocurrencies list by market capitalization. The price of XEM token declined nearly 97% since its ATH in January 2018. In terms of 24-hour volume, XEM holds the 30th place on the chart with over $13,000,000 daily volume.
The price comparison chart reveals that NEM has shown a steeper decline in price during 2018. Governance problems and the Coincheck hack negatively affected the price of the coin and were additional drivers of the selling pressure.
XEM trading volume is dominated by XEM/BTC volume, which is a sign that the token is used for speculation purposes. However, fiat pairs are also present, which demonstrates support from Asian markets, Japan and Korea.
The volume has also been declining during 2018. NEM is showing worse results compared to rivals, which indicates that it is losing the competition race.
The 30-day volatility numbers generally follow the trend of the market. However, during the last few months, NEM was less volatile on the market spikes and downturns, which is a sign of fading interest from the community.
NEM / USD Short-term price analysis
In the short-term, NEM has a neutral trading bias, with the four-hour time frame currently showing that the cryptocurrency is now trading at a critical juncture.
Price is trading just below the neckline of a bullish inverted head and shoulders pattern on the four-hour time frame, after the recent up move in the XEM / USD pair was quickly reversed lower.
Buyers will need to keep price above the inverted head and shoulders pattern neckline to sustain hopes of a continued recovery higher. Worryingly for buyers, a potential bearish head and shoulders pattern may now be forming on the four-hour time frame if the recent reversal lower gathers pace.
The MACD indicator on the four-hour time frame is attempting to correct higher, although a bearish line crossover is still underway. The RSI indicator has now turned bearish on the four-hour time frame after quickly reversing from overbought territory. Traders should also note that the recent rally in the cryptocurrency has also created a much larger inverted head and shoulders pattern on the four-hour time frame.
NEM / USD Medium-term price analysis
NEM remains bearish in the medium-term, with the daily time frame showing the XEM / USD pair trading towards the lower end of a descending price channel. As long as the cryptocurrency remains within the region defined by the trend channel, traders expect the overall bearish trend to continue.
Price is currently trading below all key moving averages on the daily time frame, with the cryptocurrency recently being technically rejected from its 50-day moving average.
Bulls will need to rally the XEM / USD pair above the current monthly trading high in order to reignite bullish trading momentum over the medium-term horizon.
The RSI indicator on the daily time frame is starting to turn lower as bearish selling pressures continue to build. At the same time, the Stochastic Indicator has turned heavily bearish and is currently generating a strong sell signal on the daily time frame. If a bearish price break outside of the descending price channel occurs on the daily time frame, a strong sell signal will be generated.
NEM / USD Long-term price analysis
NEM is bearish in the longer-term, with the cryptocurrency still trading at depressed levels not seen since the early part of 2017.
The cryptocurrency has now traded below its 52-week moving average since May 2018, with the weekly time frame chart also showing price trading close to the neckline of a massive head and shoulders pattern.
Technical indicators on the weekly time frame remain depressed and in oversold territory, although at present they exhibit few signs of turning higher.
The RSI indicator only the weekly time frame is bearish, although it has yet to move into extreme oversold trading conditions. The Stochastic Indicator is bearish on the weekly time frame and is trading in oversold territory. Traders should carefully monitor weekly and monthly price closes due to the presence of a large head and shoulders pattern on the weekly time frame.
From the technical perspective, NEM is trading at crossroads over the short-term, with bulls and bears currently in a battle for near-term control of the cryptocurrency.
The overall medium-term outlook is likely to remain bearish until we see strength above the XEM / USD pair’s 50-day moving average and a strong upside breakout from the descending price channel on the mentioned time frame. At present, the path of least resistance is to the downside, traders should closely monitor daily price closes if price starts to creep under the channel.
Despite technical indicators reaching oversold conditions on the weekly time frame, the long-term technical picture still looks pretty bleak, with the presence of a large head and shoulders pattern looming over the cryptocurrency.[/vc_column_text]