BBOD Research

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4/17/2019

Fundamental Analysis: NEM (XEM)

BBOD Rating [17/04/2019]:
BUY: A low-risk buying opportunity


Overview


Currency CodeXEM
Transaction Start Date01/04/2015
Circulating Supply8,999,999,999
Market Cap596,840,900 USD
Protocol TypeBase blockchain
Where To BuyBinance, OKex
Where To Trade on MarginBBOD

NEM is a Blockchain platform with a keen focus on addressing the needs of business enterprises by providing a highly customisable, accessible and user-friendly protocol that can be much more easily implemented into existing business models than most competing Blockchain projects.

This is achieved with a truly unique project architecture which has been built from the ground up rather than becoming another adaptation of well-known existing systems. As a result, NEM has already seen significant adoption by a well-regarded Japanese institution named Tech Bureau, Japan-based Fintech company, who has developed Mijin the private blockchain software based on NEM technology.

Unfortunately for NEM, the project was tainted in January 2018, when it became subject to the largest cryptocurrency hack of all time of 500 million USD on the Japanese cryptocurrency exchange Coincheck. Despite what many individuals believe, the hack was not the result of a weakness in the NEM Blockchain, in reality being the fault of the centralised exchange itself who were storing NEM coins in a ‘hot’ wallet with little security measures in place to protect their funds from hackers. Such a setback would likely bankrupt many other cryptocurrency projects, the fact that NEM has managed to maintain its reputation and standing within the community is a testament to the founders and developers of the project who have been quietly moving forwards despite all the negative press.

Problem To Solve

High Barriers To Entry

Currently, if a business decides to integrate Blockchain technology into their existing infrastructure it can often be incredibly challenging, expensive and inefficient. This is the result of the majority of Blockchain platforms needing highly skilled developers to learn a completely new coding language or even well-known languages which are familiar in traditional environments but become more complex when integrating into Blockchain protocols. As a result, although businesses often see the promise Blockchain brings they are hesitant to implement the technology into their existing business models. The perfect example is Ethereum, who require developers to learn Solidity, an entirely unique coding language. Ultimately, such high barriers to entry make businesses extremely hesitant to adopt Blockchain technology, as they simply do not believe that the costs outweigh the benefits.

Private Vs. Public Blockchains

Most platforms currently available in the market are purely public Blockchains, such as Bitcoin, this has immense advantages on the individual level, such as transparency, authenticity and immutable. Yet these features are not particularly useful for businesses looking to use the underlying Blockchain technology in order to make their internal processes more efficient. Broadcasting transactions and information to an entirely distributed network has so far proven to be slow and inefficient for the scalability necessary to operate large-scale operations where information is continually exchanged and needed instantly. By isolating the public from transactions which they need not be concerned with and creating an internal business silo of information, processes can be sped up dramatically to the extent that they can considerably improve upon the existing systems that businesses rely on today.  

Consensus Mechanisms

All consensus mechanisms have their strengths and weaknesses, for example, Proof of Work (PoW) is incredibly inefficient in a business environment as it simply takes to long to process transactions, despite having immense advantages for individuals, such as being immutable, censorship-resistant and immensely secure. Hence, such tradeoffs are incredibly important to decipher once a project has determined what their business model is before they decide to implement a protocol which cannot easily be changed and that is completely unfit for purpose. For Instance, Bitcoin’s PoW consensus algorithm has determined that the project has become a store of value, akin to gold, despite the original intention as proposed in Satoshi’s whitepaper to become a peer-to-peer digital cash. Such decisions, therefore, carry more weight than any decision proceeding them and should not be taken lightly.


Solution

Low Barriers of Entry

Since the NEM Blockchain was built from the ground up, independent of influence from other projects in the ecosystem, a unique approach to providing access to clients who wish to utilise the protocol was achieved. This is what NEM has coined the Smart Asset System. At the core of this system lies the ability for businesses to build on top of the NEM protocol without needing to learn any unique or complex coding languages. Instead, firms can build on top of the platform by utilising powerful API calls to transfer their existing product or service to the NEM Blockchain. This universal ease of access is an incredibly powerful concept as it significantly lowers the barriers to entry for businesses wishing to utilise the technology alongside their existing infrastructure. As such, there is no need to employ expensive Blockchain engineers to try and configure complex protocols. Instead, traditional developers can curate their Dapps outside of the often challenging ecosystem bound by no rules and simply put their ideas into practice by linking them up to NEM’s Blockchain servers. This has already gained significant traction with Mijin, the private chain solution owned by Tech Bureau, which aim to reduce the costs of banking by up to 90% by Q4 2019, whilst making it more secure and faster. Although this may seem incredibly ambitious, Mijin has already been adopted by reputable financial institutions in Japan (e.g.Azure Marketplace running on Microsoft Japan’s Azure cloud platform) who wish to streamline their services to make them more efficient, reducing costs for themselves and their users. Such support shows that NEM is indeed fit for purpose, serving the needs of businesses over individuals and is a testament to them sticking to their vision.

Customisable Blockchains

As previously discussed, everyone has the ability to build upon the NEM Blockchain by utilising API calls, but for business applications where not all information necessarily needs to be broadcasted to every participant in the network or simply cannot be as the data is sensitive, NEM offers the ability for private Blockchains to run on existing internal servers. Here businesses determine which nodes are trusted within the private network, removing the need for technical features which prevent bad actors from causing issues on public Blockchains. This allows for considerably faster transactions than possible in public Blockchains making business applications running on the NEM blockchain considerably faster and more scalable, being able to handle up to thousands of transactions per second. This scalability allows for projects which would traditionally bloat or slow down a pubic Blockchain to function efficiently on NEM’s private Blockchain, such as supply chain information and loyalty point systems, all without any unnecessary information ever being exposed outside of the closed system. Such a system is familiar to businesses as it is how they currently operate and so is more easily adopted whilst increasing efficiencies for both themselves and their consumers. Ultimately, the fact that NEM’s Blockchain is highly customisable allows businesses to easily implement existing practices in order to substantially increase internal efficiencies where they do not need the added functionalities that public chains provide. This has allowed NEM to become the Blockchain of choice for Tech Bureau and his private chain solution Mijin, which will likely spur on further adoption if the project is shown to be a success.

Consensus Mechanism: Proof of Importance

To further address the concerns of business enterprises, NEM took a unique approach to the supply of their token XEM when compared to the majority of other cryptocurrencies. Instead of releasing them at a steady rate with a diminishing supply, much like Bitcoin, when the project was launched all XEM tokens were immediately released to the founding members of the project, who then distributed the tokens accordingly to their communities. This combined with the fact that XEM has a fixed supply of 8,999,999,999 tokens makes for a much more efficient means of exchange in business environments as it is highly divisible. Additionally, it will not suffer from volatility due to scarcity and is not possessed by a few large actors, rather the community at large. Ultimately XEM should operate more akin to a traditional currency allowing it to be a more effective means of transfer in traditional business environments.

Perhaps more importantly, however, is the unique Proof of Importance (PoI) consensus mechanism that has been implemented by NEM. Since the project was built from the ground up with little care for adopting existing protocols, NEM has chosen to take attributes from both Proof of Work (PoW) and Proof of Stake (PoS) and adapt them to fit their business-oriented mindset. As all tokens have already been distributed, no new coins are minted like in PoW. Instead, nodes are rewarded by confirming transactions on the NEM Blockchain and are selected based on their perceived importance within the network. Similar to PoS, nodes have to ‘stake’ a certain amount of transactions in order for them to be eligible to confirm transactions on the network, this shows that they have ‘skin in the game’ and they are, therefore, unlikely to want to jeopardise the network as it will diminish their own portfolio. However, unlike in PoS, PoI places a large amount of emphasis on factors that prove the ‘importance’ of a network participant, such as how often and fast transactions have previously been completed and their current account balance. Nodes that are judged to possess this perceived “importance” are then allowed to process future transactions in accordance with their network “importance” ranking, promoting good behaviour within the network if nodes wish to increase the amount of money they make from transaction fees. The PoI consensus algorithm is energy efficient compared to traditional models as anyone can participate without needing expensive hardware unlike in PoW systems, this ensures centralisation of power is avoided and allows businesses to implement the protocol whilst being socially responsible to the environment. Whereas companies who choose to implement PoW, if that is ever possible, will likely be criticised for the damage they are doing to the environment. Ultimately, the PoI algorithm allows for a much more streamlined Blockchain that has increased speed when compared to its competitors which should allow the NEM Blockchain to scale for business applicants in the future, especially if they choose to implement private systems.


Catalysts

Business Solutions: Unlike the majority of Blockchain projects on the market today, NEM has truly catered their product with business enterprises in mind. The customisability of NEM’s infrastructure allows their product to integrate into existing business models without the need for considerable learning, adaptation and ultimately cost. This is achieved by utilising well-known technical features such as API calls, private data storage and speed. So far, this has attracted the well-regarded Japanese firm
Tech Bureau and his private chain solution Mijin, if this proof of concept can be as efficient as it has promised, then no doubt other businesses will be quick to adopt NEM themselves.

Independent Thought: Instead of utilising well-known consensus mechanisms that work effectively in certain environments but fail at others, NEM has chosen to create their own unique consensus algorithm (PoI) which is fit for the purpose of their vision. This shows just how ambitious and highly skilled their team of developers are, a reliable indicator of whether the project will continue to succeed. Sticking true to their intended audience, business enterprises, who wish to implement private Blockchains will likely serve them well if adoption increases after their ongoing project with Tech Bureau (Mijin), whilst other public Blockchains make slow progress.


Risk Factors

The Hack: Despite the hack being no fault of NEM, the amount of bad press that follows such an attack is enough to destroy even the most disguised brands. Despite this, NEM has proven to hold rank by market capitilisation reasonably well since the event, still sitting comfortably in the top 20 coins. Surviving such a media frenzy shows that the project has a truly dedicated community who are educated enough to see through any false news stories. A testament to both the project and the community.

Private Blockchains: Choosing to focus your efforts on allowing firms to create private Blockchains has inherent trade-offs. Some would argue that NEM is in fact just a more sophisticated database that allows firms to be more efficient without necessarily acting more responsibly. The fact of the matter is if Bitcoin maximalists want widespread adoption of Blockchain technology, projects such as NEM will provide a necessary bridge from retail to institutional clients, which will then lead to greater recognition of the underlying technology by the mainstream. Ultimately leading to greater adoption of all types of Blockchain projects in the future.


Conclusion

The NEM Blockchain is primarily focused on business enterprises, catering to all of their needs from easy adoption with low technical barriers to entry, allowing their Blockchain to be customised to be private and being socially responsible with an energy friendly consensus mechanism. This pinpoint precision will likely place them at the forefront of adoption when businesses look for a Blockchain platform that suits their needs. If the proof of concept with the private blockchain software Mijin proves to be a huge success, who knows how many other firms will look to implement NEM as their underlying Blockchain protocol. One to watch as the Blockchain ecosystem evolves to mainstream adoption.


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BBOD Rating Standard

BUY: A low-risk buying opportunity

ACCUMULATE: An opportunity to buy a medium risk cryptocurrency at a low price

SPEC BUY: A speculative opportunity for investors with a higher risk tolerance

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