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Crypto Predictions 2019: Alt-Coin Contenders XEM

In 2019 the cryptocurrency sector will continue its evolution. While its early years have been dominated by almost entirely speculative trading, as the market matures, a digital asset’s ‘fundamentals’ will become increasingly important as value indicators. BNC’s 'Alt-Coin Contenders' series introduces assets with fundamental characteristics that set them apart from their competitors and justify their inclusion in any investor’s ‘ones to watch’ list.

From an investment perspective, valuing businesses is typically done using time honored formulas like price to earnings and price to book ratios, PEG calculations and dividend yields. In the crypto space, none of these methods apply directly — and investors continue to wrestle with how best to assign a value to digital assets in a nascent industry that is sentiment driven and characterized by wild volatility

To that end, the purpose of this ‘Alt-Coin Contenders’ series is to identify specific assets that BNC analysts have identified as having fundamental characteristics that at the very least, justify investors including them in a ‘ones to watch’ list.

The selections are made based on a range of criteria – things like hashrate or an increase in on-chain transactions. Or staking metrics for Proof-of-Stake blockchains and the size and enthusiasm of an asset’s ‘community’. Or apparent liquidity — significant exchange listings and fiat on-ramps. Exposure to potential legislative action is also important, as are the people behind the scenes — inspiring leaders with ‘rock star’ social media status, or alternatively, big-time financial backers with deep pockets and a track record of success.

No single asset will tick every box, and some will tick more than others, but what this series aims to do is move readers beyond simplistic FUD, FOMO and speculation — and introduce the range of fundamental token attributes that should become recognized value indicators as the industry matures.

NEM: Enterprise grade blockchain solutions

XEM is the native token of NEM (New Economy Movement), a platform blockchain launched in 2015. The NEM network’s mission statement is to become market leading medium for launching common enterprise blockchain use cases. In this the chain regard has a number of unique retail focused projects already designed for the network.

NEM is characterized by a number of key features that make the network idiosyncratic within the crypto space. The NEM code base is completely novel, initially written in Java and then Javascript.

It uses an original consensus algorithm called Proof-of-importance, which allocates block rewards to nodes based on stake, as well as number & quality of transactions, and how long the stake has been vested for.

Institutional Grade Data Solutions

The genesis block of NEM generated all 9 billion tokens which will make up XEM’s entire possible total supply. XEM has never been ‘mined’, all rewards for creating blocks are earned through transaction fees. The nature of this reduced economic incentive means the NEM blockchain operates with a small faction of 507 ‘super nodes’.

NEM NODES
https://nemnodes.org/

In order to become a ‘Harvester’ (A NEM block producer), a user must accumulate an importance score. In order to be assigned an importance score, A NEM user must have at least 10,000 XEM vested in a NEM wallet.

XEM becomes ‘vested’ once it has spent a certain amount of time in a NEM wallet, this is dependent on the amount of NEM vested. Once the vesting point is hit, a user can start creating blocks, a one-time fee is paid to start up, with the blockchain setting limits for difficulty and rewards fluctuating around a 5% level.

While vesting makes up some portion of a nodes importance score, another influential factor is transaction activity. At a reducing rate, users are given greater importance based on how often they send XEM between unique accounts.

Opportunities to game this system are sanctioned. An individual may control multiple accounts and continuously resend XEM between them but the NEM Proof-of-Importance score reduces with activity like transaction spamming and hoarding.

This system has a number of advantages over traditional blockchain consensus models. Greater influence is given to users who have been long term participants and those who are actively using NEM. This is opposed to PoS, where influence is generally weighted towards the richest in the network. Proof-of-Importance and node reputation is also complimented with the complex Eigen-trust protocol.

Likewise in PoW, where processing power is the greatest factor for salience in the network. This design is meant to take away from mercenary style mining operations that may look to join the network observing a low difficulty but in NEM are blocked from doing so by the time-based hurdles required for block production.

The permissioned nature of the network makes it highly sybil resistant. The network rewards loyalists.

Catapulting into the future

Catapult is the latest NEM blockchain engine designed to power both public and private networks to be hosted with smart contract plug-ins.The protocol is set to become the core of NEM ecosystem and has a number of unique and ambitious features.

Catapult uses aggregated transactions which bundles multiple transactions into one, thus allowing for decentralized swaps and automatic transaction fee conversion.

In practical terms, XEM users for example may never have to give up their private key when initiating a transaction on a third party exchange. NEM using Catapult, secures both sides of the interaction so that the user never gives up any compromising information to the exchange. This is all done seamlessly and simultaneously.

If Catapult is operable and scalable, NEM can potentially offer a secured form of transaction that is rare in the blockchain space and can may allow XEM stand out with added transaction utility akin to the privacy solution offered Monero.

Catapult is also open source, meaning a Dapp creator can design projects with their own branding and given the nature of Catapult transactions user may never even know that they are interacting with XEM or the NEM blockchain.

A user for example can make a Dapp payment with a $100 (fiat), Catapult can conceivably let the Dapp creators bypass having to set up an online banking or paypal payment option. Catapult would automatically convert the USD to XEM and makes the transaction over the NEM chain and then can switch it back XEM without the customer every knowing about the XEM conversion.

Catapult is also capable multi-escrow transaction capabilities, if a user for example makes a purchase for a concert ticket on an events app, and it comes packaged with merchandise offered by a separate vendor both transactions can be handled simultaneously.

There is a question of whether there is market demand for such a complex transaction model. At this stage Catapult is likely intimidating for most App developers to interact with without an experienced blockchain developer or one with NEM experience.

Additionally while current legacy online payment systems may have some flaws and too much third party interaction & custody, they are nowhere close to being inoperable or too disruptive for the vast majority of users.

Adoption of Catapult may not happen immediately, and even when usage does begin, Dapp builders and users will almost certainly come just from enthusiasts, agents and existing NEM partners within the crypto space.

However, it is difficult to deny the novel nature of the tech behind catapult and its potential to protect users and Dapp developers from hackable third party off-chain platforms. It lets all payment operations even when interacting with an external partner happen on a secured blockchain. There is likely to be demand and enthusiasm from the market if NEM users begin to successfully carry out operations using Catapult.

Catapult has been developed by the Tech bureau a fintech and crypto software and service provider with teams in Japan, Europe and USA. They are also operate popular Japanese exchange Zaif and run a blockchain consulting business called COMSA.

Onchain Fundamentals

NVT signal XEM

Figure 1: XEM NVT signal and price. NVT signal calculated with data from Coinmetrics.io. Adjusted onchain transaction volume used for NVT signal. Bottom and top lines represents Over and under sold

Derived from the NVT ratio, the NVT signal is a responsive blockchain valuation metric developed by Willy Woo and Dmitriy Kalichkin. Crypto markets are prone to bubbles of speculative purchasing, not backed up by underlying network performance and activity. The NVT signal provides some insight into what stage of this price cycle a token may be in.

A high NVT signal is indicative of a network that is going through one of these bubble periods, and may move towards a position of becoming overbought/overvalued, because of the market’s speculative assessments running out of steam.

Based on the erratic nature of the historical NVT signal chart of XEM, Transaction volume on the blockchain is prone to very short, sharp short jumps and falls in onchain volume movement. This suggests that, historically, there is not much within ecosystem participation on NEM.

The pattern of transactions for a group of everyday blockchain participants of NEM, carrying out activities in the ecosystem like interactions with Dapps or ICO funding, is unlikely to be align with a pattern of making an enormous number of transactions on one day and then not making any a few days later.

Short term volume growth does not appear to be organic, and seems more likely associated with operations like stress tests or movement to and from exchange wallets. Despite being a project that has been around since early 2015, XEM still remains an immature assets.

Both the Mosaic (the NEM equivalent of ERC-20s) and the Dapp ecosystem of NEM has very little complexity at this stage. Projects such as Luxtag, a NEM-blockchain based anti-counterfeit solution, that tracks ownership, materials and processes of luxury goods on the blockchain for verification purposes, appears to have minimal scale and usage at this stage. This translates to minimal utility of XEM outside of speculative trading.

Luxtag and other NEM dapps appear to present relevant, practical way to incorporate the blockchain into retail purchasing decisions, but mainstream adoption

Similar to Catapult, the future is potentially bright for the XEM onchain ecosystem. If 2018 was the year for the crypto ecosystem to consolidate following periods of overly inflated valuations that the year began with, 2019 mayay be when blockchains like NEM, that do appear to be building innovative tech, began to separate themselves from ‘fluff’ projects.

As such as long as the ecosystem remains well funded and active, adoption and organic activity is likely to come for the XEM token.The NEM ecosystem is backed by vested stakeholder groups such as the NEM foundation and the Tech Bureau, that have created programs to support Dapp developers and drive adoption through marketing and public relations support.

Momentum XEM

Figure 2: XEM Network Momentum. Network Momentum calculated with data from Coinmetrics.io. Adjusted onchain transaction volume used for Network Momentum. Bottom and top lines represents Over and under sold.

Network momentum is a Blockchain indicator metric conceived by analyst Positivecrypto. Indicated by the red line on figure 3, It assesses onchain volume as an indicator for future price movements. Where it differentiates from NVT signal is that the daily volume of token transactions, rather USD value of onchain transaction volume, is used for assessments.

The simple intuitive idea is that rising rate of onchain volume (in token terms not USD terms) is signal for growing ‘momentum’ within the network, vice versa for falling on chain volume in token terms.

The network momentum of XEM has fallen deeply since around late February/early March when there was a sharp upward spike in momentum for a short period. The falling network momentum indicates the recent patterns of dipping NVT signal is more likely connected with falling price levels than rising on chain volume. This would still to point XEM approaching a point of potentially becoming oversold.

PMR signal XEM

Figure 2: XEM PMR signal and price. PMR signal calculated with data from Coinmetrics.io. Adjusted onchain transaction volume used for PMR signal. Bottom and top lines represents Over and under sold

Metcalfe’s law is a measure of connections in a network, as established by Robert Metcalfe the founder of Ethernet. It has subsequently been used to analyze the true value of network-based financial products like Facebook and Bitcoin, and by comparing it to price, can provide a useful tool to assess whether a token is over or undervalued.

It is also a more straightforward metric to implement versus onchain transaction volume, which can be challenging to measure accurately in USD terms. Addresses are measured as the number of unique sending and receiving addresses participating in transactions daily.

This makes it a relatively transparent metric as compared to onchain volume. However, there may be a question of the granularity of the data, and who controls these addresses. A consideration for a network like NEM where there is an incentive to spam transactions to build a higher importance score.

Unlike the seemingly mixed signals given by onchain volume metrics, the price-to-metcalfe ratio (Kalichkin’s) for XEM sends strong bullish signals. It has recently dropped below a historically indicated ‘oversold’ point and is likely to soon reach an inflection point and begin reversing upwards.

Historically, it appears that price has primarily led PMR rather than the other way around, so the effect of a reversing PMR signal may be minimal, or even fully disconnected from price.

But, there is a possibility that there is bubbling user activity driven by factors such as the adoption of NEM dapps. If the falling PMR was indeed driven by organic user growth, then this would eventually be priced into XEM and be major forward driver for short term valuation.

This would not be outside of the realm possibility given apparent traction created for on-chain NEM projects like Luxtag and the controversial Venezuelan Petro token.

Another short term factor is the re-opening of a previously popular on-ramp for XEM, Coincheck. The Japanese exchange which was hacked for a large amount of XEM in January, is now operated under new management and resumed XEM trading in November.

The resumption of trading had a strong short term effect on price and there is a possibility that some new accounts on the NEM blockchain were generated from users of Coincheck who are now able to re-access the XEM token.

sanbase-chart-XEM-2019-01-04T13 33 25+13 00

Github commits: Black bar chart. Data from Santiment.net

While active address activity signs for NEM are bullish, Github activity (an indicator of developer interest) has fallen drastically since the start of the year. A possible factor for this drop may be some of the recent work on NEM being carried out in-house by the Tech Bureau. The last commit made on the nem.core github repository was in August 2018.

Conclusions

2019 is likely to be a make or break year for the NEM blockchain and the XEM token. It retains a strong long term hold appeal because of the substantial amount of unique tech built and attached to the network.

However, over the last year, onchain volume and market relevance appears to have seeped away from the network, slipping outside of the top-8 of crypto market capitalization tables, facing challenges from platform blockchain challengers like EOS and Tron.

This in mind, at a technical level NEM is potentially as strong as it has ever been network with the recent Catapult upgrade and a simmering Dapp and custom token ecosystem. Under the right conditions, XEM could be a leader in the next bull run driven by utility derived from its unique transaction and Dapp capabilities.


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