NEM developed a new consensus protocol: Proof-of-Importance. It functions similarly to proof-of-stake, but it includes more variables than one’s NEM account holdings. The functions borrow from the math of network clustering and page ranking. At a high level, the primary inputs are:
- Net transfers: how much has been ‘spent’ in the past 30 days, with more recent transactions weighted more heavily.
- Vested amount of XEM.
- Cluster nodes: accounts that are part of interlinked clusters of activity are weighted slightly more heavily than outliers or hubs (which just link clusters but aren’t part of them).
The importance score addresses two primary criticisms of proof-of-stake.
One risk is that people simply hoard many coins as possible and reap the rewards from block creation. This concentrates wealth while discouraging transactions. The importance score means that hoarding will result in a lower score, while spreading XEM around will increase it. Being a merchant pays better than having a hoard.
The second risk is a nothing-at-stake problem: because block creation costs no resources, whenever there is a fork, someone can freely create blocks on both forks. This will greatly (perhaps indefinitely) prolong the fork. NEM’s proof of importance guards against this.
The process of creating blocks is called harvesting, in which the block creator earns all the fees for the associated transactions. The chances of being a harvester are based in part on the importance of the account.
Vested and Unvested XEM
Every account will have a vested and an unvested balance of XEM. Many benefits on the NEM network (such as harvesting eligibility and importance score) are based on one’s vested balance. XEM gradually becomes vested over time: every 1440 blocks (approximately 24 hours), 10% of one’s unvested balance becomes vested. Whenever someone sends XEM, it is taken from both the vested and unvested balance, and whenever someone receives XEM, it arrives unvested. This discourages rapid trading of XEM and rewards users who hold it, while the importance algorithm discourages hoarding.
Node Reputation System
NEM implements a node reputation system to help guard against a malicious node attack. Each node maintains a constantly updating trust value in each other node, based largely on how successful its attempts to synchronize have been and how accurate its feedback is about other nodes. The goal is to allow successful synchronization about the blockchain even when a large portion of the node network is colluding.
In 2015, NEM outlined the supernode system, in which high-performing and reliable nodes are eligible for block rewards. Rewards for Supernodes are funded through the development team’s “sustainability fund” which was allocated from the original development fund in March, 2015. The Node Reward Fund originally held 211 million XEM and is intended to incentivize consensus until transaction fees take over. Any node can apply to be a Supernode and must meet several performance criteria.
Native Multisig Capabilities
NEM includes multisig transactions as a native part of the platform. While apps for other blockchains do support multisig transactions, the feature is often specific to an app, service, or wallet. NEM’s native functionality provides a standard applicable to all services.
Launch and History
NEM was started by UtopianFuture, a Bitcointalk forum user who wanted to improve on Nxt. A group of developers coalesced through an open call on January 19, 2014. They decided against copying Nxt and wrote the codebase from scratch. At launch in 2015, the team of NEM was reportedly large, over 15 developers and almost 30 marketers or translators.
To initial distribute XEM, the team launched a registration process in which bitcointalk users could register and pay a small fee in BTC or NXT. In 2015, they also hosted a giveaway to Reddit users.
NEM was used as the basis for Mijin, a permissioned blockchain tested by Japanese banks. Three core developers from NEM partnered with Japan-based Tech Bureau, which runs Zaif Exchange, to create Mijin.
Consensus: Proof of Importance (similar to Proof of Stake)
Hash Algorithm: SHA-3
Block creation time: varies with average of 60 seconds
Launch condition: Registration over approximately 10 months with small BTC or NXT fee
Total Supply: 9,999,999,999 XEM
Inflation Rate: None – there will only ever be 9 billion XEM. A special reserved fund rewards Supernodes with 140,000 XEM per day, split among Supernodes.