NEM & XEM: Unique Consensus & Governance Structures

Origins of the NEM Blockchain’s Consensus Algorithm

The New Economy Movement (NEM) blockchain protocol was specifically designed to support large organizations in developing their blockchain capabilities, as was NEM’s subsequent ecosystem, the Symbol blockchain protocol. A significant part of its architecture is based on Java (a popular programming language), which is meant to make it easier for developers unfamiliar with blockchains to integrate their programs with the NEM crypto platform.

NEM’s coin XEM is the blockchain network’s native cryptocurrency, and plays a central role in maintaining the blockchain’s unique consensus mechanism. NEM’s consensus algorithm is a notable innovation that contributes to the long-term sustainability of the project. Proof of Work (PoW), although both popular and generally considered secure, is criticized by some for having slow transaction confirmation times and mining procedures that can be too costly and technically complex for many users to actively participate in. Conversely, Proof of Stake (PoS) is a collateral-based system in which nodes stake coins in order to participate in the block confirmation process. Critics argue that wealthy actors can, through staking the most coins, hoard a significant amount of governing power and influence on the system. In contrast to both of these mechanisms, NEM has designed a unique Proof-of-Importance (PoI) consensus system and harvesting protocol.

Proof-of-Importance (PoI) and the NEM Crypto Protocol

PoI is central to NEM’s unique network and is designed to mitigate some of the potential issues of preceding consensus algorithms. It does this by maintaining a score for every user — dependent on both the number of XEM coins they stake on the network and how actively they transact with XEM. These reputation scores are a shareable feature of the protocol, allowing all network participants, including users with fewer coins, to participate in the addition of new blocks and reap rewards in the form of transaction fees and block confirmation fees.

To discourage users from gaming the system by sending coins between their own accounts (a potential cheat for collecting transaction fees without actually adding value to the NEM crypto network), the reputation system only counts net transactions. This mechanism also helps prevent users from hoarding coins, which could result in the system stagnating. Additionally, in order for a user to be eligible to participate in the confirmation of new blocks, they must vest a minimum of 10,000 XEM — another barrier against malicious and frivolous network activity.

Vesting is a procedure whereby a user places their coins in a supported wallet. Every day, 10% of their unvested holdings are counted as vested. When the minimum threshold of 10,000 vested XEM is reached, the user is eligible to participate in the consensus process and earn a share in the network’s financial rewards system. In other words, XEM coin holders can participate in the network’s consensus and earn rewards for their efforts, but they must get at least 10,000 XEM vested first. The user’s Proof-of-Importance score becomes a commodity that they can share in the harvesting system as a tokenized representation of their reputation and contribution to the network.

NEM’s Coin Harvesting and XEM Rewards

XEM is set for a total fixed supply of 9 billion coins. At the beginning of the project, XEM coins were distributed to over 1,500 users in order to jumpstart community activity within the ecosystem. By setting an initial cap, NEM sought to prevent inflation issues that can result from an overwhelming supply of coins — an issue that has negatively impacted other cryptocurrencies.

NEM coin harvesting is the process through which NEM confirms the addition of new blocks to the chain. For many other blockchains, every new block added creates new coins. This is not the case with NEM’s coin XEM as they are already in circulation. Instead, the addition of new NEM blocks allows the participating nodes to harvest the transaction fees from all the transactions recorded in that block. There is an element of chance involved in each block’s reward amount since the volume of transactions in each block is variable, and rewards are paid out on a per-transaction basis. NEM node rewards are paid out from funds set aside at the project’s launch — called the Nemesis Block, a wordplay on the Bitcoin Genesis Block.

The confirmation of a block is performed by a supernode (similar to a masternode). These are high-performance computing devices that mathematically ensure the validity of each block before it is added. In order to be registered as a supernode on the network, every aspiring supernode must have a minimum of 3 million XEM coins vested. However, any user that has vested the minimum of 10,000 coins can delegate their Proof-of-Importance score to a designated supernode. The cumulative Proof-of-Importance of a supernode and those delegating scores to it will determine the probability of success the supernode has in confirming new blocks and the consequent likelihood of harvesting transaction fees. The delegating users receive a portion of these fees in return for lending their reputation score to that supernode.