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Nxt from underground

By Daniel M. Ryan
web posted July 11, 2016

One of the depressing truths you learn when you've participated in the mining-exploration penny stock arena is that stocks of explorers with huge viable deposits on their properties moon-rocket too early. A depressingly good example is Noront Resources.  In late 2007, it announced an exciting drill result from its Eagle's Nest property located in a part of far-northern Ontario that was dubbed the "Ring of Fire." The project's potential was seen to be so huge, other explorers jumped into the region. As it turned out, Noront's project was overshadowed by a much bigger deposit under the control of big-producer Cliffs Natural Resources. In a few years, the Government of Ontario set up a "Ring of Fire Secretariat" to streamline relations with the aboriginal peoples in the region and to shepherd along those projects. Not only is the Ring of Fire noticed by the Ontario government but also the Government of Canada: most recently, by Prime Minister Justin Trudeau himself.

You know how the process works if you're an American sports fan. If a top-league team wants to  come to a city, the plush seats on the bandwagon are filled by the Governor and a Congresscritter. But if the team isn't top-flight, its arrival is beneath those august electees' notice. The same plush-bandwagon effect holds for mines in Canada, mostso in remote and undeveloped regions.

Although Noront's own deposit is overshadowed by Cliff's, it's still a big one. Noront has yet to surmount the big hump for a feasible mine – getting the capital to construct it – but it does have a bankable feasibility study and has largely surmounted another difficult hump: environmental permitting. Its feasibility study boasts a net present value of more than $500 million. After close to nine years' worth of steady work, it's much, much closer to a paying mine than in 2007 when it reported those exciting drill results.

But you couldn't tell this from its long-term stock chart. As I write, Noront last traded at C$0.31. Back in the heady says of late 2007, it rocketed up to almost C$6.00. After a huge 180er, it peaked in February of 2008 at C$6.95. Anyone who bought near that peak and held on is a) part-owner of one of the few exploration projects that has a real shot at becoming a paying mine; b) sitting on about a 95% loss after more than eight years of progress.

That chart, contrasted with Noront's actual timeline, shows the hard truth about markets for assets whose valuations are essentially speculative. With no fact-based valuations possible, with only simulacrums of valuation that use projections instead of verified numbers, the speculators fall into the habit of using gut feelings and raw emotion. So much so, experienced punters have a rule of thumb: "buy the stock when it's boring." Buy an explorer only when it looks like it's surmounted the many hurdles between early-stage exploration and opening a paying mine with steady but unexciting effort, and then hold on for the few or several years it'll take from then for the company to become a real producer (or taken over by a real producer.)

As of now, virtually all alternative cryptocurrencies are like the typical mining-exploration company: all potential, virtually zero present value from a strict accounting standpoint. Consequently, many of them have their day in the sun only to fade into dormancy. As with mining exploration, the odds of a cryptocurrency becoming a "paying coin" are very low. And as with mining exploration, the ones on track to become real "producers" go through a spike of excitement only to fade back into the shadows even as real progress is being made.

It's hard to come up with a better example than Nxt, the first generation-two cryptocurrency coded from scratch instead of built on top of Bitcoin. As I write, Nxt is being overhauled to become a blockchain suite that will enable ordinary folks to create their blockchains through an innovation called "child chains:" namely, blockchains that are secured by continual squaring with the main or "parent" chain. In a nutshell, this new iteration of Nxt will make it feasible for anyone to create a blockchain without going through the expense and hassle of creating a well-secured cryptocurrency and maintaining the network for it. Slated for a go-date in the third quarter of 2017, Nxt will offer the above-thumbnailed Blockchain As A Service functionality in addition to  features that are extensions of ones Nxt already has.  These features are so numerous that Nxt has been called the Linux of cryptocurrency. And yet, not unlike with Noront, Nxt is far lower in price than it was in its rockety days of hype and hope.

Hottie To Shottie

As I explained almost two years ago, Nxt was pre-sold over a period of more than two months by BCNext. In retrospect, it garnered an unbelievably small 21 Bitcoin's worth of pre-buys. When the network launched and all claimants were vetted and their claims settled, the implied price of Nxt was a smidgen over two satoshis or two hundred-millionths of a Bitcoin. Since BCNext structured the pre-sale so as to divide the 1 billion Nxt issued between the pre-buyers, the pre-sale price depended upon how much Bitcoin he got. It's a striking symbol of how scam-ridden the ICO market was at the time: a project that could easily have hauled in four figures' worth of Bitcoin this year got only 21 in the fall of 2013.

Once it was released, Nxt didn't look back. Had Noront been a new shell company seeking funds for Eagle's Nest whose IPO closed just before it announced its galvanizing drill-sampling result, its stock chart would have looked a lot like Nxt's  price.  At its height, one Nxt went for more than a U.S. dime. At that time, the Nxt wallet itself had few of the features that comprised BCNext's vision. Almost all of the improvements scotched out bugs, ironed out performance degradations and saw to housekeeping matters. The only gen-2 features enabled at that time were aliases – a blockchain-recorded association of a simple text value like "Nxtblg" to a complicated text value like "NXT-PSY8-B4SS-JQ7G-AJD86" – and plain-text Arbitrary Messages that would be permanently recorded in the blockchain. Back then, Arbitrary Messages were not encryptable so all of them were readable through a block explorer.

In retrospect, Nxt in January of 2014 was in the hope-and-hype stage – like a mining-exploration penny stock with a hot property. Unfortunately, as a result of the cryptocurrency boom's cresting amplified by the cloud of skepticism that resulted in that pre-sale price of only 2 satoshis, Nxt went from "too good to be true" to "too true to be good." As it soared up to the ranks of the top ten cryptocurrencies by market cap, and briefly entered the top five, the rancour in Bitcointalk's Alternate Cryptocurrency board grew. Through most of 2014, there were threads aplenty about how Nxt was a "scam."

Would-be Nxt evangelists were caught in a tough pass. At the time, Joe Public was prone to believe that Bitcoin was a "Ponzi scheme" or "some kind of multi-level marketing thingie." That impression was a distorted fun-house-mirror image of the way that Bitcoin evangelists plumped for Bitcoin while it was cresting to above $1,000. Since Bitcoin had arrived, and since it was (and still is) the representative cryptocurrency, Bitcoiners had the luxury of laughing off Joe Public's misapprehensions in thire usual haunts. Nxters did not have that luxury: they faced a craggy valley of other altcoineers yelling that Nxt was a scam, and a steep mountain with Joe Public seemingly waiting to call Nxt "a scam like that Bitcoin." Even with Nxt having its own dedicated forum, evangelizing for it was still a tough slog.

The answer proved to be a prelude to Ethereum's more systematic evangelization strategy: instead of rallying the public loudly, they enticed individual and business quietly. Because Nxt lacked the all-star-team connections of Ethereum's developers, this quiet but slowly effective evangelization didn't surface in the press. Nxt has been a classic "sleeper," in that you had to do some specialized fact-digging to see what was going on.

Progress From Underground

Despite all those yells, Nxt got a big boost in the crypto world with its most popular feature: its Asset Exchange. A coloured-coin system, the Asset Exchange lets you issue a token on the Nxt blockchain – an Asset – and sell it for Nxt. Intended for crowdfunding, it became the go-to platform shortly after the Asset Exchange's enablement on the main network on May 12th, 2014. As the offerings flourished, a lush ecosystem developed with Nxt as the base. Granted that the Asset markets weren't that liquid except for really popular Assets, but the overall volume was still impressive for the then-tiny altcoin space. For a time, the trading was voluminous enough to support an Asset which produced dividends by making markets for popular Nxt Assets. Taking advantage of the sometimes-high spreads, this Asset (called MMNXT) produced a steady and high return until the spreads inevitably narrowed.

There were some growing pains at the time; some scammers did invade the space. They took advantage of the fact that Assets are trust-based; there's no protection, cryptographic or otherwise, from someone outright lying. Inevitably in such an environment, the Asset Exchange was dogged by at least two Ponzi schemes which claimed stellar returns from altcoin trading and/or mining. Had the claimed returns not been too good to be true, those schemes would have claimed a lot more victims than they had. Scotching out these schemes was one way in which the Nxt community was tested.

Another way came, ironically enough, with the rapid addition of feature after feature. Because Nxt evangelists were apparently bashful, and because Bitcointalk was a hostile environment until well into 2015, the Nxt community was unusually tight-knit. This solidarity, plus a feature in the client wallet that notified users of an upgrade with the word "[Your Client Is] Outdated!", upgrades which required hard forks were unusually smooth to implement. As a result of this tight-knittedness and the dev team's hard work, Nxt later boasted a Digital Goods decentralized market, later rebranded as the Marketplace; a Voting System, which has been used not only for polls but also for decisions on Asset policy that mimic the decisions a board of directors has to make; Phased (now Smart) Transactions, which allow for transactions to be prepared but not executed unless specified conditions are met such as more than one account holder signing off on them. Other well-appreciated features have been an expansion of the character limits that an Arbitrary Message can contain, with the payment of a higher fee, and Blockchain Pruning. Some of them have been prefaces to the Nxt 2.0 redevelopment, whose official name is Ardor.

The Dispossessed

But a few of these improvements required breaking the formats for the data delivered from Nxt's Application Programmer Interface (API.) That led to a ruction between the dev team and the fellow who at least arguably was the Asset King. James, or jl777, bills himself as a "humble C programmer." Right after Nxt's Asset Exchange debuted, though, he issued Asset after Asset in partnership with others and quickly became a star. As is inevitable with a system that grows through accretion, an infographic showing his Assets plus the relationships between them looks mind-numbingly complex even after he had consolidated them somewhat through his flagship Supernet project.

At issue was the fact that the API changes would require recoding any application that used the API services being changed.  James complained that doing so would require hundreds of programmer hours for all his projects, which the devs regarded as an exaggeration. The first two times, he went along albeit under protest. The third time, he announced that he was selling all the Nxt he owned personally and that he would be looking for a new platform to host his Assets. This decision, he followed up with a "Declaration of Independence" that plumped for an "Atomic Cross Chain Asset Standard."

At the time he sold out, Nxt's price slid down further than it already had. It was one of the major alts that did not participate in the altcoin bull market until recently; as spring sprung for others, NXT slipped down to its nadir in satoshi terms. Under a cloud, it bottomed at two-thirds of a penny. Long gone were the days when NXT traded at a nickel or more.

The Brothers Nxt

This falling-out, though, was not only remarkable for its clash-of-the-titans nature but also its rarity. All other objectors to any changes, even the most controversial, fell into line. In a very real way, Nxt's underground marketing has proven to be a real blessing because the lack of viral-type evangelizing has kept the Nxt community tight-knit. As a result, feature adds have proceeded with only a pale shadow of the uproar that Bitcoin faced over the block size controversy. It's this tight-knittedness, plus the not-that-visible evangelizing, which enabled Nxt to be the platform of choice for the Drachmae project; Brian Kelly's Nautiliscoin, which aims to power a Euro-free mobile banking system, business-to-business ecommerce platform, and a travel-booking site on the Greek island of Agistri; and, most noticeably, a pilot project with Russia's National Settlement Depository to test out blockchain voting. It's quite an impressive suite of connections for an alternative cryptocurrency, moreso for an alternative cryptocurrency that was slagged as a "scam" in 2014 and as run by a disorganized "hippie commune" in 2015.

Granted that a cryptocurrency is in some ways a poor fit for a comparison to a mining explorations company, as the goal of a mining explorer is to develop and open up a mine that will yield metals that can be sold in the open market. That's different from a cryptocurrency, as the value of the latter comes from its utility which can develop alongside the cryptocurrency itself. In the case of a mine, all the development has to be upfront. Moreover, "utility" is more diffuse than X ounces or pounds of s certain metal per quarter. But the comparison makes sense at a primal level: in the early stages, both assets' values are speculative; both depend on values in the future. That's why the price charts of both Noront and NXT show a striking similarity: excitement jacking up the price way beyond a sustainable level followed by a long, slow slide as the real development work takes place under the radar. The essence of both, from this angle, encapsulates the mistakes we make when we valuate assets whose actual value can't be known in the here-and-now.

What To Expect From Nxt 2.0 Ardor

Four out of five of Ardor's features listed in the official announcement of it are extensions of services that Nxt already has. It's the first listed feature, "Blockchain as a Service," which is going to be the real game-changer.

Even though cryptocurrencies aren't very hard to clone, a robust blockchain is hard to get up and rolling. That's because their security depends on the size and power of their underlying networks. It's not that hard to derail the blockchain ledger of an unpopular Proof-of-Work altcoin with low hash power; all it takes is a majority for a 51% attack to have a good chance of succeeding. A cheap Proof-of-Stake altcoin with a low market cap is similarly vulnerable to the simplest form of stake attack, one which resembles a 51% attack. Both fall under the general rule that a cryptocurrency with the least value is easiest to derail.

In both cases, at least for a seasoned cryptocurrency, the best protection is a high market cap that either attracts a lot of mining hashpower (Proof of Work) or makes a stake attack prohibitively expensive (Proof of Stake.)  This network-strength requirement makes it a daunting task to set up a new blockchain for real use. The obvious solution, in which the devs provide the hashpower themselves through servers they themselves throw together, introduces the risk of centralization and a concomitant single point of failure. A centralized cryptocurrency is like a deeply hierarchical nation; both can be thrown into chaos by successfully attacking the head. It's socialism's vulnerability in this department that results in a socialist nation inevitably having a large military. The wider and more extensive a command-and-control system, the more tempting it is for its head to be aimed at by an outside party who would like to be the new commander and controller.

Nxt's Blockchain As A Service gets around this catch-22 by backing new blockchains by the entire Nxt network. Once Ardor is ready, a company will have the ability to create a separate blockchain on the platform in the form of a child chain. Each child chain will be secured by the main chain via a to-be-created special child chain called the "forging" (blockchain-securing) chain. The forging chain will anchor every other child chain that's created on the Nxt platform because the forgers – the nodes who add new blocks to the blockchain and reap the fees form each block's transactions – will be obliged to validate a supplied identifier hash of all child-chain transactions. This forging chain will have a special to-be-created cryptocurrency, with which the creator of a child chain can use to incentivize forging nodes to validate its blockchain directly. The "Overview" of Nxt 2.0 envisions bundling nodes that will act as fee-jitneys between the child chains and the forging chain by collecting the fees from child-chain transactions and paying the forgers' fees with the forging-chain cryptocurrency. To facilitate token recycling, the scope of the Asset Exchange will be broadened considerably to enable any Asset – or child-chain token: to be traded against any other Asset, or child-chain token. This will make possible a fee market, so bundlers will not only be able to recycle the child-chain tokens that they receive in fees but also use the cross-token markets to assess how profitable it is to support a particular child chain.

This sounds quite complicated, but it's complicated in the way Linux is complicated. Once the system is completed, the only folks who have to worry about the innards are the IT guys who set up and administer a new blockchain. The ordinary user won't need to know, any more than you or I need to know if a Website has Linux inside its server.

Ardor represents a real quantum leap in cryptocuurency-as-a-platform, one which has been influenced by feedback from businesspeople interested in using the Nxt system but desirous of a more straightforward user interface than Nxt offers now. Since this new forging token is growing out of Nxt, the devs hit upon an unusual distribution scheme. Starting on July 14th, they'll take hourly snapshots of Nxt's main blockchain until October 12th. They'll then take an average of each account's Nxt balance over that timeframe and then distribute the forging-chain tokens in accordance with these balances. All a Nxter has to do to receive some is to keep a balance in his or her account. The forging-chain tokens will be issued on the Asset Exchange until Ardor is ready to go, at which point there'll be a one-for-one swap. Six full months have been budgeted to test Ardor before its release.

And then, the era of Blockchains As A Service will begin. It's a heck of an achievement for a pre-sold cryptocurrency that only gathered 21 Bitcoins. ESR

Daniel M. Ryan, as Nxtblg, is shepherding the independently-run Open Audi Initiative Prediction Market Shadowing Project. He has stubbornly assumed all the responsibility and blame for the workings and outcome of the project.

 

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