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Nxt Explained

We’re all waiting for a project to come along with the security, scalability, feasibility and community to finally realize the greater part of block chain technology’s future.

You may be part of the crowd eagerly awaiting the launch of Ethereum, which proposes to manifest the ‘decentralize everything’ mantra, becoming the network to rule all distributed networks.

If that’s the case, you’d be better off barking up the Nxt tree.

Nxt is a big deal. Let me tell you why.

100% proof of stake

Nxt is the first 100% proof of stake cryptocurrency. This comment warrants an explanation, as it is absolutely revolutionary and will have a lasting impact within the digital currency landscape.

To understand, let’s step back and look at Bitcoin. Bitcoin was the first network that could secure and validate itself in a peer to peer, distributed manner. Bitcoin provided a solution to the long standing problem of achieving consensus of participants in a decentralized system.

Well done bitcoin.

Bitcoin achieves this through a ‘proof of work’ process called ‘mining’. Mining is simply Bitcoin’s method of picking which node (network participant) will compile the next block (bundled record of transactions within a certain time frame) and tack it on the end of the blockchain (accounting ledger of all bitcoin transactions that have occurred since inception).

To successfully compile a block and have it accepted by the blockchain, the chosen node needs to have the agreement of 51% of the network that the transactions within the block are valid.

Miners have an incentive to carry out the job of processing transactions, by being awarded newly minted bitcoins. The more computing power a miner commits to the network, the more likely they are to be rewarded with bitcoins. This reward system has resulted in a huge amount of money being spent on hardware and electricity for the purpose of mining.

There are a couple of problems with this setup:

  • The Bitcoin network costs a huge amount of money to run; this cost is being indirectly paid through inflation of the bitcoin monetary base at the expense of savers.
  • The bitcoin network becomes more and more centralized as mining becomes more competitive, exposing bitcoin to the possibility of a 51% attack.

Seeing these problems, various projects enter the picture asking the question ‘Is there a way to have a distributed network like Bitcoin, without these issues?’

The most successful answer to this question to date is ‘proof of stake’ mining. Proof of stake secures a block chain by getting users to prove they have ownership of the digital currency in question. Peercoin was the first project to actually implement proof of stake in some form. Coins within the Peercoin network are minted through a combination of proof of work (like bitcoin), and proof of stake. As time goes on, a greater proportion of new coins will be minted using proof of stake until proof of work mining tapers off completely, the Peercoin network then settles into constant 1% inflation.

Following Peercoin’s lead, the Nxt community kicked into gear with an initial crowd sale that rewarded people who pledged bitcoin to the project with Nxt coins. A fixed amount of one billion Nxt coins were created and distributed to investors. All coins that would ever be in existence were generated during this crowd sale meaning Nxt could not implement an inflationary model like Peercoin.

Unlike Peercoin, Nxt is not a hybrid. To determine which node will compile the next block, Nxt implements a 100% proof of stake process called ‘forging’.

Forging is carried out by leaving a Nxt client that has a non-zero balance that has been confirmed 1440 times (approximately two days) unlocked and communicating with the network. Nodes are randomly selected by the network to produce the next block depending on their balance. For example, if a participant has 1% of the total amount of Nxt being used to forge, they have a 1% chance of generating the next block. Users have an incentive to forge, as the chosen node gets to keep all the transaction fees within a block.

People who don’t want to leave their Nxt clients on 24/7 in order to forge can ‘lease’ their Nxt to a node that does. This is a similar concept to mining pools, as it allows people to make a return on their Nxt balance by consolidating resources. Unlike Bitcoin, consolidation of these pools is not a problem, even if the majority of Nxt in existence were controlled by one person; it would not be possible to maliciously attack the network.

Lastly, Nxt plans to release a feature called ‘transparent forging’ that will allow network participants to predict who will author the next block in the Nxt block chain. Allegedly, this will allow clients to send transactions directly to the author of the next block making the network highly scalable in terms of the number of transactions per second the network can process. This feature is still awaiting full launch and it remains to be seen whether the development community will be able to put forward a working implementation.

The ‘keep it simple, stupid’ summary:

  • Nxt is very cheap to run. The network does not require huge amounts of electricity or specialised hardware. Check out this awesome cost comparison with the Bitcoin network.
  • Nxt is self-sustaining. It does not rely on debasing its money supply to incentivise parties that secure and verify transactions on the network; these parties are rewarded with transaction fees.
  • Nxt is not vulnerable to 51% attack, or even attack by a participant with a holding of 90% of the Nxt in existence.
  • Nxt could prove to be the most scalable crypto currency with the successful implementation of transparent forging.

Nxt clients

Nxt clients are damned smooth. Everything about how a user interacts with the network via a client is classy. The user experience is login based, this means that account info is stored by the network. All someone needs to do to access their account is enter their password into a Nxt client. All someone needs to do to create an account is enter a password into a Nxt client. All someone needs to do to keep their account safe is remember their password and keep it secret. All someone needs to do to send Nxt is know the recipients account number.

Too easy. This is Grandma easy.

Too easy. This is Grandma easy.

Within the client the user can access features such as:

  • Arbitrary messaging – allows users to send up to 1000 bytes of data as a message through the network.
  • Alias system – translates alphanumeric text into almost anything.
  • Asset Exchange – allows any user to create an arbitrary number of tokens that can represent anything, the most common use case being equity in a company. These assets can then be traded on the decentralized asset exchange, with no fees and no counterparty risk, accessible within the Nxt client. The asset exchange is similar in scope to Mastercoin and Counterparty’s smart property features.

The future

Yes, Nxt is an excellent digital currency in itself, but it is positioning itself to be so much more than that. Nxt has aspirations of becoming a secure base upon which a range of decentralized applications can be built. With full utilization of both the arbitrary messaging and alias system it is thought that a huge number of decentralized services are feasible.

I guess we’ll have to wait and see.

6 Comments

  1. You made a good article! People will surely understand Nxt more thanks to your post!

  2. Superb write up and at last a good explanation of NXT. I have asked so many people about it and never really ‘got’ it. This is absolutely an interesting approach and worthy of a decent amount of research. Again Angus, well done.

    If you had links to the pertinent parts it may help folks a little more. Brilliant work.

  3. Good write up, Nxt seems to have a lot of really interesting projects in the works. Unlike other alts, Nxt is continually announcing new and innovative features. I’ll keep watching.

  4. Liked how you covered the client.

  5. Great article, Explains every thing

  6. Great article, thanks! What do you think are the downsides/risks of NXT?

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