NXT Report: Follow-Up

In the wake of the inaugural Glassbox report, which focused on the NXT platform and the “James/j777” assets, our thoughts and findings triggered a spirited discussion at nxtforum.org.

The NXT community suggested we write a follow-up piece to clarify a few issues. We agreed that this would be an excellent idea.

One piece of feedback was that the report gave the impression that nearly everything that happens on NXT has to do with the James assets. While we made an effort to point this out in the first report, it bears repeating and clarifying: NXT is a bustling crypto 2.0 (C2) platform that is teeming with crypto-assets. Many of these assets are completely unrelated to James. There are also unique features in NXT itself that mark a substantial evolution over Bitcoin and other “1.0” blockchain technology.

Another criticism had to do with our comment that NXT is not completely open-source. We removed this statement from our initial report. The source code is in fact open-source, and can be found here. However, when it comes to the development process, things are not as transparent. As explained by NXT developer ChuckOne :

This topic is extremely complicated and relies on many philosophical and information-theoretical assumptions (regarding software in general and crypto in particular) that I will not bring up here again because different people different assumptions to be true. Sorry for being too abstract on this but we finally settled this by the following:

NRS development currently does not follow 100% standard open-source software development and especially building, packaging and distribution. But the current approach works and I am confident that time will shape that process to be better and better over time as we grow naturally. If in the end of this natural shaping process stands the usual standard procedure, the better. A confirmation for the standard procedure and confidence we did it right.

Another issue that comes up regularly is that people say “Why not making development public as well?” That as well is an extremely sensitive issue and also based on several assumptions and lack of knowledge how things work. We currently do not consider making the development public for three reasons:

1) Simply not necessary because it is done when it is done anyway and only the fully implemented code is relevant as only that works; half-backed code does not work and is therefore not relevant.

2) Simply not possible because developers develop on their own machine. We cannot make that changes public as developers machine are private property. What happens once in a while is that developers push changes to another place (could be a USB stick, could be a remote repository, could be our private repository). The possibilities with git are endless. We will not surveil our developers (not as long as I am in charge). They are free to do what they think is best to do their work. And if it means they only push finished features after 2 months from their private machine which means the same as not making development public in the first place.

3) hinder adoption by clones

4) changing just because of the sake of changing does only draw development resources away of which we have little to waste

In our view this is a defensible stance to take on closed-source development; the existence of open-source code allows users to vet and examine the result of the closed development process. However, if it’s crucial for you – the potential investor – to be involved in a platform where all development happens in the open, from start to finish, NXT may not be the ecosystem for you.

Another point of concern that we highlighted in our initial report is the possibility that the way NXT was distributed may have led to a higher likelihood of price manipulation in NXT-issued assets. But as pointed out by NXT user durerus, the ICO for NXT was not a brief one-time event open to just a few individuals:

This is important info…when you just talk about the limitation to 21 BTC people might believe that the IPO was only a day or a few days, and only BCNext’s (ed: BCNext is the anonymous creator of NXT) previously informed friends were able to invest. IPO lasting for two months means that for a long time people had the chance to invest.

This is a relevant point; there was ample opportunity during the initial sale of NXT for the general public to invest in the currency.

Our primary concern lies with the fact that some actor – or party of actors – may have quietly accumulated an inordinate share of the NXT currency during the ICO. This would provide those actors with the ability to manipulate individual assets built on NXT. So while the distribution of the currency itself now  appears to be more widespread, the concern is that the price of NXT-based assets could be easily manipulated by those who gained a large share of NXT in the currency’s ICO.

This is a phenomenon that investors in other C2 platforms will also have to be aware of, to varying degrees. During the first two weeks of the Ethereum crowdsale, for example, a very small proportion of the overall purchases were in amounts over 200,00 ETH. It’s possible that these early disproportionate holders – or “whales,” to use the favored phrase of crypto traders – might use their equally disproportionate leverage to manipulate the price of assets based in ether.

With respect to the James assets, we received a response from James himself, in response to this query:

- What are your reasons for remaining anonymous?

- Would you ever consider making your identity known?

- What are your thoughts on implementing some of the additional transparency recommendations we outlined in the conclusion of our report?

His reply was as follows:

I am not sure how much more transparent I can be. All the accounts are on the blockchain and I have posted which accounts are for which assets, etc. Everybody can see all the transactions for all the public accounts and even my personal one. I have a minority interest in pretty much all the assets, so they are more community owned than “jl777″ assets.

For SuperNET: https://nxtforum.org/index.php?topic=5407.0 has details on all the expenditures. Is that not transparent enough? has slack logs of all the activity. https://github.com/jl777/libjl777 is my development repo with thousands of commits and over 40,000 lines of code I have written. Since my work product is published as I develop it and all the finances are transparent and the community activity is logged, what benefit is there to expose my identity? Does it really matter what my blood type is?

Specific threats have been made against me, so I do not feel it wise to disclose my identity. There is a chance that if my identity was known that something bad would happen to me. Is that something worth risking? At the very least it would take up a lot of time dealing with people hassling me, so the downside of disclosing my identity seems to be quite a bit larger than any benefits.

If people feel that they need to know my identity before they invest, then they should buy paycoin or many other projects which have fully identified people. In any case, I dont expect to be doing much fund raising in the future as SuperNET has enough funds and once we release revenue generating products, people can continue to not buy SuperNET because I am anonymous, that is their choice.

All expenditures are approved by committee and as soon as NXT has the Phasing implemented, we will be putting the SuperNET NXT into a Phased account so I wont have sole access to it. As it is, we felt that the least risk way to safekeep the NXT was for me to retain it.

A committee to approve access to funds can offer invaluable oversight and checks & balances, provided those on the committee apply the necessary due diligence. A “rubber stamp” committee, on the other hand, would offer only the appearance of oversight. Assuming these committees do their job in an unbiased fashion, they can offer a valuable service to the community.

The links James provides may offer insight into the legitimacy of his assets, provided you understand the code. We encourage other developers in the NXT community to examine this code closely, and explain to those who aren’t developers what is happening behind the scenes. . Those who message James on the forum can also obtain access to the Slack chat, which could offer additional insight into the development of his various projects.

The desire to avoid harm to oneself is a legitimate reason to remain anonymous. And as James himself points out, there are myriad options to invest in projects with known developers. Nonetheless, in our view the level of risk is notably higher when an asset creator is unknown. The right to anonymity is a core principle of the crypto world. However, we believe this dynamic changes, on a fundamental level, when one begins asking for money from others.

We strongly encourage James to rethink this decision at some point in the future, following the lead of other high-profile entrepreneurs and developers in the crypto space who have successfully navigated between the Scylla of complete anonymity and Charybdis of known-identity risk.

 Our advice for potential investors

As we noted in our first report, there’s a lot happening in the NXT ecosystem. At nxforum.org you’ll find people who are passionate about the technology, people who are simply looking to make a quick crypto-buck, and everyone in between.

Our advice, if you’re interested in NXT and the assets that are offered on the platform, is to visit nxtforum.org. Spend some time digging through the threads. Ask questions. Do your due diligence. If something doesn’t feel right, don’t invest in it.

As we noted in this follow up thread, assets which have verifiable revenue streams and clearly-understood routes to monetization and profits are more likely to be legitimate. We’ll restate our logic here:

Assets that are tied to revenue-generating services are more likely to be legitimate investments. Those that are actually swinging a profit are often even more legitimate.

As we’ve seen time-and-again in the crypto world, it’s all to easy to create an asset out of thin air, pump it full of hype and pretty rainbows, and then dump it for a profit. Revenue generation sends a clear signal that an asset is more likely to be a legitimate investment.

Speculation on the future valuation of non-profitable companies is a perfectly legitimate investment strategy – and it happens all the time in the “real world.” Just look at Twitter (TWTR), who lost $175 million last quarter. However, Twitter does have a clear business model and does generate revenue ($361 million in Q3). Although some would argue that it’s a colossal time-sink, it’s clearly not a hollow shell designed simply to get investors on board.

Speculative assets that generate NO revenue whatsoever would be riskier. A phantom service, built simply for a pump-and-dump, would be very likely to fall into this category.

This is not to say that ALL non-revenue-generating assets are pump-and-dumps; much like successful crowdfunding efforts, some are wonderful ideas that require funding to be fully realized. But again, revenue generation sends a clear signal about legitimacy.

To put it another way: imagine if Glassbox itself issued an asset tomorrow, along with glowing projections for the future. As of today we’ve released one report and have no quantifiable user base. The risk of investing in us would be quite high. On the other hand, if we had 1000 subscribers at $10/month each, along with a track record for rapid growth, the risk of investing in us being a pump-and-dump would be notably less.

NXT user valarmg provided a list of assets that may be a good starting point for finding revenue-generating assets:

CryptoCoin: An actively managed crypto portfolio. http://cfa-consulting.ch/en (http://cfa-consulting.ch/dlfiles/CryptoCoins_Presentation_EN.pdf)

Coinomat: https://coinomat.com/ This returns dividends from transaction fees on currency conversions.

MGW: (http://multigateway.org/) (ed: Also outlined in our first report)This allows deposit and withdrawal of coins onto the asset exchange (via a proxy asset) so they can be traded on decentralized asset exchange. Fees haven’t been enough to cover expenses yet, but it generates revenue from deposit/withdrawal fees.

MMNXT: This uses investment funds to fund a trading bots, trading profits are returned as dividends.

Nxt Inspect: Asset rating agency that sells subscriptions of “early bird” asset ratings to investors.

ForgeCoin: http://www.forgeco.in/ Bitcoin mining asset which buys miners with investment capital and returns dividends based on bitcoins mined. (There are several other mining assets.)

HRLTCGear: One of several cloud mining assets based on LTCGEAR. (These have returned substantial dividends, but LTCGEAR might be a ponzi, in which case they are all in trouble right now.)

Our advice for the NXT community

One problem with the James assets – and many unrelated NXT-based assets as well – is that it’s difficult to find clear, verifiable information.

Projects such as the SuperNET wiki are a step in the right direction. However, a great deal of information on NXT-based assets is buried in the forum threads. It would be helpful if one could easily find – in one spot – accurate, objective, and easy-to-understand information about an asset’s:

  • Business Model
  • Operational status
  • Revenue (if applicable)
  • Creator(s)
  • Community Ratings
  • Comprised assets

The final point refers to the fact that some assets are collections of other assets – operating, essentially, as funds. In other cases, an asset may pay dividends related to the performance of other assets. The makeup of these funds and dividend-paying assets should be clearly delineated and trackable on the blockchain, and easy to understand for investors. If wealth is commingled in accounts, making it unclear where one asset ends and the other begins, there is a higher potential for manipulation.

As a rule of thumb, if clear and verifiable information on the above points isn’t available, you should assume the asset carries a higher risk.


Crypto 2.0 investing: building a stronger foundation

We urge the NXT community – and the overall C2 community – to broaden its collective horizons. Many in the crypto world view the various competing platforms as a zero-sum game: one platform to rule them all. However, this does not have to be the case. Just as programming languages happily coexist, interface, and borrow from one another, C2 platforms have the potential to offer the same interaction.

Cultural diffusion and idea-sharing are far more likely to happen when C2 communities aren’t silo’d off from – and opposed to – one another. For example, what lessons might NXT learn from Ethereum’s more transparent development process? What can BitShares, Ethereum, and Counterparty learn from NXT’s growth as a stable, and widely-used platform? How can developers of DApps and creators of crypto-assets learn from the successes and mistakes of those who came before them?

The answers will help create a better crypto ecosystem – for investors, entrepreneurs, and developers alike.