NEO, the smart contracts platform sometimes called the ‘Chinese Ethereum’ (as it is backed by the Chinese government), has been rising fast. At the time of this writing, it is the 11th most valuable cryptocurrency with a market capitalization of about $5.5 billion.
Many think that NEO could eventually unseat Ethereum as the premier smart contracts platform, mainly due to scalability. Right now, Ethereum does only about 15 transactions per second whereas NEO has a theoretical limit (emphasis on theoretical) of 10,000 transactions per second. This comes from its consensus mechanism; NEO uses Proof of Stake (specifically Dedicated Byzantine Fault Tolerance) while Ethereum is still using Proof of Work, although it intends to shift into Proof of Stake, and integrate other on-chain features such as sharding, to increase its scalability. There are also questions concerning the amount of centralization involved in NEO’s smart contract compared to other blockchains, such as Ethereum and Bitcoin.
Only time will tell which platform will be the ‘victor’. But Neon Exchange, or NEX, may be the catalyst that takes NEO to the next level.
Where Does Neon Exchange Fit In?
NEX is billed as a ‘high performance trade and payment platform’ that is built on the NEO blockchain. Its key value proposition is that it allows both cross chain exchanges and fiat-crypto exchanges. Crucially, it intends to achieve this while also delivering the highest standard of trading performance.
Now, NEX is far from the only decentralized exchange out there. Some examples of highly rated ones that are also operational (NEX is still very much a work in progress at the moment) include IDEX, Stellar, and Waves. The advantages that NEX intends to offer over the current crop of decentralized exchanges are performance, usability, and the aforementioned capability to use fiat to enter the exchange.
The way that NEX will allow users to use fiat currencies to enter into the exchange is through a partnership network with various financial institutions. However, at this time, no partnerships have been announced yet.
If NEX turns out to be successful, it would be a huge boost for NEO. In fact, some have speculated that NEO’s price spike in the beginning of 2018 was at least partly due to investors anticipating an NEX ICO and airdrop.
The Problem with Current Decentralized Exchanges
As it is with the entire concept of blockchain and decentralization in general, the problem with the decentralized model comes down to performance. One of the main advantages of centralization is efficiency and scalability; this is a key reason why blockchain is still far from mainstream use. An oft-mentioned statistic is Ethereum’s 15 transactions per second compared to Visa’s 40,000 to 50,000 transactions per second.
The advantage that the decentralized model offers is trust. So at the moment the tradeoff that people face is between trust and performance. Reduced performance means a lack of capability to execute more complex trades as well as giving up arbitrage opportunities.
Some solutions other decentralized exchanges implement to attempt to get around this include state channels and off-chain relay. However, NEX notes that because of a lack of trade matching, arbitrage opportunities are still created against slow traders and capability to execute complex trades such as limit buys and market sells are limited.
NEX’s offering is this: the performance levels of centralized exchanges at the expense of a small amount of trust.
Read NEX’s whitepaper here.
NEX’s Off-Chain Matching Engine
Key to NEX’s performance promises is its unique off-chain matching engine. While NEX has yet to release technical specifics on its matching engine (its Github is still relatively empty), it has explained how this engine would work.
When a user confirms an order, it is sent to the engine for processing. Once the trades are matched with the other party, they are signed off-chain and committed back on-chain to the user accounts. The trade itself is executed via smart contract. For cross-chain exchanges, since the engine is off-chain, it will be able to communicate with smart contracts on any number of chains.
The engine is also able to ‘batch’ matched orders back to the blockchain, improving scalability. The whitepaper claims that assuming a speed of 1,000 transactions per second, NEX could potentially execute over 100,000 trades per second on-chain.
However, even with batched trades and the higher speed of the NEO blockchain, there is a possibility that at a certain size, it would still be too slow for ideal trading performance. Hence, another method that NEX will use to improve performance is the ‘smart contracts vault.’ The smart contracts vault, which will be compatible with both NEP5 and ERC20 tokens, can temporarily store funds for future trading. This will allow immediate trading after a previous order without any delay, allowing a trader to react quickly to market conditions.
That said, there is an element of slightly reduced trust. After all, how would a user know whether the engine is matching trades fairly? For one, NEX ensures that the engine never has access to the full balance of a user’s account; only active orders. Second, the deterministic algorithm that it uses to match trade will be made public. Third, NEX will also offer bounties for spotting errors in the engine.
The NEX Web Extension
Another defining component of NEX is its web extension for improved usability. Through the use of APIs, NEX wants to integrate everything into a single web extension. If successful, users can use a single website to trade cross-chain (making it the first cross-chain browser extension) and fiat as well.
NEX is not just for trading; it’s a payment platform as well. As such, one potential application is a web app that can collect payments for goods in cryptocurrency but cash out in fiat.
The NEX Token
Unlike most blockchain projects nowadays, the NEX token will not be a utility token. Instead, the NEX token will function more as a stake in the entire NEX. Holders of the NEX token will be allowed to share in the revenues generated by the fees charged on NEX. The minimum revenue share will be 25%, with the potential to be increased to 75% if a user decides to stake his or her NEX tokens for up to 2 years.
Here’s a quick example. Assume that you own 10,000 NEX tokens and the NEX ‘fee pool’ is $10 million. If you staked your tokens for 2 years at 75% you would receive (10,000/50,000,000 x $10 million x 75%) = $1,500. The total NEX tokens supply, as you can see from the equation above, is 50 million.
Users can opt for two methods for receiving their payouts. The first is via a direct cut of fees across each token on the exchange. So if NEX is trading on NEO and GAS, the user will receive a proportional share of both. In the second method, the user can specify a preferred asset type, with NEX performing an automatic conversion.
Because of this profit sharing model, NEX notes that its token will be registered as a security, beginning in Europe. As for the fees themselves, NEX operates on the market maker/price taker model. Market makers will pay no fees while price takers pay a fee ranging from 0.13% to 0.25%, depending on trade volume. These fees will be added on top of any GAS payments.
NEX Development Status and Roadmap
It seems that the NEX project is operating slightly behind its planned schedule. It’s already one month into the second quarter of 2018, yet a couple of milestones designated for the first quarter have yet to be achieved. For example, it has yet to announce its partnerships. NEX’s roadmap plans for the mainnet release and start of trading operations to begin in the third quarter, however, it looks like there’s a decent chance that it may fall behind schedule.
NEX Token Sale Details
Out of the 50 million NEX tokens, 25 million will be made available for sale. There will be no private sales, and while Chinese citizens can participate, US citizens, despite NEX’s best efforts, will not be able to.
The ICO’s price will be 1 NEX = $1, and it will be split into two parts. The first round will occur sometime in May 2018 and will only last for one day in estimated block time. The maximum contribution per person for this round is $1,000. The second round will be for any unsold tokens, will last for two days, and have a maximum contribution of $9,000.
Participants for both rounds are selected via lottery. All lottery winners have already been chosen, and the KYC for the first round participants was completed in early April. The KYC for the lottery winners for the second round of the ICO is currently ongoing.
What are NEX’s Short Term and Long Term Potential?
With a maximum of $25 million for its ICO, NEX is far from a ‘mega ICO.’ It doesn’t even have a Discord or Telegram group. There is a NEX subreddit but it is apparently unaffiliated with the official NEX team, and there have been warnings that it is a scam; it has since been made private. Yet, there is a good chance that the full 25 million will be sold out within the first round of the ICO. The fact that the NEX team made it last only one day shows how confident they are in their project. Hence, in the short term, NEX has a lot of potential.
Over the long term, NEX identifies a clear market need and has proposed an innovative solution for solving it. With the increasing popularity of NEO, a decentralized exchange that offers high performance, fiat-crypto capability, and convenience via a single web extension, it has a great chance of becoming a major player. Keep an eye out on NEX’s development.
What do you think of NEX? Could this project be the catalyst for NEO unseating Ethereum in the future? Let us know your views in the comments below.