Wednesday, 18 April 2018

Neon Exchange (NEX): A New Decentralized Exchange (DEX)


NJ Bridgewater
18 April 2018

[NOTE: This post should not be considered or construed as financial advice or other advice and is written solely for informative and educational purposes]



One of the most anticipated ICOs will be starting in a few days (with the date TBA) – the Neon Exchange ICO. Neon Exchange, which has been founded by members of the City of Zion (CoZ) development team, in partnership with the NEO Foundation, is a revolutionary new DEX (i.e. a decentralized cryptocurrency exchange) based on the NEO blockchain. Why is it revolutionary? According to the Neon Exchange whitepaper (version 2, 2018), a decentralized exchange allows “users to retain control of their funds as trades are mediated by smart contracts on the blockchain.” What does this mean? Let’s go back to basics. A cryptocurrency, as we learned in my previous post, “What is Bitcoin?”, is basically a new form of money. Money has evolved over time, taking many forms, including shells, precious metals, coins, paper money, and now cryptocurrency. Cryptocurrencies can also be described as ‘digital assets’ because they represent units of value which are not necessarily pegged to traditional monetary instruments. Most cryptocurrencies are based on the blockchain, which is a distributed ledger allowing users to verify transactions and prevent double spending. In other words, blockchains allow for secure, verifiable transactions of digital assets. 

As digital assets, cryptocurrencies are traded between users, either for other digital assets (e.g. someone might trade Bitcoin for Litecoin, or Ethereum for NEO) or for fiat currencies, e.g. dollars, pounds, Euros, etc. Most people buy cryptocurrencies via an exchange, like Coinbase, but you can also buy and exchange cryptocurrencies peer-to-peer, e.g. through LocalBitcoins. In addition, you can also simply buy items with cryptocurrencies, exchanging them for goods or services, provided that the seller offers cryptocurrencies as a payment option. Another, more recent option, is to use a decentralized exchange (or DEX for short). Coinbase is an example of a ‘centralized’ exchange, because Coinbase retains all of your private keys, as well as a great deal of personal information on you. This is why we constantly hear about cryptocurrencies getting hacked – because all it takes is one intrepid hacker getting access to the centralized database of a centralized exchange and your coins are gone. They simply extract hundreds or thousands of private keys and move the coins to another wallet where they cannot be recovered. This is the first and major danger of using a centralized exchange.

The second, and equally pernicious, danger of using a centralized exchange is the very real possibility that the exchange will give your financial and other personal details to a government. National governments usually have very militant tax collection policies. The Internal Revenue Service (IRS) of the United States, for example, has made it clear that they expect tax revenue from all sales of Bitcoin and other cryptocurrencies, often badgering exchanges to provide said information.[1] In fact, roughly one year ago, the IRS filed a lawsuit against Coinbase, demanding that it supply records on all its user from 2013 to 2015. Coinbase regarded this as an overreach of the IRS’s authority. However, after the IRS modified its request to include only those users who had conducted transactions of $20,000 or more within that time period, a U.S. federal court ordered Coinbase to turn over the records of more than 14,000 users.[2] Since many (perhaps even most) Coinbase users do not live in the United States, or are not U.S. citizens, this could be regarded as an unreasonable overreach of authority – very different from the American Founding Fathers’ views on limited government and minimal taxation. As Founding Father and 4th President James Madison (1751 – 1836) wrote:

“…As a man is said to have a right to his property, he may be equally said to have a property in his rights. Where an excess of power prevails, property of no sort is duly respected. No man is safe in his opinions, his person, his faculties, or his possessions.”[3]

James Madison, 4th President of the United States

The question arises, then, how one can be more secure “in his opinions, his person, his faculties, or his possessions.” Cryptocurrencies (or ‘digital assets’) are certainly excellent tools for preserving individual liberty, free speech and control over personal property and wealth. Centralized exchanges defeat the purpose of this amazing innovation by centralizing your private keys—which are the only real tie you have to your digital assets—and attaching your identity to otherwise mostly-anonymous crypto-assets. You are entrusting the centralized exchange with your personal details and information, in the hope that they will not ever report this information to government authorities or tax authorities, or—even worse—that they won’t inadvertently leak your information to the public via some weakness in their security or encryption systems. Not all governments are benevolent, so one needs to be able transfer wealth and assets without government oversight or knowledge.

Examples of decentralized exchanges include IDEX, which lets you trade ERC-20 tokens, OasisDex, Waves Dex, Radar Relay, OpenLedger Dex, BarterDex, Bisq (or BitSquare), and Stellar Dex.[4] So, what is a DEX? According to the Neon Exchange whitepaper, a DEX allows “users to retain control of their funds as trades are mediated by smart contracts on a blockchain.” Does this mean that your information is anonymously held? Not necessarily. While anonymity is key to most DEXs, this is not always the case. In the case of Neon Exchange, it must be noted that the Neon Exchange token (NEX) is a registered European security. This is a plus for investors, because it minimizes the risks of insider trading and market manipulation, especially for securities which are being sold illegally or covertly. It also means that, as a company, Neon Exchange will be subject to regular audits to ensure that its finances are in order.[5] However, the downside of this is that users (at least those who invest in the ICO) will have to complete KYC (know-your-customer), which includes providing information on one’s name, birth date and national ID (or passport) number. Due to complications with U.S. law (e.g. their laws on licensed investors), American citizens will not be able to participate in the ICO or purchase NEX tokens.

If Neon Exchange is being monitored under European law, it will not provide absolute freedom from government oversight and there will be a possibility that intrusive tax authorities might investigate the exchange or request/demand the names and details of users. For standard investors, this is absolutely fine. For cryptocurrency enthusiasts (the so-called ‘crypto-barbarians’)[6] and anarcho-capitalists, this is not an ideal situation. The choice as to whether to use the Neon Exchange platform and/or invest in the NEX token, therefore, depends largely on your personal philosophy and proclivities. This especially relates to one’s views on governments’ claims to be able to demand an accounting of everyone’s income and wealth. As John Locke (1632 - 1704), the famous English political philosopher, wrote: “The supreme power cannot take from any man any part of his property without his own consent: for the preservation of property being the end of government, and that for which men enter into society, it necessarily supposes and requires, that the people should have property…” He, furthermore, asserts that “no body hath a right to take their substance or any part of it from them, without their own consent.”[7] In other words, Locke argued that taxation, without consent, is illegitimate.



The name NEX (Neon + Exchange = NEX) seems to derive from the word NEO, as the NEX token runs on NEO, an innovative cryptocurrency often referred to as the ‘Chinese Ethereum’. Like, Ethereum, NEO operates as a sort of ‘virtual machine’ which allows numerous other tokens and ‘decentralized applications’ to operate on its network. The base asset of the NEO blockchain is a non-divisible token called NEO, which generates GAS (NEO Gas), which is used to pay for transaction fees. NEO users receive GAS on a daily base as a sort of dividend for holding NEO.[8] Ethereum, which also runs decentralized applications, does not have a separate token for transactions. Rather, the native cryptocurrency of the Ethereum network is called Ether (ETH). There are currently over 17,724 ERC20 (i.e. Ethereum-based) tokens, while Ethereum Classic (ETC) has about 7 tokens.[9] According to NEOTracker,[10] there are currently 16 NEP-5 (NEO-based) tokens, and the number is growing all the time. NEO may be the newcomer to the ‘decentralized crypto-assets’ space, but it is also one of the most promising.

So, what makes NEO and NEO-based token so interesting? NEO, until June 2017 called ‘Antshares’, aims to be a platform for a new ‘smart economy’.[11] This should not be mistaken for an anarcho-capitalist economy where there are no rules or regulations. Rather, NEO aims to form a smart economy under governmental regulation. NEO, in fact, aims to issue ‘digital identities’ in accordance with an international standard, which allows for financial assets to be regulatorily compliant.[12] This is more in line with the Chinese perspective of respecting government authority and complying with the powers-that-be, and it is rather at odds with the British (Anglo-American/Anglo-Saxon) notion of individual sovereignty and natural rights. As Bill Flax (2011) writes in an article for Forbes, the Anglo-Saxon ancestors of the English “developed tribal mores around commonwealths of sovereign individuals claiming inherent, inviolable rights.”[13] In contrast, Confucianism promoted loyalty to one’s ruler as a virtue. For example, in the Classic on Filial Piety (Xiaojing), which is attributed to Confucius (551 BC – 479 BC), we find: “As they serve their fathers, so they serve their rulers, and they reverence them equally… Therefore when they serve their ruler with filial piety they are loyal; when they serve their superiors with reverence they are obedient.”[14]

An Anglo-Saxon king with his Witenagemot ('council of wise men')

Neon Exchange will function using NEX, which is a NEO-based token. As such, it acquires all of the benefits (and potential risks/downfalls) of the NEO blockchain. NEX itself, as a digital asset and NEP-5 token, will be compliant with government regulations. If you want to use the token for money laundering or tax evasion, therefore, this may not be token for you to invest in. Much of the innovation within the NEO-verse comes from the City of Zion (CoZ), which is an independent, open-source community of developers. The name, of course, comes from the City of Zion in the Matrix movies, whose main character, as you will recall, was called Neo. This, in turn, derives from the Greek neos, meaning ‘new, young, youthful; fresh, strange, etc.’ and which was derived from the Proto-Indo-European root, *newo-.[15] Zion (Hebrew Ṣîyōn, modern Tsiyyon) derives ultimately from the Biblical Zion, which is the hill in Jerusalem on which the city of David was built. The name implies new beginnings, hope and expectation. In the case of the Matrix movies, it refers to a new beginning for humanity, free from the oppressive illusion of the Matrix. In any case, NEO is certainly an improvement on ‘Antshares’, which was a rather uninspiring name for a revolutionary new utilization of blockchain technology. In addition to general NEO development, City of Zion (CoZ) is the development team behind the Neon Exchange (NEX).

What makes Neon Exchange different from other DEXs? According to the whitepaper, most DEXs are “slow, hard to use, and are restricted to trades on a single blockchain.” Neon Exchange, in contrast, aims to solve each of these problems using a “high performance off-chain matching engine built with Elixir”, which will “handle a massive order volume, allow cross-chain exchange, and support more complex trading APIs.” One of the main disadvantages of current DEXs is that they do not allow fiat payment channels, and one of NEX’s main objectives is to allow just that. In other words, you will eventually be able to buy tokens on the Neon Exchange using USD, EUR and other currencies. This will be enabled by a network of third parties which will integrate with the platform. The Neon Exchange functions using a Chrome browser-extension which can be utilized as a wallet in order “to collect payments for goods in any digital currency, make trades and transactions across blockchains, and interact with smart contracts across NEO and Ethereum.” These are all powered using the NEX off-chain matching engine. Rather than storing your keys on the exchange, the key to your NEX browser extension will be held by you alone. This adds the advantage of practical unhackability (unless you do something inept/irresponsible) while also bestowing upon you the responsibility of ensuring the safety and security of your own private keys and passwords.

What other advantages does it have? One of the chief advantages, in my opinion, is its limited supply. Many new tokens nowadays come out with huge total supplies, of 10 billion, 30 billion, 50 billion, or even 100 billion tokens. If a cryptocurrency with a supply of 100 billion is to reach $1 in value, it has to have a total market cap of $100 billion. That’s a huge total market cap, especially when you consider that the entire crypto-asset space at the moment has a total market cap of $327 billion (as of 18/04/2018), with Bitcoin having a market cap of $135 billion and NEO with $4.5 billion. If you think that new token you’re invested in will reach $100 billion tomorrow, dream on. The total supply for NEX, on the other hand, is 50 million tokens. Not only are these tokens being released “to fund development and future expansion, of which 25 million will be sold to the public” in the upcoming ICO, but they will also be integral to the off-chain matching system. Every transaction on the exchange will take place using NEX, which will thus bolster and increase the value of the native token. In other words, as long as the platform is being used, and the number of users increases, thus increasing the demand for the token, the value of the token should rise over the long run (as per the law of supply and demand). I urge caution, however, as this is only a non-expert opinion, and should not be taken as financial advice. Nevertheless, I feel strongly that NEX has the potential to increase many times over the value of its original ICO price, which is $1 per token. I’m not trying to create FOMO (fear of missing out) here; however, imagine if you could have bought NEO for $1, or Ethereum, or even Litecoin, for the same price. Each of these tokens has increased to many multiples of $1. ETH even reached heights of over $1,200 USD not long ago, and may again return to those heights, if not greater heights. NEO itself, now under $100, is also likely to increase in value over time and reach new all-time highs (ATHs).

In addition to everything above, NEX is a security and, as such, grants the person who stakes the tokens a proportional share of the profits of the exchange. Investopedia defines a security as “a fungible, negotiable financial instrument that holds some type of monetary value.”[16] In the U.S., securities are tradable financial assets of any kind, including debt securities (e.g. banknotes), equity securities (e.g. common stocks), and derivatives (e.g. forwards, futures, options and swaps).[17] NEX, therefore, likely comes under the definition of a security because it acts as an equity security, giving ownership of a percentage of the exchange. According to the whitepaper (version 2), the “minimum fee share rate is 25%, increasing linearly to a maximum of 75% when tokens are staked for two years.” In other words, you can choose to stake (or ‘lock in’) your tokens for a set period of time, ranging from a minimum length which grants you a proportional 25% fee share rate, to a maximum two-year lock-in period which grants you a 75% token fee share rate. For more details on this, I highly recommend that you read the whitepaper in full.

Neon Exchange (NEX) has huge potential, not only because it is highly innovative and has a great team behind it, but because of its ambitious plans to enable a ‘cross-chain engine’, allowing NEO and ETH to be traded, for example, as well as Bitcoin and Litecoin eventually. It will also allow for fiat payment channels, enabling you to buy or sell cryptocurrencies using USD and other fiat currencies. Furthermore, as the NEX smart contract only has access to funds “involved in active trades, and not the full balance of tokens at a user’s address”, the chances of being hacked are much lower than on centralized exchanges, such as Coinbase or Bittrex. So, how can you invest in NEX? At the moment, you cannot, unless you have already signed up for the ICO and won the participation lottery, which selected 25,000 participants. For more details on the lottery, see the article on Medium.[18]

Where will it go from here? The best place to look for more information on the Neon Exchange and its future plans is the website, as well as their official Twitter feed. In addition, the ‘roadmap’ is also published in the whitepaper. Quarter 1 (Q1) saw the launch of the web extension, for example, and Q2 is seeing the launch of the token sale. It is also projected that the trading interface will launch on NEO TestNet this quarter, and the NEX web extension will offer support for ETH and ERC20 tokens. Q3 will see the beginning of trading operations, cross-chain conversion support in the NEX extension wallet and the launch of the staking contract on NEO for NEX token-holders. Finally, in Q4, other security tokens will start trading on NEX, advanced trading features will be enabled and cross-chain support for BTC, LTC and RPX will follow. You can follow the official Twitter feed for more updates and news regarding the Neon Exchange and the NEX token. 

For more information on Bitcoin and other cryptocurrencies, check out my previous blog post entitled ‘What is Bitcoin’, as well as my short e-book Bitcoin: 10 Ways to Make Money Using Bitcoin, which is available on Amazon, as well as here and here. You can also check out my YouTube video, Bitcoin: What is it?

- NJ Bridgewater

Sources:

Mike Anderson (2018) NEX Token Sale Instructions, Medium, April 14, 2018. URL: https://medium.com/@mike.anderson12288/nex-token-sale-instructions-659be319d300 (accessed 18/04/2018)

John Bardinelli (2018) What The Future Holds For Neon Exchange (NEX), InvestinBlockchain, 4 days ago. URL: https://www.investinblockchain.com/what-the-future-holds-neonexchange/ (accessed 18/04/2018)

Bloomberg (2017) Cryptocurrencies are new barbarians at the gate of central banks, Financial Review, Aug 31 2017 at 3:53 PM. Updated Aug 31 2017 at 4:12 PM. URL: http://www.afr.com/technology/cryptocurrencies-are-new-barbarians-at-the-gate-of-central-banks-20170831-gy849b (accessed 18/04/2018).

NJ Bridgewater (2017) What is Bitcoin? Crossing the Bridge, 7 December 2017. URL: http://nicholasjames19.blogspot.com/2017/12/what-is-bitcoin.html (accessed 18/04/2018)

Dan Caplinger (2018) Will Coinbase Report My Bitcoin Gains to the IRS? The Motley Fool, Apr 15, 2018 at 8:05 AM. URL: https://www.fool.com/taxes/2018/04/15/will-coinbase-report-my-bitcoin-gains-to-the-irs.aspx (accessed 18/04/2018)

Confucius (attributed author), James Legge (translator) (1879) The Sacred Books of China: The Texts of Confucianism. Part I The Shu King, the Religious Portions of the Shih King, the Hsiao King (Oxford: At the Clarendon Press). URL: http://oll.libertyfund.org/titles/school-the-sacred-books-of-china-the-texts-of-confucianism-part-i  (accessed 18/04/2018)

Ethan Fast, Luciano Engel, Fabian Wahle, Fabio C. Canesin, Thomas Saunders (2018) NEX: A High Performance Decentralized Trade and Payment Platform (version 2), NeonExchange.org. URL: https://neonexchange.org/pdfs/whitepaper_v2.pdf (accessed 18/04/2018)

Bill Flax (2011) Forget Multiculturalism: Restore The Anglo-Saxon Philosophy Of Liberty, Forbes, Sep 29, 2011 02:07 pm. URL: https://www.forbes.com/sites/billflax/2011/09/29/forget-multiculturalism-restore-the-anglo-saxon-philosophy-of-liberty/#6d8fbf79f81f (accessed 18/04/2018)

Investopedia (2018) Security, 2018, Investopedia, LLC.. URL: https://www.investopedia.com/terms/s/security.asp (accessed 18/04/2018)

Sudhir Khatwani (2018) 9 Best Decentralized Exchanges Which You Can Use To Trade Right Now, CoinSutra, last updated: 03/03/2018. URL: https://coinsutra.com/best-decentralized-exchanges-dex/ (accessed 18/04/2018)

Noam Levenson (2017) NEO versus Ethereum: Why NEO might be 2018’s strongest cryptocurrency, HackerNoon, Dec 6, 2017. URL: https://hackernoon.com/neo-versus-ethereum-why-neo-might-be-2018s-strongest-cryptocurrency-79956138bea3 (accessed 18/04/2018)

John Locke (1690) Second Treatise of Civil Government, Chap. XI., Sec. 138. URL: https://www.marxists.org/reference/subject/politics/locke/ch11.htm (accessed 18/04/2018)

James Madison, Political Essay: Property, quoted in James Madison (author), Ralph Ketcham (editor) (2006) Selected Writings of James Madison (Indianapolis/Cambridge: Hackett Publishing Company)

NEO (cryptocurrency) (Wikipedia article). URL: https://en.wikipedia.org/wiki/NEO_(cryptocurrency) (accessed 18/04/2018)

Security (finance) (Wikipedia article). URL: https://en.wikipedia.org/wiki/Security_(finance) (accessed 18/04/2018)


[1] Dan Caplinger (2018) Will Coinbase Report My Bitcoin Gains to the IRS? The Motley Fool, Apr 15, 2018 at 8:05 AM. URL: https://www.fool.com/taxes/2018/04/15/will-coinbase-report-my-bitcoin-gains-to-the-irs.aspx (accessed 18/04/2018).
[2] Caplinger (2018).
[3] See: James Madison, Political Essay: Property, quoted in James Madison (author), Ralph Ketcham (editor) (2006) Selected Writings of James Madison (Indianapolis/Cambridge: Hackett Publishing Company), p. 223.
[4] See: Sudhir Khatwani (2018) 9 Best Decentralized Exchanges Which You Can Use To Trade Right Now, CoinSutra, last updated: 03/03/2018. URL: https://coinsutra.com/best-decentralized-exchanges-dex/ (accessed 18/04/2018).
[5] See: John Bardinelli (2018) What The Future Holds For Neon Exchange (NEX), InvestinBlockchain, 4 days ago. URL: https://www.investinblockchain.com/what-the-future-holds-neonexchange/ (accessed 18/04/2018).
[6] See: Bloomberg (2017) Cryptocurrencies are new barbarians at the gate of central banks, Financial Review, Aug 31 2017 at 3:53 PM. Updated Aug 31 2017 at 4:12 PM. URL: http://www.afr.com/technology/cryptocurrencies-are-new-barbarians-at-the-gate-of-central-banks-20170831-gy849b (accessed 18/04/2018).
[7] John Locke (1690) Second Treatise of Civil Government, Chap. XI., Sec. 138. URL: https://www.marxists.org/reference/subject/politics/locke/ch11.htm (accessed 18/04/2018).
[8] See: NEO (cryptocurrency) (Wikipedia article). URL: https://en.wikipedia.org/wiki/NEO_(cryptocurrency) (accessed 18/04/2018).
[9] See: How many Ethereum-based tokens are there? URL: https://ethereum.stackexchange.com/questions/31922/how-many-ethereum-based-tokens-are-there (accessed 18/04/2018).
[10] See: https://neotracker.io/browse/asset/1 (accessed 18/04/2018).
[11] See: Noam Levenson (2017) NEO versus Ethereum: Why NEO might be 2018’s strongest cryptocurrency, HackerNoon, Dec 6, 2017. URL: https://hackernoon.com/neo-versus-ethereum-why-neo-might-be-2018s-strongest-cryptocurrency-79956138bea3 (accessed 18/04/2018).
[12] See: Levenson (2017).
[13] Bill Flax (2011) Forget Multiculturalism: Restore The Anglo-Saxon Philosophy Of Liberty, Forbes, Sep 29, 2011 02:07 pm. URL: https://www.forbes.com/sites/billflax/2011/09/29/forget-multiculturalism-restore-the-anglo-saxon-philosophy-of-liberty/#6d8fbf79f81f (accessed 18/04/2018).
[14] Confucius (attributed author), James Legge (translator) (1879) The Sacred Books of China: The Texts of Confucianism. Part I The Shu King, the Religious Portions of the Shih King, the Hsiao King (Oxford: At the Clarendon Press), Chapter V: Filial Piety in Inferior Officers. URL: http://oll.libertyfund.org/titles/school-the-sacred-books-of-china-the-texts-of-confucianism-part-i  (accessed 18/04/2018).
[15] URL: http://www.dictionary.com/browse/neo- (accessed 18/04/2018).
[16] See: Investopedia (2018) Security, 2018, Investopedia, LLC.. URL: https://www.investopedia.com/terms/s/security.asp (accessed 18/04/2018).
[17] Security (finance) (Wikipedia article). URL: https://en.wikipedia.org/wiki/Security_(finance) (accessed 18/04/2018).
[18] See: Mike Anderson (2018) NEX Token Sale Instructions, Medium, April 14, 2018. URL: https://medium.com/@mike.anderson12288/nex-token-sale-instructions-659be319d300 (accessed 18/04/2018).