Nxt is considered a 2nd generation crypto currency. With all the alt coins coming out that only change things such as hashing mechanism, time between blocks, starting difficulty, and so on, Nxt brings much much more to the table and was designated this way for a number of reasons:
1. It is not an “alt coin” like coins such as litecoin, peercoin, and others who have their code based on Bitcoin’s source code. It is brand new from scratch with its own code.
2. It provides built in support for planned extra features such as a decentralized peer-peer exchange, colored coins, messaging/chat, decentralized DNS, and options for instant transactions. We will describe these advanced features later in this article.
3. It is a 100% proof of stake versus the proof of work mechanism the vast majority of other coins are based on. This effectively removes a large security risk inherent in most other coins, as now the issue of a 51% attack or other vulnerabilities inherent to PoW coins are now gone. The biggest plus here is how green this protocol is (not a reference to colored coins) in power consumption, since PoS doesn’t require massive amounts of hashing power
4. It was announced weeks in advance, unlike mere hours like most coins. The 71 stakeholders are responsible for distributing the 1 billion Nxt coins that were ejected from the genesis block via an injection of bitcoin (donated by them, 21 BTC total) into the genesis block. This is a requirement for this PoS system to work and this distribution is now in progress. Nxt is listed on http://coinmarketcap.com/ and people are trading on a 1on1 basis in the forums as well as on a temporary (centralized) exchange http://www.dgex.com.
Let’s get into the first planned feature, a decentralized exchange. How do we currently trade coins now? Well you have to sign up for an account on a centralized platform such as Cryptsy/BTC-E/Bter/etc, transfer them your coins and pay them for transactions. This brings in a large concern that I personally have yet to be seen brought to light, in that it’s possible that the exchange could just bail with everyone’s deposits. This has actually already happened when the Sheep Marketplace did just that with 96,000 bitcoins, ending up as the largest theft in history. The developers of NxT (BCNxt and his crew) are developing a peer-peer exchange into the software to allow for decentralized trading which will eliminate this trust point. It will also eliminate trading fees! Obviously this is all still completely secure and anonymous as are current bitcoin transactions.
But let’s not stop there. If you can have a decentralized exchange based on the peer-peer model then what else is possible? Well, quite a bit as it turns out; the developers are also building in a decentralized DNS system to compete with namecoin. Also in the future we can expect messaging and chat systems that, like the p2p exchange, will also be completely secure and anonymous. Think of what this will allow: Completely anonymous websites, AND anonymous payments, to go with an anonymous support system in the chat/messaging feature, all 100% secure, encrypted, and irreversible.
Nxt (pun intended) is one of the more curious services: colored coins. To understand the concept of colored coins requires a fairly deep view into bitcoin transactions that most people aren’t aware of. With bitcoin, each transaction’s output hashed address is based on a previous receiving address that originally received that coin. So with the blockchain, a set of bitcoin transactions can be traced. Not to a person mind you, but what is meant is that an individual coin or pieces of that coin can be traced back on a transaction by transaction basis. Since this is a case, then if it was possible to expand the protocol to allow a person to designate or “color” a particular coin, then we can build a bridge from the virtual crypto currency world to the physical world. In effect that coin can then be used to represent some physical entity here on earth. Property, stocks/bonds, commodites, or really any concept that can be concretely identified could be used. This protocol expansion is exactly what is being built into Nxt’s unique code to allow for the use of colored coins.
Let’s talk about Proof of Stake and green energy. Everyone knows how bitcoin is based on Proof of Work. That is there are thousands of miners around the world crunching away at hashes and gobbling up TONS of power. Now, PoS doesn’t really involve ‘mining’ per se; it’s important to realize that unlike bitcoin, all Nxt that will ever exist already exists, so client wallets now ‘mine’ for transaction fees. A growing trend is to refer to this as ‘forging’ instead of ‘mining’. Since this can be done on a client wallet loaded on a PC (CPU mining), it is MUCH more environmentally friendly and power efficient.
Now, on to the nuts and bolts of Nxt’s implementation of PoS. Its elegantly simple: transaction fees are distributed out proportionally to all users based on the amount of Nxt a client has. (assuming that client is running and unlocked). So if a client has 1 million Nxt, then they have 1/1000 of a chance of receiving the transaction fee for any transaction. The math here is 1 million (amount the client has) divided by 1 billion (total Nxt in existence) is 1000, so that is 1/1000 of a chance.
Some extra notes about Nxt:
Nxt is a brain wallet, a very long and secure passphrase MUST be used to generate your account.
As stated, to forge (AKA mine) for transaction fees, your client must be running and unlocked on your machine.
The software is currently java based, and closed source. Pieces of the code are available for review upon permission of the devs, but the full code will not be released until Jan2014 official launch.
Many people refer to this as 100% pre-mined, but this isn’t really accurate since there *is* no mining, and the PoS system depends on all coins being distributed out.
The Nxt official thread in bitcointalk.org is at https://bitcointalk.org/index.php?topic=345619.0