Criteria to satisfy when evaluating crypto-assets

Last year many new participants entered the space of distributed ledger technology.

While its a very young and complex space the initial financial incentives often lead to real interest in the protocols that are being built. In the search for a systematic approach on how to asses crypto-assets I stumbled upon the “Guidance on the use of Distributed Ledger Technology and the acceptance of Virtual Currencies” issued from the Malta Gaming Authority (MGA). Its amongst the most en pointe frameworks that I’ve encountered in my research, which is why I’d like to share it. Despite the fact, that the original context of the criteria is derived from the licensing process of the MGA I think it can be considered for general assessment of crypto-assets, whether its for investment or participation.

Ideally crypto-assets satisfy the following criteria [source]:

Financial Value

1. The technology represented by the cryptocurrency has to provide value for the network participants, address a market requirement which is yet to be met and/or help solve a problem;
2. The underlying network is to be public, trustless and decentralised;
3. The financial system is available to everyone without being controlled by a single entity; and
4. It is easy for members to participate in the economy, having control of their wealth and the freedom to invest in it as they choose.

Technological Value

1. The technology is open source, well documented and well tested by entities separate from the core development team;
2. There is a working product either on a test network or a main network; and
3. The technology is secure with prompt responses to discoveries of vulnerability and performance issues.

Scalability

1. The technology behind the cryptocurrency has a clear roadmap for development and project milestones;
2. There are practical applications either in the present or in the future for the technology; and
3. The cryptocurrency is operating on its separate blockchain or is utilising an existing blockchain for practical purposes.

Market Conditions

1. The cryptocurrency has a competitive market capitalisation in comparison with the general market capitalisation that is allocated to other digital assets;
2. There is a trading pair between the cryptocurrency and fiat currencies; and
3. The cryptocurrency is available to trade on asset exchanges and not restricted to one geographic region.

Economics

1. The cryptocurrency must be necessary in order for the platform to operate.
Cryptocurrencies that are classified as physical assets are not eligible for consideration;
2. There is a fundamental reason to purchase and hold the cryptocurrency based on its future plan and vision regarding growth and milestones. Simple fundraising is not a valid enough purpose;
3. There are ways to incentivise miners, validators and other participants on the network to work in a fair manner while penalising malicious behaviour, where this is applicable.
4. There are strict security protocols limiting scams, hacks and theft of funds.
5. The team behind the cryptocurrency should allow a fair distribution of it (limiting the risk of a small number of investors acquiring a majority supply of the cryptocurrency);
6. The team behind the cryptocurrency should be available to respond to feedback and
questions about the technological product and the cryptocurrency; and
7. The business plan and the technology’s website should have an ethical and professional code of conduct.

Lets look at a few, potentially controversial ones:

The financial system is available to everyone without being controlled by a single entity

There are a couple very popular crypto-assets that are controlled by a single entity in some form. These protocols claim to have a different philosophy and that is ok. However, its important to distinguish community-owned and -governed networks from centralized ones.

There is a working product either on a test network or a main network

The amount of capital raised on a whitepaper is astonishing. Understanding the different stages of a network, whether its pre-whitepaper, an ERC20 token or a custom blockchain with a running mainnet is important.

The cryptocurrency has a competitive market capitalisation in comparison with the general market capitalisation that is allocated to other digital assets

I personally disagree with that one in the context of assessing crypto-assets. The market capitalisation (MC) is a function of supply * price. In times where non of this technology has proven adoption their price can be arbitrary, mostly based on supply and demand, driven by speculators.

Overall I was positively surprised to see the level of sophistication with which authorities in Malta approach crypto-assets.