Developing Appropriate Risk Indicators for Blockchain-Assets
Assuming somewhat reasonable investors in the crypto world, they must have a method for assessing the risk of their investments? May it be a simple scorecard, extended analysis and research, or relying on single blockchain expert opinions. The latter we have found to be not a good idea. But that’s another story!
This story, however, is about how we came up with Alethena’s holistic rating methodology, how it works and what do the rating scores indicate.
In 2016 we started participating in token sales. During the first weeks and months it was easy to focus on a few projects, read their white papers, and make informed decisions. But as soon as the real hype started, it became pretty difficult to make said decisions, in particular with respect to deciding whether to sell or #hodl the tokens after exchange listing. Therefore, we started clustering the critical success factors from an investor’s perspective and began assessing the ICOs along this factors.
As the market evolved, we experienced significant differences between projects. There were the ones like Aeternity, Status, or Nimiq, raising money and keeping people posted during their development, and there were others like the famous Tezos project, ending up in lawsuits caused by significant governance issues.
Since its inception by the end of 2016, having analysed more than 100 projects, our concept led to approximately 40 investment cases. By analysing projects in detail, we further refined our methodology and started to formalise our venture. Alethena was founded.
Starting with the go-live in December 2017, we initiated the second stage of our project: walking through the process of an ICO with all its challenges — to raise money for the further development and to refine the due diligence methodology from an ICO’s perspective.
Unfortunately, the funding failed, on one hand due to typical startup failures — afterwards you always know better — on the other hand due to the market situation related to the crypto winter starting in January 2018. Nevertheless, we were able to further refine our methodology and come up with the best release version so far — now including not only the investor’s perspective but also the ICO’s perspective.
The methodology is a factor-based scorecard with values between 1 and 10, where 17 different clusters are being evaluated. For this assessment, a total of more than 70 factors are currently being considered. The clusters are then consolidated into 4 different dimensions (technical, business, legal, and governance) and finally into one overall rating score. The following excerpt shows in detail how a final score is calculated:
The number of factors being assessed is subject to change over time with new releases as the methodology must allow adoption to market developments and new insights.
The final rating of Alethena’s due diligence results in an assessment of a project’s risk from an investor’s perspective, whereby a rating of 7.0 is considered investment grade. However, this does not imply that investors should refrain from investing in projects below 7.0, but suggests that investments should be assessed and managed accordingly. The rating itself is dynamic and is being adjusted over time, at least quarterly.
Alethena Rating Scale
10 = Prime
9 = High Grade
8 = Upper Medium Grade
7 = Lower Medium Grade
6 = Speculative
5 = Highly Speculative
1–4 = Extreme Risk
Alethena’s due diligence assessment results in project reports that are currently accessible for free on https://mvp.alethena.com. It can be applied to all kind of blockchain-assets such as payment tokens, utility tokens, or asset tokens as well as tokenised equity or bonds and is independent of the project’s timeline. It provides investors, clients, business partners, and other stakeholders with independent, objective, and fact-based deep-dive insights into all 17 rating clusters. To reduce different risks such as factor dressing, the individual factors and its related assessment criteria are not public.
If you are interested in talking about our due diligence or receiving an assessment for your project, do not hesitate to reach out to us and join our network of like minded blockchain pioneers and trusted partners, acting as pioneers in making the market around blockchain-assets and ICOs more professional and mature.
Alethena is the first Blockchain-Asset Rating Agency made in Switzerland that is 100% independent, transparent, and neutral. Visit www.alethena.com for more information.