What is RDA Index
The Financial Conduct Authority (FCA) have advised consumers to be cautious when buying cryptoassets and should ensure they understand and can bear the risks involved with assets that have no "intrinsic value". Click here to read the FCA policy statement on cryptoassets. By intrinsic value, the FCA refers to the “intrinsic nature” of the cryptoasset and not to the mechanism by which it was acquired.
RDA Index was developed to assess the intrinsic nature of cryptoassets. The points system of RDA Index helps crypto users, investors and analysts to determine the iintrinsic value of cryptoassets and to better manage the risks involved in dealing with the asset class.
Traditional Assets vs Cryptoassets
Because we conduct most of our business with people who do not know us personally, traditionally there has been a need for a central authority to guarantee the value of the currency we use in financial transactions.
Although centralised monetary systems provide an environment where everyone believes in the same currency and standards of value, proponents of cryptoassets claim that it has concentrated too much decision-making power in the hands of a single institution that may be vulnerable to mismanagement. Along with the inherent risk of mismanagement, crypto enthusiasts argue that the intermediation of every digital transaction by a central authority and other affiliate banks is a source of technology and cost inefficiencies to the overall financial system.
The 2008 financial crisis was a clear example of how these inefficiencies can damage the health of the monetary system with the cost of rescuing the system totalling some £500 billion (approximately $850 billion) alone in the UK. The government also invested in some banks to keep them alive with the investment sold back to the market at an overall profit to the taxpayer.
Bitcoin, the first cryptoasset was invented in the aftermath of the 2008 financial crisis, and the crisis was a clear incentive for its creation. Fast forward to 2021, over £800 billion pounds has migrated from traditional financial markets into cryptoassets.
The Intrinsic Value of Cryptoasset
Cryptoassets enable peer-to-peer transactions. A peer-to-peer transaction simply means the transaction is always between two parties (peers) without any intermediary. In a cryptoasset payment network, value goes from one person (peer A) to another person (peer B) without the need for a central authority or intermediary (e.g., bank) to regulate the value of the asset being used or facilitate the transaction. The network is decentralised. This decentralisation of cryptoasset networks is achieved through a network of computers all over the world who have no affiliation with one another. This network is often referred to as the blockchain. Most of today's blockchain payment transaction run without a person, company, bank, or government to mediate or control their settlement. Participating computers in the network are owned by a community of individual or institutions who are rewarded in cryptoassets for their participation.
There are two types of blockchain networks, permissioned and permissionless. Permissioned network is restricted by policy to a specific group of participants, while permissionless networks such as Bitcoin, Litecoin, Ethereum, etc are open to anyone with access to the internet thus making them borderless and inclusive. Due to the advanced coding involved in storing and transmitting cryptoassets are generally considered very safe and secure so long as they reside on the blockchain.
Despite their intrinsic nature to enable borderless-permissionless-decentralised peer-to-peer transactions, behaviour consistent with speculative trading accounts for the majority of cryptoasset uses. In other words, most people buy and keep not because of their promise to deliver a more inclusive and censorship resistant financial system. Rather, people mostly buy, hold and eventually sell cryptoassets for financial profit or in most cases a loss. The FCA cryptoasset consumer research 2020 concluded that 47% of people considered buying cryptoassets as a gamble that could make or lose money, 25% sees it as part of their wider investment portfolio, 22% don't want to miss out on a money making opportunity, 17% classifies it as part of their long term savings plan (e.g. pension), and 7% invest in it because they don't trust the current financial system. Majority of people appears to buy them on the expectation that they will increase in value over time due to new use cases or because more people are buying speculatively. The latter creates risks for investors at all levels of the pyramid.
RDA Index Approach
Many cryptoassets hold similar promises of peer-to-peer decentralised financial system. In principle, they have the same fundamental. They however differ in their practical "intrinsic nature" in terms of how they fulfil their promise of a libertarian financial system to their user community.
Before we explore the RDA Index approach for evaluation and ranking of cryptoassets, we clarify a few assumptions:
lIntrinsic value can be measured on any scale. RDA Index measures intrinsic value on a scale of 0 to Nth where 0 indicates no intrinsic value and 500 for example indicates a relatively higher intrinsic value.
Intrinsic value is not synonymous to price although price value may be derived from intrinsic value based on an appropriate conversion model.
The intrinsic value of a cryptoasset is determined by its characteristics which users consider to be of value to them. We refer to these characteristics as Real Digital Asset (RDA) Attributes.
Hence, we define RDA Attributes as core drivers of the intrinsic value of cryptoassets,
Real Digital Asset Attributes
think the internet is going to be one of the major forces for reducing the role
of government. The one thing that’s missing but that will soon be developed, is
a reliable e-cash, a method whereby on the Internet you can transfer funds from
A to B without A knowing B or B knowing A.”
Milton Friedman, 1991
We take Friedman's conjecture for granted that
users of cryptoassets value the ability to engage in trust-less, decentralised,
censorship resistant peer-to-peer financial transactions. From these
value drivers we derive several other qualities, demand-side and supply-side,
that a cryptoasset must have to be of value to users. We aggregate these
qualities into to four distinct groups which we refer to as Real Digital Asset
(RDA) Attribute Groups. Detailed analysis of the RDA Attributes is
outside the scope of this article. We present a broad view of the attributes as
Business Ecosystem Stability (E)
The Business Ecosystem Stability component represents resilience and the capability to maintain a stable state of socio-economic equilibrium that keeps the cryptoasset alive and valuable. This group of attributes reflects the value brought to the token by the strength of the team, community, investors and the influence of competitors and regulators.
Digital Utility (U)
Much of the speculation around the value of digital assets stems from their promise as investment vehicles, and this area is subject to intense regulatory scrutiny from securities agencies. However, for other tokens, at least a proportion of their value is intrinsic to their actual use case within a payment or software application ecosystem. A pure utility token may still rise in value if the ecosystem for which it is developed undergoes growth and demand increases, however under this group of attributes we examine the extent to which the token has inherent value due to its use cases both on-chain and off-chain.
Technology Efficiency (T)
All cryptocurrencies may be regarded as innovative technologies, however with a 13 year history now to draw upon, different technologies may be regarded as having distinguishable track records of effectiveness. As a range of different consensus mechanisms and mainnets proliferate at this time, we compare a diverse range of factors to yield evaluations of how efficient and secure the specific technologies in use are.
The Sentiments attributes seeks to measure the level of sentiments that persists in favour of the asset's fundamentals i.e. ecosystem stability, utility, and the underlying technology. In an era when hype has had far too much influence on cryptoasset valuation and pricing, RDAi is keen to ensure sentiment is viewed with the appropriate lenses as another important factor alongside the preceding groups of core RDA attributes. The role of sentiment on the intrinsic value of cryptoassets cannot be downplayed particularly in the social endorsement of an asset's intrinsic worth.
To model the intrinsic value of a cryptoasset, A, we specify a mapping (E, U, T, S) ---> r(A) that quantifies the intrinsic value of the asset as a function of its attributes.
The Problem with Current Intrinsic Valuation Approaches
Since December 2011, many organisations include Wall Street have issued cryptoasset valuation guidelines. In doing so, comparisons are often made between the market capitalisation of cryptoassets and that of traditional assets. These sorts of comparisons are unreliable for many reasons: first and foremost, unlike Companys' market capitalisation value- the market capitalistion value of cryptoassets are not driven by industrial economic activities that asset creators are mandated to execute. Rather the factors that drive the value of cryptoassets are multi-faceted, cross-domain and highly fluid. This is not a necessarily a weakness, it is often stated as strength of an asset class that is built on a censorship and regulatory free ecosystem.
Benefits of RDA Index
The RDA Index methodology for evaluation cryptoassets serves as a flexible and dynamic approach to determine the intrinsic value of cryptoassets. RDA Attributes-weighting is also a mechanism to arrive at objective prices of cryptoassets (through translation of their intrinsic value measure to FIAT value).
Crypto Fundamentals at Market Speed
RDA Index Level provides a measure of how the overall cryptoasset market is faring over time.
The RDA Index Level serves as a reference for the evolution of fundamental drivers of the cryptoasset industry. By definition, it is the higher frontier of intrinsic value of cryptoassets.
The index level calculation empowers users and market analysts with the confidence and trust required to engage effectively in a decentralised cryptoasset economy.
Intrinsic Value (IV) Rating
Using the RDA Points as a reference we establish a 5-tiered Intrinsic Value (IV) rating system for cryptoassets. RDA IV Ratings enable people and institutions to identify toxic assets and counterparty and investment risks.
The RDA Index data allows market participants, analysts and regulators to summarise market pricing of cryptoassets with respect to their underlying attributes. The fundamental price data promotes investment-type behaviour and reduces overall market volatility arising from excessive speculation.
Fundamental Exchange Rates
Having established the fundamental prices of cryptoassets, we generate fundamental exchange rates between cryptoassets serving as a useful reference for over-the-counter trading and crypto payment use cases.