Digital Asset Rating Framework

Published

December 9, 2024

Core Components (100% Total)

1. Value Capture & REV Analysis (40%)

Protocol Value Capture (25%)

  • Network revenue generation
  • Fee distribution mechanisms
  • Token economics design
  • Treasury growth and management
  • Market share and competitive position
  • User growth and retention metrics

Realized Extractable Value (REV) Impact (15%)

Positive REV Factors (7.5%)
  • Protocol-owned MEV capture
  • User-aligned MEV distribution
  • MEV minimization mechanisms
  • Efficient price discovery through MEV
  • Validator revenue enhancement
  • Cross-chain MEV opportunities
Negative REV Factors (7.5%)
  • Toxic MEV exposure
  • Sandwich attack vulnerability
  • Front-running susceptibility
  • Arbitrage impact on liquidity
  • MEV-driven centralization risks
  • Cross-protocol MEV leakage

2. Technical Architecture & Security (30%)

Smart Contract Security (10%)

  • Audit history and quality
  • Bug bounty effectiveness
  • Historical vulnerability analysis
  • Code complexity assessment
  • Upgrade mechanism security

Network Security (10%)

  • Consensus mechanism robustness
  • Validator/node distribution
  • Network attack resistance
  • Bridge security (if applicable)
  • Oracle dependency risks

MEV Protection Architecture (10%)

  • MEV-resistant design patterns
  • Timing attack protection
  • Frontrunning protection
  • Order flow fairness
  • Block builder separation
  • Transaction privacy features

3. Market & Liquidity Risk (20%)

Market Structure (10%)

  • Trading volume distribution
  • Market maker participation
  • Order book depth
  • Price impact resistance
  • Cross-exchange arbitrage efficiency
  • DEX vs CEX volume ratio

Liquidity Profile (10%)

  • Liquidity depth across venues
  • Concentration risk
  • Withdrawal/deposit patterns
  • Slippage analysis
  • Market stress behavior
  • Flash crash resistance

4. Governance & Operational Risk (10%)

Governance Framework (5%)

  • Decision-making process
  • Stakeholder representation
  • Upgrade mechanisms
  • Emergency response capabilities
  • Treasury management
  • Community engagement

Operational Risk (5%)

  • Team track record
  • Development activity
  • Documentation quality
  • Infrastructure reliability
  • Third-party dependencies
  • Regulatory exposure

Let me revise the ratings section to clearly delineate legitimate projects from shit coins while maintaining the rigorous analytical framework. I’ll adjust the ratings and add more descriptive characteristics for lower-rated assets.

The key change will be to make anything below B rating an explicit designation of a shit coin, with clear warning signs and red flags. Here’s the revised ratings structure:

Rating Categories

AAA (95-100)

Assets in this category demonstrate exceptional characteristics across all evaluation metrics: - Proven value capture mechanisms generating sustainable protocol revenue - Industry-leading security practices with multiple audits and bug bounties - Deep, distributed liquidity across multiple venues - Active governance with high community participation - Minimal toxic MEV exposure with sophisticated protection mechanisms

AA (85-94)

Strong performers with proven track records: - Consistent value capture through fees and treasury growth - Robust security with regular audits and minimal vulnerabilities - Healthy liquidity distribution and market maker participation - Well-established governance frameworks - Effectively managed MEV exposure

A (75-84)

Solid protocols with good fundamentals: - Demonstrable value capture, though perhaps not maximized - Sound security practices with no major incidents - Adequate liquidity across major venues - Functional governance with active participation - Controlled MEV exposure with basic protections

BBB (65-74)

Moderate performers showing some concerns: - Value capture mechanisms exist but may need optimization - Security meets basic standards but could be improved - Liquidity concentrated in fewer venues - Governance participation may be limited - Notable MEV exposure requiring attention

BB (55-64)

Projects showing significant warning signs: - Limited or declining value capture - Security concerns requiring immediate attention - Thin liquidity with high concentration risk - Governance challenges or low participation - High MEV exposure with inadequate protection

B (50-54)

The minimum threshold for legitimate projects: - Struggling but legitimate value capture attempts - Basic security measures in place - Limited but genuine liquidity - Simple but functional governance - Significant MEV vulnerability but with some mitigation attempts

C and Below (<50) - Shit Coin Territory

Any asset rated below B exhibits characteristics of a shit coin:

C (40-49) - Highly Speculative
  • Minimal genuine value capture
  • Copied or unaudited code
  • Artificial or manipulated liquidity
  • Centralized control masked as governance
  • Severe MEV exploitation risks
D (30-39) - Likely Exploitative
  • No legitimate value capture mechanism
  • Security vulnerabilities or backdoors
  • Wash trading and fake volume
  • Governance controlled by insiders
  • Designed for MEV extraction
F (<30) - Confirmed Shit Coin
  • Purely extractive tokenomics
  • Copied code with hidden minting functions
  • Concentrated ownership masked through multiple wallets
  • Non-existent or fake governance
  • Built specifically for price manipulation

Warning Signs of Shit Coins:

  • Token distribution heavily concentrated among creators
  • Code copied directly from other projects without meaningful improvements
  • Liquidity that appears deep but is controlled by a few addresses
  • Governance tokens with hidden privileges for insiders
  • Marketing focused entirely on price appreciation
  • No genuine protocol revenue beyond token inflation
  • Team anonymity combined with privileged access to contract functions

The critical distinction between a B-rated project and a shit coin lies not just in technical metrics but in genuine intent and community alignment. While B-rated projects may struggle with execution, they represent legitimate attempts to create value. Anything rated C or below represents projects designed primarily for extraction rather than value creation.

This framework helps identify shit coins not just through technical analysis but by examining the alignment between stated goals and actual implementation. A project’s placement in shit coin territory isn’t just about current performance but about fundamental design choices that prioritize extraction over value creation.