NEO: The New Big Controversy
Some folks in the crypto world seem to love a fight, punching and counterpunching about each other’s favorite coin. Our love is strictly for independence and objectivity.
Our ratings are not a beauty contest. They are based on meticulous analysis and a mathematical model that makes hundreds of thousands of calculations to fairly evaluate investment risk and reward … as well as technology and adoption fundamentals across the entire universe of cryptos that we cover. So whether the agenda is to attack a particular grade or to defend it, isolating a single variable is a mistake.
Unlike Moody’s, Standard & Poor’s, Fitch and other firms, we never accept compensation of any kind from issuers. Our revenues are derived strictly from the sale of our research to individual consumers, investors and other end users. And unlike some investment research organizations, we have hired cryptocurrency analysts and consultants with deep experience in the industry.
With this preamble, let me respond to the latest controversy: our grade for NEO.
“Granting NEO an A confirms, in the eyes of critics, that Weiss — a company with no background in cryptocurrency — doesn’t understand the industry it is judging. What sort of skewed ratings system places one of the world’s most centralized cryptocurrencies leagues ahead of one of the most decentralized (bitcoin)?”
Why we give Bitcoin a C+ is the subject of our whitepaper published here one month ago. Why we give NEO a higher grade is the subject of our commentary today.
NEO’s Weiss Rating Explained
NEO is a B+ right now, down a notch from an A- earlier. Is that a significant downgrade? No.
As we said from the outset in Weiss Cryptocurrency Ratings Explained, “The metrics used to evaluate cryptocurrencies can change more rapidly than those of other investments. Therefore, when using Weiss Cryptocurrency Ratings, investors should expect frequent upgrades and downgrades.”
Moreover, an important component of our ratings is investment risk and reward, which is based mostly on price action. So, market swings can also cause upgrades and downgrades … even if the underlying technology and fundamentals are unchanged. Relative to other coins, NEO’s reward/risk metrics have been rising nicely for quite some time. Last week, they came back down somewhat.
We recognize this is not the kind of rating crypto industry leaders and developers were expecting. They wanted a rating that sticks strictly to the coin’s technology and fundamentals, regardless of what happens in the markets. But our primary objective is to help investors make more money with less risk. And to validate our ratings, we’ve run them thorough regression analysis, demonstrating that they achieve that objective very well — something that would not have been possible with mostly static grades.
NEO is already starting to do what Ethereum aims to do in the future. The founders’ stated mission is to become the go-to blockchain platform for creating a “Smart Economy,” including Initial Coin Offerings and applications that can range from supply-chain management or package tracking to games. Our ratings model has identified the following strengths that can support their mission:
Strength #1. NEO is powered by the dBFT (delegated Byzantine Fault Tolerance) consensus algorithm. This allows for about one thousand transactions per second, making it one of the fastest currently functional blockchains. In contrast, Ethereum is — for now, at least — too slow to be the go-to smart contract platform for the economy of the future.
Strength #2. The dBFT consensus algorithm allows NEO token holders to elect their block producers, called “bookkeepers.” This aligns the interests of block producers with those of the community, introducing elements of on-chain governance to the network — a key to ensuring the future sustainability of the ecosystem.
Strength #3. NEO’s focus on interoperability with side-chains and external blockchains is another plus.
Strength #4. The coin’s compliance-driven structure allows individuals and organizations to store their digital identity (VID) on the blockchain. We believe this is a feature that all projects should have if they hope to integrate with existing economies, businesses and communities.
Simultaneously, our model has also identified some issues of potential concern:
Concern #1. The way NEO handles ID on the blockchain could potentially lead to censorship in the future. If a platform intends to remain censorship-resistant, the ID is something that needs to be handled with extreme care to protect user privacy.
Concern #2. Other blockchain projects in development boast technology that’s more robust than NEO’s. They have solid teams of developers and a roadmap to “take over” the space some years from now.
Projects with the best chance to succeed in the longer term are not strictly those with the best mousetrap. They are those that, in addition to good technology, can build a broad community around them. NEO scores well in this area because of several factors:
1. Although NEO doesn’t enjoy the adoption of more-established projects like Bitcoin, Ethereum or Ripple, its adoption is on an upward path as it gains more recognition.
2. It has a dedicated developer community that focuses on building applications specifically for the NEO ecosystem.
3. NEO’s popularity on social media also helps, potentially establishing NEO as a household name in the crypto space.
4. Our model also likes the fact that there’s almost no correlation between price action and usage on the network. Unlike many other coins, where usage rises and falls with the ups and downs of speculative activity, NEO’s relatively stable usage implies real-world, non-speculative adoption of its technology.
What About Centralization?
One of the big criticisms cited for NEO is centralization. Our model recognizes this issue. But it views most of the criticism as premature for four reasons:
First, because NEO is essentially still in alpha, and this is not unusual for a cryptocurrency. Even Bitcoin is arguably still in development. In fact, the latest Bitcoin Core version 0.16.0 was just released days ago.
Second, control by the founding team is also very common, especially among third- and even second-generation currencies. In fact, some would argue that, in the early stages, this kind of centralization can be a necessary evil. It allows the creators to fix bugs and test new features in a quick and easy manner.
Later, once a crypto is widely used, it can be more difficult. Just ask Bitcoin or Ethereum developers. Many of them say the process of upgrading their networks is like “trying to fix the engine on a car while it’s speeding down the highway.”
Third, NEO’s consensus protocol is built from the ground up for decentralization. That shows its technology is capable of achieving that goal in the future.
Fourth, our model also measures NEO’s centralization metrics in the real world. For example, it looks at who’s actually running the nodes and how the network is reaching consensus. On these metrics, we don’t think any cryptocurrency has yet achieved true decentralization, and that includes both newer cryptocurrencies such as NEO, EOS, Cardano and Stellar, as well older ones like Bitcoin, Ethereum or Ripple.
Our model punishes them for it. But at this stage in the industry’s evolution, it does not grade a crypto expecting perfection. And the math demonstrates that NEO’s centralization is more or less in line with that of other coins.
As I suggested at the outset, one single variable cannot be used to attack or defend any Weiss Cryptocurrency Rating. This is particularly true for NEO. It demonstrates a relatively good balance of mostly positive scores across the board: A technology that allows the platform to scale … relatively strong usage metrics that go beyond mere speculation … plus, I might add, trading patterns indicating it’s a favorite of the investment community.
We believe 2018 could be a very interesting year for NEO. The longer Ethereum is unable to solve its scalability issues, the more new projects will look for alternative platforms.
NEO is open for business. It’s ready to scale and support thousands of dApps. And it could indeed become one of the go-to platforms for the Smart Economy of the future.