Crypto exchange is a price determination platform which provides trading service for crypto currencies. Its basic functions include combination of transactions, asset management and asset clearing. Compared to traditional stock exchanges, crypto exchanges also take the roles of market maker and investment bank. As market maker, exchanges earn post by increasing the liquidity of the market. As investment bank, exchanges provide services such as issuing and underwriting for crypto, collecting fees from deposit, or collecting deposit in the form of voting by the exchange community. As the most profitable part in the crypto industry chain, crypto exchange is required with extremely high security concern as well. Crypto exchanges have always been controversial, since security incidents are even more common recently. Therefore, the market needs professional, objective and independent exchange ratings urgently, to enable market stakeholders to better understand them.
Shulian Ratings is a new brand that was founded by Shared Finance officially in May 2018. Team of Shulian Ratings consists of a group of seasoned crypto investors, R&D engineers from well-known rating agencies, as well as senior blockchain product managers. Currently, the team is around 10 people. The aim of Shulian Ratings is to provide investors decision-making reference with its professionalism, objectivity and independence.
Compared with existing crypto rating agencies (teams or self-media), Shulian Ratings has three major advantages:
(1) On the basis of inheriting ideas and concepts of international rating agencies such as Standard & Poor's, Shulian Ratings establishes a rating system specifically for the blockchain industry, which ensures the professionalism of the rating results to a large extent;
(2) All the data resources are derived from public channels. The agency promises that there is no private information or data, which largely guarantees the objectivity of the rating results;
(3) The income is not from the rating target, which means there is no interest relationship with the rating object. This greatly guarantees the independence of the rating results.
The exchange rating method is based on experiences of financial business practices and technical method researches, at the same time drawing lessons from rating concept of international rating agencies. The aim is to improve the transparency of the rating, and to help investors understand basic ideas, main framework and key elements of the rating.
The crypto exchange rating is a comprehensive ranking of strength, popularity, liquidity and security. Under the guidance of this method, Shulian Ratings set up a crypto exchange rating model with core rating factors such as strength index, popularity index, liquidity index and safety index, then conduct a comprehensive analysis with both qualitative and quantitative methods (see Graph 1).
Graph 1. Rating Method of Crypto Exchanges
Data source: Shulian Ratings
Rating results are derived from four dimensions: Strength Index, Popularity Index, Liquidity Index and Security Index. Under each dimensions there are some rating factors that influence rating results directly.
1. Strength Index
Shulian Ratings mainly evaluates the strength index of cryptocurrency exchanges through core rating factors such as basic strength and shareholders’ strength.
Basic Strength. Basic strength of crytocurrency exchange includes its own elemental resources, in terms of platform security, user experience, capital flow, capital reserves, technical capabilities, etc.; 2) profit model, including transaction fees, incubation fees, etc.; 3) licenses and qualifications, since local government regulatory policies are the lifeblood of cryptocurrency exchanges.
Shareholders Strength. Shareholders’ strength is mainly examined through two aspects. On one hand, we investigate the time when the founding team entered the crypto field and how influential they are. Their influence is evaluated by their industry resources, income of the team, technology development experience and market or community operation capabilities; on the other hand, we investigate their partners and investment institutions, including their founding time, industry reputation, capital size and investment capacity, etc.. For instance, in November 2013 Huobi Exchange received the Angel Investment from the Real Estate Fund and the well-known angel investor Dai Zhikang. In April 2014, it further received millions of dollars from Sequoia Capital, which provided not only funds for Huobi, but also professional knowledge and experience as well.
2. Popularity Index
Shulian Ratings evaluates popularity index through core rating factors such as community popularity index (Twitter followers), daily average UV and global user concentration.
Twitter follower. Twitter is an important part of cryptocurrency eco-chain. Popularity of crypto exchanges can be quantified to some extent by the number of Twitter followers, which is closely related to community popularity.
Unique Visitor Per Day. Daily average UV is a statistical quantitative indicator that shows the situation of users’ using service. Specifically refers to the number of independent visitors to the crypto exchange within 24 hours, that is, a computer client accessing the website is called a visitor, and one visitor is only counted once during 00:00-24:00. Each independent visitor accurately corresponds to an actual viewer with respect to each IP. Using independent visitors as a factor, we can accurately more understand how many visitors actually came to the corresponding page in a unit of time.
Global User Concentration. Due to the global nature of crypto transactions, the more dispersed the crypto exchanges, the stronger the ability to resist policy regulatory risk, therefore the higher the user base. The higher the concentration of global users, the stronger the locality of crypto exchanges.
3. Liquidity Index
Shulian Ratings evaluates popularity index through core rating factors such as trading volume, currency diversity, transaction dispersion and other currency liquidity.
Trade Volume. The change in trading volume is reflected in whether the crypto trading is active, which will directly affect the profit of the crypto exchange. Therefore, trading volume indicator is very important in the crypto exchange rating system. For example, according to coinmarketcap.com , the sum trading volume of top three exchanges (Binance, Okex and Huobi) is close to 50% of the total first 30 exchanges in Shulian Rating’s report. The volume of trading directly affect exchanges’ profitability.
Currency Diversity. In general, the more currencies a crypto exchange has, the more choices investors can choose. Investors with different preferences will help build a healthy and stable exchange user ecology.
Trading Dispersion. We count the proportion of two transactions with the largest transaction volume on each crypto exchange. The higher the proportion (meaning the more concentrated the transaction), the worse the dispersion of the transaction, therefore, the worse the liquidity of other transaction pairs.
Other Currencies Liquidity. Other currency liquidity indicators are similar to trading dispersion indicators. The specific calculation method is to estimate the average transaction volume of all other currencies after eliminating the largest two transaction pairs. The larger the value, the stronger the liquidity of other currencies.
4. Security Index
Shulian Ratings evaluates security index through core rating factors such as security corporation, Special Issues and other security factors evaluated by professional technology agency. Recently, Shulian Ratings and Chainshell technology agency jointly published “35 Crypto Exchange Rating Report”.
Security Corporation. Shulian Ratings believes that the exchange's cooperation with third-party professional security agencies can help improve their security. For example, Huobi cooperates with Changting Technology and Chengdu Lian’An Technology.
Special Issues. Special issues include hacking, stolen token, and unusual trading issues. Shulian Ratings believes that if the above-mentioned special issues occur on the exchange, it proves that the security construction of its system still needs to be further strengthened.
Interpretation of Rating Results
Rating symbol, rating observation and rating outlook, which all belong to rating system, are influenced by rating logic, framework, factors and standards. Rating is prospective, for it demonstrates specific conclusions based on information that is processed by rating method. Rating observation or rating outlook, however, is a judgment on uncertainty of future trends, reflecting the possible trends in the short and medium terms.
1. Rating Symbols
In Shulian Ratings’ rating system, there are nine rating symbols: AAA, AA, A, BBB, BB, B, CCC, CC and C (ranking from high to low). Symbols from AAA to BBB are considered as investment levels, while symbols from BB to C are regarded as speculative levels.
Rating Outlooks and Observations
Rating outlook and observation both have three types: developing, positive and negative. In the prospective of certainty, level adjustment is higher than rating observation, which is higher than rating outlook. Specifically, the probability of level adjustment is higher with rating observation list, compared to rating outlook.But it does not indicate that the level will be surely adjusted when a rating object is considered unstable or included in the rating observation list. Besides, each rating object will have an unique rating outlook or rating observation. When an rating object is included in the observation list, the outlook is invalid, while the level remains.
Graph 4. Explanations and Types of Rating Observation.
Disclaimer and Risk Warning
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In no event shall the agency be liable for any direct or indirect damages caused by any person or entity. The rating result of the agency is not an investment recommendation, but is only considered as a factor that investors may take into account. Particularly, rating results are not precise science due to unforeseen future events and developments.