How to Evaluate a Cryptocurrency

how to evaluate a cryptocurrency

Evaluating and analyzing cryptocurrencies is essential for anyone looking to invest in this emerging market. With thousands of cryptocurrencies and more launching every month, it can be challenging to identify projects with good long-term investment potential. This comprehensive guide will walk through the key factors on How to Evaluate a Cryptocurrency and consider when researching and evaluating a cryptocurrency before deciding if it’s a good addition to your portfolio.

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Introduction to Cryptocurrency Evaluation

Cryptocurrencies are decentralized digital assets and payment networks which run on blockchain technology. They enable peer-to-peer transactions without central intermediaries through the use of cryptography and consensus mechanisms.

As cryptocurrencies have grown into a $1.75 trillion market, proper evaluation is vital before making investment choices. Careful analysis can help investors identify promising projects with solid technology, favorable supply dynamics, real-world utility and sufficient community support.

Asking the right questions and assessing both qualitative and quantitative factors is crucial when analyzing cryptocurrencies. This allows investors to gain conviction by understanding the opportunities and limitations of each project. Evaluation involves a mixture of fundamental analysis, technology review, adoption metrics assessment and community research.

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The key factors analyzed while evaluating a cryptocurrency include:

  • Market Potential & Competition
  • Technology Stack & Development
  • Adoption, Utility & Use Cases
  • Token Economics
  • Community Support & Transparency
  • Performance Data & Technical Analysis
  • Team & Governance Structure

Thorough evaluation across these aspects allows investors to make informed judgments on the mid to long term viability and investment merits of any cryptocurrency project.

Getting Started with Crypto Evaluation

When first beginning analysis on a new cryptocurrency, investors should start with understanding the most basic background details:

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Market Capitalization & Supply

  • Market Capitalization measures the total value of all the coins in circulation. This gives perspective on the overall network value. Comparing market caps between assets provides a snapshot of their relative sizes.
  • Circulating Supply indicates the number of coins currently available to trade or hold. Understanding whether max supply has been reached or additional coins may dilute value is useful.
  • Volume shows the amount traded in the past 24 hours which demonstrates activity and liquidity. High consistent volumes signal active interest and trading.

Resources like CoinMarketCap and CoinGecko provide market data dashboards for comparing capitalization, volume and circulating supply metrics across cryptocurrencies.

Development Team & Structure

The developers behind a cryptocurrency play a central role in advancing capabilities. Understanding team structure and key participant backgrounds can build credibility:

  • Researching the core developers’ expertise, academic credentials and technical accomplishments demonstrates capability for executing proposed development roadmaps.
  • Established histories working on successful crypto projects gives increased trust. however anonymity of development is common in crypto too.
  • Checking if key stakeholders have public profiles adds transparency credibility to the community’s governance.

Project websites, whitepapers and community channels help provide context on development team structures varying from large companies to volunteering open source organizations.

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Technology & Use Cases

Each cryptocurrency has unique technical capabilities serving various use cases for securing cryptographic transactions to enabling decentralized ecosystems.

Evaluating the underlying technology and assessing real-world utility based on proposed or in-market use cases gives the foundational layer driving a network’s value.

For Bitcoin – it’s use as decentralized digital money on a peer-to-peer payment network. For Ethereum – it’s ability to support decentralized finance and blockchain based applications through smart contracts. The use cases matching a cryptocurrency’s technological capabilities and purpose should align with acceptable tradeoffs around scalability, security and decentralization.

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Social Sentiment & Community Engagement

Beyond whitepapers and protocol specifications, joining community discussion channels like Discord servers and Reddit forums provides qualitative insights into user perspectives, developer activity momentum and overall network health.

Monitoring social sentiment can uncover issues or hype impacting a cryptocurrency to factor into evaluation. Community size and engagement signals adoption traction and belief in the project vision. Larger decentralized support conveys longevity capabilities extending beyond founding teams which may pivot away after launch. User experiences and complaints should provide ground truth on actual performance, fees and shortcomings.

With so much complexity spanning technology, game theory and economics – no single metric can definitively determine fitness. Holistic analysis across the key evaluation categories covered in this guide aims to quantify and qualify projects for ultimately judging investment potential.

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Evaluating Market Opportunity and Competition

Assessing market landscape factors allows benchmarking cryptocurrencies against competition to gauge adoption viability:

Competitor Analysis

  • Segment top cryptocurrencies by market capitalization to identify direct competitors by use case
  • Benchmark technical specifications to compare speed, scalability, fees between rival platforms.
  • Researching comparisons on cryptography, consensus models and governance structures provides context on relative capabilities.
  • Consider which networks have first mover advantage or show more innovative and disruptive approaches.

Ethereum has established dominance for decentralized applications while rival smart contract platforms like Solana and Polkadot offer higher speeds and lower costs. Bitcoin maintains largest adoption for digital gold capabilities while Litecoin aims to build off bitcoin as silver with faster payments.

Understanding where platforms align, overlap or diverge across user needs aids evaluating best positioned networks.

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Addressable Market Analysis

Estimating long term outlook across target addressable markets conveys upside potential:

  • Evaluating TAM (total addressable market) size demonstrates major trends in adoption and opportunity globally.
  • Cryptocurrency use cases like decentralized finance, metaverses, self-sovereign identity and Supply chain tracking each represent billion dollar plus global markets.

Bitcoin’s potential as digital gold gives it market potential measured in the trillions for disrupting gold and banking ecosystems. NFT marketplaces have seen exponential growth in their addressable digital collectibles and creator economy markets.

Comparing adoption in context of TAM showcases meaningful penetration runways. Even 1-10% adoption connotes exponential value potential for the native assets underpinning cryptocurrency powered markets.

Network Effects

Network effects occur when increased numbers of users or participants on a platform make it exponentially more useful and valuable for every subsequent user.

  • Evaluating early traction and user growth provides perspective on adoption lifecycle positioning for users, developers, institutions and enterprises.
  • Transaction counts and activity metrics signal strengthening network effects taking hold.
  • Integration partnerships expanding use cases also showcase network effects forming across organizations.
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Bitcoin and Ethereum have established strong lead network effects over years which newer Layer 1 chains are trying to replicate through incentives for swapping ecosystems. Integration use cases like Visa crypto debit cards demonstrate widening interoperability expanding utility and cohesion.

Analyzing inflection points in user growth curves quantifies strengthening network effects and consequent lock-in barriers.

Roadmap & Strategy

Evaluating technology roadmaps provides visibility into planned features and development timelines:

  • Comparing roadmap ambitions against currently released capabilities flags realism or hype regarding teams overpromising.
  • Analyzing roadmap priorities demonstrates channeling of resources towards network’s target use case objectives.
  • Reviewing high level roadmaps conveys foundational build outs while granular product roadmaps offer detailed feature scoping.

Enterprise partner timelines expand insight on development goals and priorities applied towards delivering staking, identity, compliance and privacy focused capabilities.

Roadmaps showcase strategic visions which still require successful execution in ever-evolving decentralized landscapes. Planned features can anchor long term milestones for continually reassessing development traction.

Analyzing market positioning and competitive standing provides benchmarks for framing adoption potential as cryptocurrency platforms mature across target use cases. Evaluating development roadmaps in context of market opportunity flags consistency between long term ambitions and addressable market viability.

Evaluating Technology Capabilities

Under the hood, cryptocurrency platforms comprise intricately designed software protocols with specific technological tradeoffs catering towards target applications.

Consensus Protocols

The consensus algorithm secures transaction processing and distributed data transmission for determining the canonical truth on all nodes within a cryptocurrency network.

Different models carry distinct decentralization tradeoffs between security, scalability and computational costs:

  • Proof of Work depends on computationally intensive cryptographic puzzle solving using hardware mining rigs to process and validate transactions while securing the network immutably through cumulative hashpower. Bitcoin and Litecoin rely on PoW consensus which struggles scaling transaction throughput but offers strongest security guarantees.
  • Proof of Stake allows network participants to validate transactions and sign blocks based on locking up stake amounts to demonstrate commitment towards upholding network security and liveness. Ethereum is transitioning to PoS which enables far greater energy efficiency albeit necessitates complex staking tokenomics balancing security, stake participation rates and minimum requirements.
  • Delegated PoS and innovative hybrid models like Solana’s Proof of History introduce greater scalability and efficiency tradeoffs relying on fewer but still decentralized validator set infrastructure and parallelized innovation in cryptography and networking stacks.

Analyzing the game theoretic dynamics and protocol capabilities demonstrate how competitive strengths address consensus shortcomings. Economic, computational and scalability realities constrain realizing the trilemma so analyzing the right balance weighs favorable tradeoffs.

Architecture & Documentation

Evaluating the software architecture powering blockchain protocols and applications provides technical due diligence:

  • Perusing documentation like technical yellow papers and GitHub code conveys capabilities to experts for reviewing standards legitimacy.
  • Most networks run open source code allowing scrutiny which aids credibility through transparency by developers and researchers.
  • Analyzing modular architecture demonstrates effective abstraction between consensus, transaction processing, virtual machines, RPC interfaces and networking layers.

Code quality, testing coverage, documentation completeness, security audits and modular architecture communicate capabilities meeting reliable software development standards.

Scalability

Network scaling conveys capabilities supporting higher throughput for transactions, data capacity and compute:

  • Comparing transaction per second processing and block sizes offers insight on baseline performance and congestion likelihoods during peak demand.
  • Roadmap scalability research around blockchains and sharding demonstrates lateral advancements for complex computational trilemma tradeoffs.

OMG Network and Bitcoin Lightning leverage Layer 2 scaling through payment channels while Polkadot and Cardano pursue Layer 1 advancements around parallel chains and sharding which carry security considerations with higher validation costs.

Scaling often necessitates decentralization tradeoffs evaluating correct balance fitting use case constraints.

Security & Testing

Objectively evaluating consensus rules and cryptography means assessing resilience against risks like coordinated hacking attacks, network spamming and protocol governance misconfigurations:

  • Reviewing documentation provides threat models conveying attack surface awareness by developers.
  • Security audits by independent firms like Trail of Bits provide third party validation testing core components.
  • Assessing incident histories examining severity of issues and response demonstrates viability of safeguards and crisis responsiveness by stakeholders.

Stringent testing and auditing combined with reliable encryption, key management and sufficient funding conveys capable institutionalization.

Analyzing technology architecture and design decisions reveals engineering priorities made to address cryptocurrency network needs. Testing and reviews enable deeply understanding unique capabilities, limitations and risks inherent to each model.

Evaluating Adoption Metrics and Use Cases

Progress tracking quantitative adoption indicators conveys product-market fit translating platform capabilities towards real world usage:

User Activity

Active wallet growth and transactions showcase expanding utility:

  • Comparing monthly active wallets over time gauges engagement trajectories demonstrating sticky retention beyond speculation.
  • Transaction counts by use case quantify adoption and spot surges signalling awareness and interest even amidst price volatility.
  • Daily transfer values assess grassroots peer-to-peer exchange viability against competitors.

Spikes in exchange traffic and wallet installations showcase speculative mania effects drawing new entrants during bull markets alongside steady base transaction flow indicating real world usage.

Analyzing user activity metrics over multi-year timeframes smooths cyclical bubbles for assessing sustainable adoption trends.

Enterprise and Institutions

Large scale institutional participation expands cryptocurrency validation across various use cases through trusted intermediaries:

  • Evaluating partnership announcements reveals integration roadmaps by major banks, payment processors and tech giants supporting capabilities primed for mainstream.
  • Assessing CME futures open interest or Grayscale AUM (assets under management) gauges institutional investment demand.
  • Trading volume flow from exchanges like Coinbase convey retail trader participation likely to persist despite regulation.

Increasing Financialization from major traditional institutions signals that conventional incumbents acknowledge some technological competitiveness merits despite structural inertia. However, disintermediation disruption potential may displace current profit structures.

Analyzing the pace of growing integrations helps gauge the duration adoption time cycles ahead as institutions progressively legitimize crypto through services consumption even if reluctantly at times.

Use Cases Analysis

Evaluating applications which drive utility measures how effectively capabilities match addressable needs:

  • Coin Supply as transaction medium necessity for powering on-chain app economies conveys baseline viability.
  • Staking for consensus participation, governance rights and yield promotes holding coin stakes taking supply from circulation.
  • Decentralized Finance scales community owned open source software banks improving efficiency and interoperability.
  • Metadata standards like ERC-721 enable trustless exchange of digital assets like art and collectibles with verification and scarcity.
  • Computation and storage resource monetization allows renting decentralized cloud services by the minute across a shared economy.
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Assessing metrics like Total Value Locked (TVL) in DeFi apps quantifies stakeholder commitment while growing developer mindshare improves future capabilities launching further advanced applications.

Expanding use cases and integrations signal technology delivering against promises to meet user needs through continually evolving applications. This pulls greater utility demand and adoption for the native assets like ETH collateralizing interactions by users and developers.

Reviewing adoption indicators over a trajectory offers perspective on product-market fit validation across core cryptocurrency use cases while deeper analysis verifies capabilities consistency claims enabling those applications.

Evaluating Community Support

Grassroots community momentum drives cryptocurrency development and its decentralized ethos:

Developer Communities

Quantifying technology contributor momentum conveys progress sustaining software development:

  • Monitoring developer activity on community forums spots trends in problem solving conversations which guide roadmap priorities to address needs.
  • Tracking GitHub code activity frequent commits, contributors and closed issues indicates reliable maintenance momentum.
  • Analyzing code additions and deletions measures feature scope delivery towards improving platform capabilities.
  • Higher bug bounties incentivize identifying security threats for ranking severity to enabling fixes by core teams.

Consistent developer participation momentum sustains improving network capabilities and conveys community stability supplemented by well funded core software organizations.

Social Sentiment & User Experiences

While whitepapers proclaim intended capabilities, user commentary qualifies actual utility delivered:

  • Reddit and Twitter often host initial user reactions during network events which quantified through sentiment analysis monitors overall perceptions.
  • Analyzing medium posts and youtube reviews gauges detailed experiences covering nuances missed by milestone based reporting.
  • Addressing complaints across transaction speeds, fees and platform intuitiveness gives grounds to improve mainstream accessibly.
  • Surfacing friction points around key flows like onboarding, transfers, staking and dApp usage sustains participation through refined user experience.

Community feedback channels capture candid perspectives across diverse users and market conditions spotlighting platform shortcomings needing iteration beyond marketing claims. Persisting issues left stagnant risks alienating supporters unable to advance core value.

Analyzing public developer and user engagement acts as a qualitative pulse check on technological progress translating to utility gains felt by network participants beyond price fluctuations. Sustained community participation supports constantly improving cryptocurrency capabilities staying at frontier of adoption.

Fundamental Analysis of On-Chain Signals

While technical analysis studies price chart patterns, fundamental analysis assesses intrinsic project health through blockchain data:

Analyzing Coin Distribution

Token distribution conveys centralization risks in assessing true circulating supply holding concentrations:

  • Reviewing the genesis block coins allocation provides transparency on founding team vs public sale distributions while marking vesting schedules.
  • Distributions skewed too heavily towards teams and VCs may reflect profiteering motives over decentralization principles.
  • Assessing wealth concentration among largest holders flags censorship risks if coordination significantly damages integrity and governance.

Concentrated holdings among a few “whales” contradicts decentralization so progressive community distributions uphold incentives alignment sustaining network growth.

Analyzing coin distributions demonstrates actual free float market capitalization and circulating supply levels accounting for ambiguous vesting schedules. This further examines fair initial allocation balances between capital investors and public contributors supporting the cryptocurrency’s purpose.

Transaction Data Metrics

On-chain data offers robust signals for analyzing user activity and protocol health:

  • NVT ratio (Network Value to Transactions) measures market cap overhead relative to network usage level valuation signals. Lower ratios reflect undervaluation at current adoption.
  • Daily active addresses signals daily engaged user growth through comparing native transactions against external dApp ecosystem usages.
  • Monitoring gas costs and circulation ratios on blockchains quantifies user demand momentum placing capacity constraints. Higher utilization risks congestion and stifling adoption.

Evaluating blockchain usage against network valuations highlights maturity progression across adoption cycle spectrum – spanning early stage experimentation, mid stage proven capabilities ready for saturation usage demand influx and late stage subdued stagnant activity. What stage a network sustains clarifies upside as momentum continues maturing.

Analyzing on-chain signals contextualizes user driven value realization quantified through network fundamental activity counterbalancing pure speculation inennial to market price cycles.

Technical Analysis

While cryptocurrencies carry more variable fundamentals than traditional assets, assessing historical patterns guides short term performance probabilities:

Price History

Reviewing long term daily charts framed against key capability launch milestones conveys adoption value realization pacing:

  • Comparing against timeline of mainnet launches tests consistency between community expectations and actual deliverable pace limiting adoption.
  • Plotting multi-year support and resistance levels demonstrates investor conviction through repeated commitment despite testing macro conditions.
  • Adding moving averages demonstrates data-backed floor and ceiling frontiers used by algorithmic funds for automated rebalancing strategies.

Historical price charts contextualize community sentiment fluctuations in response to headliner events and changing blockchain fundamentals.

Indicators & Patterns

Indicators analyze mathematical combinations of price and volume metrics to generate trading signals based on historical outcomes:

  • Oscillators like RSI measure momentum gains and overheating risks signaling reversal likelihoods for entry and exit timing guidance.
  • Moving averages form dynamic support and resistance to identify directional biases monitored for crossover trend change signals.
  • Ichimoku cloud indicators project equilibrium zones where valuations balance speculation against demonstrated adoption utility.
  • Classic reversal chart patterns like head and shoulders formations signal overextension peaks while double bottom patterns mark accumulation basin bottoms.
  • Using fibonacci retracements overlay identifies phycological thresholds likely to retest prior resistance and supports.
  • Charting wedges and channels highlights sideways consolidations signaling continuation breakout momentum building.

Combining indicators analysis with pattern recognition theorizes probabilistic price projections. Still, exceptions occur frequently within volatile crypto markets so relying on confluence across multiple signals improves outcome reliability.

Technical analysis quantifies investor perception metrics to assess entry and exit thresholds informed by historical precedents. Price sustained outside bounds of anchored averages or established patterns signals sentiment shifts as acceptance transfers towards new equilibrium revaluing cryptocurrency assets relative to changes in demonstrated capability and community confidence.

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Evaluating Team & Governance Centralization Risks

The teams contributing to cryptocurrency development, promotion and governance uphold maintaining long term viability:

Backgrounds & Pedigrees

Development team credentials provide credibility:

  • Academic research affiliations like peer reviewed papers lend scientific validation to cryptographic protocols design methodologies. Multiple PhD researchers conveys cutting edge advancements.
  • Previous expertise founding software companies demonstrates business track record executing ambitious technology visions at scale.
  • History contributing code to other reputable open source crypto projects conveys reliable capabilities.

Founder pedigree from top universities, proven entrepreneurship records and strong technical skills established credibility executing complex cryptographically secure distributed systems.

Governance Centralization

Evaluating centralization risks around development and governance conveys adaptability towards ecosystem changes:

Many early cryptocurrency protocols like Bitcoin and Ethereum established credible decentralization through alumni teams supported by diverse global open source contributors and community forums enabling open progress tracking.

Analyzing voting power distributions determines whether governance privileges or development milestones understand community needs or mainly serve leadership profit motives above purpose. Equal voting rights conveys decentralization whereas concentrated insider control raises censorship risks long term if community voice drowned.

Funding allocated towards enriching executives over advancing technical ambitions signals misplaced priorities that limits adapting to community complaints and falling behind competitor capabilities. Resources should enable hiring engineering, research and adoption talent.

Assessing influence centralization by leaders estimates resilience sustaining equitable and decentralized progresses in face of greed, controversy or shifting external regulatory landscapes.

Risk Analysis of Cryptocurrencies

Beyond breakthrough potential, evaluating risk across volatility, regulation and market correlations gauges portfolio suitability:

Market Risk

Extreme price swings makes cryptocurrencies highly speculative:

  • Volatility measured by beta against benchmarks like S&P 500 allows estimating relative fluctuation risk compared to stocks.
  • Left fat tail distribution means disproportionate downside risks require strong risk management. Conditional value at risk (CVaR) analysis quantifies drawdown potential impact.

Volatility arises from sensitivity to adoption news cycles amidst massive liquidity mismatches as most holders refuse to sell positions despite 90%+ drops during bears as enthusiasts brace for long term. Still, relentless volatility taxes conviction posing bankruptcy risks leveraging futures.

Analyzing volatility suitability against personal risk tolerance thresholds informs portfolio allocation positioning.

Liquidity Risk

Thin real volume despite reported market caps means limited demand exists to support exits from large positions:

  • Bid ask spread differentials highlight insufficient order book depth for major traders to enter or exit without significant slippage losses from indicated prices.
  • Lower market cap alternative cryptocurrencies face delisting risks losing key exchange access necessary for trades.

Analyzing true liquidity requires aggregating real volume across platforms to benchmark against market caps and daily traded values.

Despite valuation trophy sizes, liquidity shortfalls mean cryptocurrencies remain unsuitable for short term institutional allocation requiring overnight liquidation capabilities until market cap totals scale 10X with greater trading infrastructure.

Regulatory Uncertainty

Evolving global legislation reckoning with applying existing frameworks or crafting new policies towards cryptocurrencies creates questions around legal classifications and tax implications:

  • Ongoing lawsuits against asset categorization as securities or currencies split implications for exchanges and traders navigating compliance obligations.
  • Uncleared tax guidance around loss deductions, realized gains rates and claiming stakes leaves investors wary of misreporting implications.
  • Anonymized transactions may undergo deanonymizing chain analysis by authorities investigating suspicious activities.

Cryptocurrencies exist across a spectrum – from Bitcoin’s apparent commodities classification to asset token cases likely meeting investment contract criteria. Assessing project decentralization qualifies likelihood of avoiding securities designations but outcomes stay unpredictable pending litigation and legislation changes.

Analyzing legal ambiguityquantifies regulatory risks to inform portfolio weighting cautiously limit exposure given enforcement history against earlier perceived transgressions. Monitoring compliance updates helps navigate operating model adjustments needed to satisfy changing requirements by various global authorities.

Evaluating cryptocurrency volatility, liquidity gaps and unclear regulations allows balancing portfolio allocation sizes given individual risk appetite for assets operating across regulatory gray areas. Limiting position sizing curbs fallout from fast markets, liquidity traps or legal rulings applying suddenly without recourse.

Key Takeaways for Cryptocurrency Evaluation

Evaluating cryptocurrencies requires analyzing qualitative and quantitative factors assessing technology viability, adoption progress and community support momentum across core use cases.

Careful benchmarking against the current competitive landscape is necessary for determining project positioning. Comparing addressable market sizes conveys expanding opportunity windows as global awareness accelerates.

Analyzing developer activity and social sentiment qualifies community health driving ecosystem growth through grassroots support and External Validations by institutions signal increasing legitimacy.

On-chain data fundamentals contextualize speculation likely ahead of demonstrated value. Technical analysis quantifies probabilities playing out adoption hype cycles. Teams and governance structures balance advancing decentralization without crippling efficiency.

Risk management evaluations across volatility, liquidity and regulatory fronts determines appropriate portfolio exposure limits relative to individual preferences.

Ongoing monitoring against evaluation factors provides continual conviction reassessments as project prospects and crypto markets evolve overtime. No single perfect methodology exists beyond dynamically evaluating cryptocurrencies from multiple perspectives.

Staying objective without emotional or tribal biases allows adapting analysis frameworks as innovation disruption brings new opportunities and risks. Rather than one time static picks, active rebalancing warrants prudent portfolio management guiding investments towards fiduciary rationale.

With rigorous evaluation, cryptocurrencies carry both incredible potential and risks meriting careful analysis tailored to personal strategy. Their ever evolving nature offers little certainty beyond anticipating continued frontier innovation as this asset class continues maturing.

Evaluating cryptocurrencies enables informed conviction weighed against rational skepticism for determining portfolio merit worthiness by analyzing current adoption realities against projected capabilities.