How To DYOR
(Do Your Own Research )
The purpose of DYOR is to answer two questions:
- Is the project real/legitimate?
- Is the team capable?
I only invest in a project if I believe the answer to both questions is ‘yes’. Otherwise, I pass.
The areas I focus my research on:
- Use case
By the time I’m done researching these points, I’ll have 80% of the information I need to decide if the project is worth investing in.
Let’s go through each of them now.
The first question I’ll ask is: What does the project actually do?
This might seem like an obvious question, but you’d be surprised at how often people buy a token without having a clear answer.
Take Dogecoin for example. At this time of writing it has a $16 billion market cap, yet many of its holders have no clear idea about its purpose.
I hope I don’t have to tell you, but this is not good investing practice; You need to know what it is exactly you’re investing in.
Another reason you need to understand the use case of the project is because it gives a clue as to how much it can be worth if it gains traction.
For example, a new blockchain might be expected to grow to a minimum $5 billion market cap, while a new lending platform might only be expected to grow up to a maximum of $1 billion. The valuation range of a project depends on what it does (i.e. its use case).
In other words, the use case of a project determines the upper limit of its market cap.
One of the first things I do when looking into a project is to get a sense of its potential market cap. And the simple way to do this is to compare it with similar, more mature projects.
For example, if I’m researching a new lending platform, I might compare it with the largest one in the space, Aave. At this time of writing, Aave has a market cap of $1.6 billion, so I might forecast an upper limit of this new project to be around $500 million. There’s no hard-and-fast rule to this estimate - just use common sense based on what you know about the project.
Next, I consider how much more the project’s market cap can grow from where it is currently. If it is not substantial (say, around 4x), I’ll typically give it a pass.
Note: The real "use case" of a crypto project is not always straight-forward.
Take NFTs like CryptoPunks or Board Ape Yacht Club, for example.
On the surface, they seem to be just simple pieces of digital art...
So why are they worth over 6 figures each?
You see, people who think their purpose is art have misunderstood the value of these NFTs.
In reality, these NFTs are not so much valued for their artistic qualities, but more so for community and status signaling.
It’s the same reason people pay stupendous amounts of money for branded goods in the real world – to show off and be part of the ‘in’ group!
Certain NFTs/projects are being valued at ridiculous prices today for the same reason.
The better you understand the true value of a crypto project, the better you’ll be at estimating its potential market cap.
Here's another helpful question to ask:
> Is the token necessary?
Many crypto developers are just in the space to ‘get rich quick’, and they attempt to do this by taking normal software and blindly adding a cryptocurrency into it.
The idea here is to capitalize on the ignorance of laymen and get rich by selling them these tokens.
The most prominent example of this is Binance (the centralized exchange). Its founder, CZ Peng, took the idea of a centralized exchange, incorporated an unnecessary token (BNB) into it, and became a billionaire in seven months.
This isn’t to say that Binance isn’t a valuable platform (it is). That’s not the point.
The point is to consider whether the token is a necessary component of the project.
Simply ask: Can the project function without the token?
In the case of Binance: Can the exchange fulfill its function without the BNB token?
I’ll save you time: The answer is yes. The entire supply of BNB can disappear tomorrow and the Binance exchange will continue to work just fine.
In other words, the main purpose for the creation of BNB was for the founder to sell it for cash. It serves a secondary function of lowering transaction fees, but it does not impact the platform function in any way.
The problem with this is that even if the project becomes successful, most of the value will not be captured in the price of the token; The success of the project is not tightly linked to the token price.
Now let’s consider a different project: Bitcoin.
Going through the same thought process, we find that BTC (the cryptocurrency) is integral to how Bitcoin (the network) works. If you remove BTC from the network, it will fail to function.
In this case, the success of the Bitcoin network is directly tied to the price of BTC. The more popular the network gets, the higher the BTC price gets.
So summarize the point, when assessing the use case of a crypto project, I'll ask:
- Is the token necessary at all?
- How closely is the token price tied to the success of the project?
The answers to these questions will not be spelled out conveniently for you; You’ll have to dig into the project and find out for yourself.
Thankfully, most of the info can be uncovered from the official documentation (whitepaper) or by asking around the project Discord/Telegram chat rooms.
The best projects to invest in are those that introduce something new; A new process, a new result, a new way of looking at things. They offer innovation in an area that people care about.
This is the ideal type of project to research into. Such trailblazer projects will have no competition for some time.
Unfortunately, such gems are few and far in between. For the most part, new projects tend to be blatant copies of another project that has already gained traction. And, most likely, it won’t be the only one; Clone projects are common in this business.
The Olympus Fork era
In autumn 2021 attention started to grow around Olympus, a DeFi platform that, up until that point, had mostly flown under the radar.
From Aug - Oct, the price of the Olympus token (OHM) rallied from $250 to $1,250, a 400% increase in just 8 weeks.
The rapid success of Olympus sparked an explosion of clones (forks) as developers across various blockchains copied and deployed the project in hopes of striking it rich.
By some estimates, there were as many as 30 Olympus forks at the time.
One reason Olympus attracted so much attention was because it introduced a novel way for DeFi protocols to improve the retention of liquidity on their platform.
The DeFi industry was buzzing as everyone wanted to get in on this “revolutionary” new innovation. One of the most popular forks, Wonderland, saw the price of its TIME token rally 12x from Sep - Nov 2021.
Some people got rich from investing in Olympus forks, but many got burned because the price of those tokens subsequently crashed.
So… are clone projects worth investing in?
Well, it depends. If you’re new to crypto you’re probably better off avoiding them.
But if you have a keen grasp of market sentiment and have the discipline to get out while the going is good, clone projects can be a good source of high returns.
The key factor here is timing. You need to know when to get in, and when to get out.
To ‘time’ your investment well, here are some considerations:
> How early are you? How crowded is the space?
As a rule of thumb, you want to join the “new innovation” trend as early as possible. The fewer clones that exist (at the time of getting in), the better.
Personally, I only invest in projects that are the first or second in the space (before the mass of clones show up). This allows time for the project to capture significant market share before the clones start overcrowding the space.
One major benefit of getting in early is the low entry price; This is a huge advantage that cannot be overstated.
Imagine getting in on a project at $1/token, and the price goes up to $10, netting you a 10x return. If you were a little late and got in at $3 instead, your return would be only 3.3x! This is a huge difference.
> What's the market cap of the project?
The lower the market cap of the project, the earlier you are. This, of course, assumes that the project is legitimate in the first place.
Never forget that the crypto industry is littered with scams and rug pulls. Just because a project has a low market cap, doesn’t mean it’s a good investment!
Here’s my rule of thumb: I only invest in projects that I believe can easily 2x (in market cap) from the time I enter, and potentially 4x or more.
Investing in small cap projects is risky, so payoff must be large enough to be worth it.
> How much uncertainty can you tolerate?
In practice, you’ll have to strike a balance between taking time to thoroughly research a project, versus investing early.
The more time you spend on research, the more certain you can be about the project. But the more time you spend on research, the more likely the price of the token goes up, and the lower your potential gain from it.
In the end, you’ll have to decide on the balance you’re willing to tolerate between certainty and return.
The price of every token is determined by demand and supply.
While demand is difficult to anticipate, supply can be reasonably anticipated because every legitimate project will describe its token emission (i.e. token creation) schedule in its whitepaper.
This is essentially what Tokenomics is about: token supply.
Keep in mind that all tokens are created from nothing, and they are only worth what someone will pay for it.
Virtually every crypto project will launch its own token because it’s the easiest way for developers to fund the development of the project and pay themselves.
When you participate in a token launch sale (pre-sale, token mint, etc), you are essentially paying the developers for a chance to profit from the potential price appreciation of the token.
When you study the tokenomics of a project, you are in essence trying to estimate the likelihood of making money after buying the token.
To give an extreme example, imagine a project with a token price of $1/token, where 100 million tokens will be emitted (created) every month. Would you buy this token?
I hope you said ‘no’, because the supply dynamics (i.e. tokenomics) is horrible.
Here’s why: With 100 million tokens created each month, a minimum of $100 million is required to buy the token every month just for the price of the token to stay at $1. This is unsustainable and the price of the token will quickly crash due to the lack of fresh funds buying the token.
So when researching into a crypto project, make sure you understand the following:
> Max token supply
Is there a hard cap to the number of tokens that will ever be created? Or is there no limit to the token supply?
> Token emission/inflation rate
How quickly are the tokens being created? The faster they’re being created, the more likely the price of the token will end up falling. A rapidly increasing token supply is generally bad for its future price.
> Token burn mechanisms
Many projects have built-in 'token burning' mechanisms. This simply means that the project has incorporated processes that permanently “destroy” a certain amount of tokens. The more tokens burned, the better it is for the sustainability of the token price.
> Token distribution
How much of the token supply is given to insiders (development team, seed investors, etc)? Typically, this ranges from 10% - 20%.
In my view, the larger the percentage, the less confident the team is about the future of the project.
Think about it this way: If the team truly believes that the project can grow to a large market cap, they would be happy even with just 10% of the tokens (eg. 10% of $500 million is $50 million).
So when I see a project where the insiders give themselves a significant amount of tokens (say, >20%), I get wary. It suggests that the developers may not have conviction in the long term future of their own project.
Some teams try to hide the fact that they’re giving themselves a large portion of the token supply by using vague terms. Example:
This is the token supply breakdown of a project that shall remain nameless (this pie chart was taken from their whitepaper).
On the surface, it looks like the team is allocating 22% of the tokens to themselves.
Upon closer inspection however, notice that they are also giving themselves tokens in the form of ‘Marketing’ and ‘R&D’ (sneaky sneaky!)
And, keep in mind that the team may have full control over the ‘Treasury’ component as well.
This means that, in effect, the team is awarding themselves a minimum of 35% of the entire token supply, and potentially up to 50%! For every $1 you invest in the token, $0.35 - $0.50 goes directly into the team’s pockets.
This is a big red flag because the team is barely incentivized to make the project succeed; They 'll already gave gotten rich from selling the tokens!
Always remember: many developers are only looking to get rich quick, and have no real interest in building a solid project that can stand the test of time. As a potential investor you should always be mindful of this risk and be wary of teams that allocate a large amount of tokens to themselves.
> Token vesting/unlocking schedule
To prevent insiders from dumping their tokens soon after the project launch, there is often a time period within which they are not technically able to sell. This is called a vesting or unlocking period.
What happens here is that the tokens are released to the insiders over time in small batches, rather than all at once. The purpose is to reduce the price impact of them selling their tokens the moment they receive them.
All else being equal, the more gradual the unlock (the longer the vesting period), the better it is for the token price.
> Token holding benefits
The more reasons there are for investors to hold the project token (rather than sell it), the better.
As such, many projects incorporate a ‘token staking’ mechanism where one can stake the token to receive a yield on it. Think of it like a “bank deposit” for tokens, where you deposit your tokens into a smart contract, and earn interest on your deposit.
Many projects will also offer governance rights, whereby token holders can vote for policies regarding how the project is run.
The more attractive it is to hold the token, the less people sell the token and the better it is for the token price.
The 2 main reasons for understanding the tokenomics of a project are to (1) discern the intentions of its founders, and to (2) get a sense of the sustainability of the token price.
The basic questions to ask are:
- How easy have the developers made it for themselves to exit the project for a big pay day, right after retail investors (i.e. you) have bought into it?
- How likely is the token price to stay up, as opposed crashing?
The answers should determine your investment plan for the project, and if you should even invest in the first place.
You can learn about the tokenomics details of every project from:
It goes without saying: the development team is a critical component of any crypto project.
When researching a project, there are essentially two things I want to know about the dev team:
- Is the team honest?
- Is the team capable?
If the answer to either of these questions is ‘no’, I will not invest in the project. Both answers need to be ‘yes’ for me to be interested.
Obviously, there’s no way to be 100% certain, but one can get pretty close to the truth by considering these factors:
> Is the team doxxed?
Right now, the industry standard is for developers to remain anonymous. So if the devs reveal their real-life identity, there’s a good chance they do not have malicious intentions.
> Does the team have prior tech/crypto achievements?
The crypto industry is relatively young, and most developers have little experience in the space. As such, those who have previously worked on successful projects are valuable members of the team. Industry experience counts for a lot.
> How much effort has been put into the website/whitepaper?
This is a simple, but commonly overlooked factor. The more professional/detailed the official website and whitepaper, the better. I’ve avoided a number of rug pulls and protocol exploits simply by following this guideline. If the team hasn’t put effort into the frontend, they probably haven’t been conscientious with the backend either.
> Is the project backed by professional investors?
One way to shortcut your research into the team is to check if any prominent investors have bought into the project. Their names are typically mentioned on the project website.
Professional investors are required to do their due diligence into the team before investing in the project. So if they’re willing to back it with their capital, it’s likely that the team is legit.
For example, Platypus is a stableswap protocol on the Avalanche blockchain. The identity of its founder is unknown to the public, but the project was given a grant by the Avalanche team. This significantly boosts the credibility of the Platypus team, as the Avalanche team would have certainly done their due diligence on them (and stand to lose a lot if they didn’t).
> Does the team answer difficult questions in a transparent way?
Most teams will hold ‘Ask Me Anything’ (AMA) events where community members can pose questions to them. Experienced crypto enthusiasts often attend these AMAs to have their doubts clarified, and the team’s reply will often reveal a lot about their capability, character and vision. Attend as many of these AMAs as you can.
> Has the project code been audited by a neutral and respected third party?
Audits are not 100% foolproof, but they’re better than nothing. Make sure the audits have been carried out by reputable organizations.
> Is the treasury secured by multisig?
This simply means that the project funds are not subject to the whims of a single person. Before the funds can be transferred to another wallet, certain key people must sign off on it. Ideally, the multisig members should not all be from the project dev team (to avoid collusion).
The community behind a project is a critical factor that can ‘make’ or ‘break’ it.
As a rule of thumb: the more devoted the community is to the project, the better.
A telltale sign of an irrationally obsessed community is when someone makes a skeptical yet rational argument about the project (say, on social media), and gets verbally attacked without having any of his points getting addressed.
In almost any other situation, this would be a red flag. In altcoin investing however, this is a big green flag. The more stubborn people are about supporting the project (regardless of the facts), the better. You don’t want to be one of these people, but you want them supporting the project you’re in.
Alas, the time will come to sell your investment, and these are the people that will be your exit liquidity. They will buy your inflated bags and HODL them all the way down the next trough, convincing themselves that they are "long term investors".
Again, you don’t want to be one of these people; You just want them supporting the project.
Here are some of the things I pay attention to when assessing a project’s community:
> Social media subscriber growth & engagement (Discord, Telegram, Twitter, YouTube)
Most projects run social media channels where the dev team and community members can interact. Keep track of how quickly the member count in these channels is growing.
Sometimes, these channels are filled with bots so pay attention to how lively these channels are. Obviously, the more frequent/lively the discussions, the better. If you see a channel with a large number of members but very few discussions, it’s probably filled with bots; Avoid these projects.
Twitter is a major social media platform in crypto, so if you have yet to join it, do so ASAP. Look for the main Twitter profiles/tags related to the project and follow them. Observe the depth and tone of the discussions between these accounts. This will give you a good idea of how engaged the community is.
Another tell-tale sign of a good project is the number of independent YouTube channels that pop up, and are dedicated to talking about the project. (Note: I’m not talking about crypto influencers that shill a different project each week; I’m talking about channels that only talk about one or two projects exclusively.)
I hope I don’t have to detail what a lively, engaged community looks like. When you come across one, it’s obvious.
Example of shallow, low engagement discussion:
Example of deep, high engagement discussion:
A commonly overlooked factor is the liquidity of the project token.
Some tokens are highly illiquid and suffer significant slippage when you sell them (especially if you’re investing 6 figures or more).
If the project isn’t too obscure, you should be able to search for its trading volume on Coinmarketcap or Coingecko.
Before loading up on a project token, make sure there’s sufficient liquidity for you to easily exit when the time comes to sell.
The primary purpose of DYOR is to answer a single question:
- How safe is it to invest in the project?
The best way to answer this question is to break it down into two smaller ones:
- How honest is the team?
- How competent is the team?
The information you need to answer these questions is scattered across the web, and you'll have to look for them; They won't be found neatly packaged in one place.
Such is the “wild west” that is crypto today. You have to actively search for the information you need to make timely decisions.
You'll get some of the best info from:
- the project's whitepaper
Be sure to join all social media channels, observe what the community is saying, ask questions, and try to make sense of what's going on.
With practice, you'll quickly get a sense of how "safe" it is to invest in a crypto project.
- What does the project actually do?
- What's the potential market cap for this type of project?
- Is the token necessary for the project to run?
- How closely is the token price tied to the success of the project?
- Does the project introduce something new? Or is it just a clone/fork?
- How many clones already exist in the market/industry?
- What's the current market cap of the project?
- Can the project easily 2x its market cap from here?
- Can the project justifiably 4x its market cap from here?
- What's the token supply cap?
- What's the token emission rate?
- What are the token burn mechanisms (if any)?
- What does the token distribution look like?
- What does the token vesting schedule look like?
- Are there benefits for holding the token?
- Is the team doxxed?
- Does the team have prior achievements?
- How much effort has been put into the website/whitepaper?
- Is the project backed by prominent/professional investors?
- Does the team answer difficult questions in a transparent way?
- Has the project code been audited by a neutral and respected third party?
- Is the treasury secured by multisig?
- How devoted/obsessed is the community to the project?
- How quickly is the social media subscriber count growing?
- How lively/deep are the discussions about the project?
- Are there independent YouTube channels being created about the project?
- How easily can you enter/exit an investment position without suffering excessive slippage?
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