🧑🏫Research & Evaluation
It’s essential to conduct thorough research before participating in token sales, purchasing NFTs, or investing in projects. The phrase "Do Your Own Research" (DYOR) is commonly emphasized to help protect participants from risks such as scams, poorly designed tokenomics, or unsustainable projects.
How to DYOR (Do Your Own Research)
Understanding the Project
Whitepaper
The whitepaper is a foundational document that outlines a project’s vision, technology, tokenomics, and roadmap. Key elements to focus on include:
Project Vision: What problem is the project trying to solve, and how does it intend to achieve this?
Technology: What blockchain is it built on, and what unique technological aspects does it offer?
Tokenomics: How are the tokens structured, and what role do they play in the ecosystem?
Roadmap: What milestones has the project set for itself, and do they seem realistic?
Team and Advisors
Investigate the background of the founding team and advisors to ensure they have the necessary experience to execute the project.
Previous Experience: Have the founders and advisors worked in successful blockchain projects or relevant industries before?
LinkedIn Profiles: Verify the team's presence on professional networks like LinkedIn to ensure legitimacy.
Public Engagement: Are the team members publicly active in the community, participating in AMAs or speaking engagements?
Tokenomics
Tokenomics refers to the economics behind the project’s tokens, including how they are distributed, their use cases, and their long-term sustainability.
Total Supply: How many tokens are available? Is the supply capped or uncapped?
Distribution: What percentage of tokens are allocated to the team, investors, and the community? A high allocation to insiders could be a red flag.
Vesting Period: Does the project have a token vesting schedule for team members to prevent sudden token dumps?
Community and Social Proof
Community Engagement
A strong, engaged community can be a positive sign that a project has long-term potential.
Telegram, Discord, Twitter: Is the project active on these platforms? Are they responsive to questions and concerns from the community?
Follower Quality: Ensure the community isn’t filled with bots or low-quality accounts by checking the level of engagement on posts.
Social Media Presence
An active, transparent presence on social media platforms is crucial for building trust with potential investors.
Regular Updates: Does the team regularly update the community on the project's progress?
Transparency: Are they transparent about the challenges they face, or do they only share positive news?
Red Flags
Be cautious of:
Over-Hyped Promises: If a project guarantees profits or makes exaggerated claims about future success, proceed with caution.
Fake Followers or Engagement: Large numbers of followers with little to no engagement can indicate a lack of genuine interest.
Technical Evaluation
Code and Security
If the project is open-source, review its codebase or see if it has been audited by reputable security firms.
Open-Source Code: Projects that publish their code publicly are typically more transparent.
Smart Contract Audits: Check whether the project’s smart contracts have been audited by third-party security firms. Projects with unaudited code may carry additional risk.
Partnerships
Partnerships with established companies, platforms, or influencers can be a good indicator of a project's legitimacy.
Industry Partnerships: Look for partnerships with respected blockchain platforms or companies.
Collaborations: Are they working with other DeFi projects or ecosystem builders that can add value to their platform?
How to Use This Information
Once you’ve gathered information about a project’s fundamentals, team, tokenomics, community, and technology, the next step is forming an educated opinion.
Risk Tolerance: Consider your own risk tolerance. Are you comfortable with the risks involved, or does the project seem too speculative?
Long-Term vs. Short-Term: Decide whether you’re interested in the project for the long term or looking for quick gains. Many successful projects take time to mature.
Diversify: Spread your investments across multiple projects to reduce the risk of a single project failing.
Tip: Never invest more than you can afford to lose, especially in highly volatile markets like DeFi and cryptocurrency.
Understanding Tokenomics
Tokenomics is the study of the economic model behind a project’s token. Proper tokenomics can mean the difference between a sustainable project and one that is destined to fail. Understanding the key components of tokenomics will help you evaluate whether a project’s token model makes sense.
Components of Tokenomics
Token Supply
Capped Supply: Tokens that have a maximum supply (like Bitcoin) are deflationary by nature, meaning their value could increase over time as supply becomes scarce.
Uncapped Supply: Projects with uncapped supply or inflationary models can create more tokens over time, which might dilute value if not managed properly.
Inflationary vs. Deflationary Models
Inflationary Tokens: These models increase the supply of tokens over time, typically to reward participants or support network growth. It’s important to assess whether this inflation is sustainable.
Deflationary Tokens: Deflationary models reduce the supply of tokens over time, potentially increasing their value. This could occur through mechanisms like token burns.
Utility Tokens vs. Governance Tokens
Utility Tokens: These tokens are used to access services within the project’s ecosystem. The more demand for the service, the higher the value of the token.
Governance Tokens: Governance tokens give holders voting rights over the future direction of the project. These are often used in decentralized autonomous organizations (DAOs).
Vesting Schedules
Vesting schedules help to prevent large sell-offs by team members or early investors, which could crash the token’s price.
What is Vesting?
Vesting means that team members, advisors, and early investors only receive their tokens over a set period rather than all at once. This ensures they remain incentivized to contribute to the project’s success.
Best Practices for Vesting
Cliff Period: A period during which no tokens are released. For example, there might be a 6-month cliff before any tokens are unlocked for the team.
Linear Vesting: After the cliff period, tokens are released gradually, usually monthly or quarterly, over a period of 1–4 years. This ensures the team is invested in the project’s long-term success.
Token Distribution Models
Fair Launch vs. Pre-Sale
Fair Launch: A project releases tokens to the public without any pre-sale, meaning all participants have equal access to the tokens at launch.
Pre-Sale: A portion of the tokens is sold to early investors at a discount before the public sale. While this can provide funding for the project, it also means early investors might have an advantage if the tokens appreciate quickly.
Token Allocation
Token allocation refers to how the total supply of tokens is divided among stakeholders, including the team, investors, community, and ecosystem incentives.
Team Allocation: A large percentage allocated to the team could be risky if vesting schedules aren’t in place.
Community and Ecosystem: Tokens set aside for community development and incentives can help foster long-term engagement.
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