Although the “Wild West” is becoming a tired metaphor for cripto, it couldn’t be more true. There’s digital gold in the hills, and an entire frontier of possibilities in the metaverse, web3, and blockchain applications we haven’t even thought of yet. But where there is adventure and opportunity, there is always risk and danger.
If you are relatively new to cripto, you will quickly notice that we speak our own language here. One important acronym that is spread through cripto Twitter and beyond is DYOR (do your own research). This is usually a disclaimer tacked on to the end of a tweet leaking some hot “alpha,” referring to a hint at some hush-hush knowledge that will be released imminently by more reputable sources.
Here’s a typical web3 tweet for you:
In this case, “probably nothing” means something like “this is BIG and all cripto assets will probably 10x in the next month, so buy in now while you still can.” cripto and NFT degens (that’s endearing shorthand for “degenerates”) love to be coy and cryptic, and this has a tendency to create FOMO. But emotions have always been the enemy of smart investing. That’s why you need to #DYOR as so many of these posts specify!
There is an endless feed of users shilling web3 projects, so how do you actually do your own research and make safer decisions? This article can give you some ideas for exactly that, and help you do proper due diligence before buying into the latest new projects.
Surprise, surprise there’s no one-size-fits-all answer. But you can make more educated decisions based on the following.
When cripto is involved, an important factor to consider is the cryptocurrency’s use-cases. In other words, what does it actually do? When it comes to simply sending money peer-to-peer in a private, censorship-resistant manner, Bitcoin has had that covered for years (although there’s much room for improvement). What you should be looking for now are novel blockchain networks and cryptos that are solving problems and adding value to the decentralized landscape of web3. For example, Ethereum changed cripto forever by introducing smart contracts and has fostered perhaps the largest and most involved community of developers. After you take a look at the basics of “what problem are we solving here,” then take some important technical and financial metrics into consideration:
Market Cap — A coin’s market cap is a telling sign of its overall perceived value. In cripto, market cap is expressed as: Market Cap = Price X Circulating Supply. The higher a coin’s market cap, the higher its perceived value.Network Activity — How often are coins or tokens getting traded, used, or airdropped? You can get a feel for how active a network is by measuring things like “sent from” addresses in the past week or month. A quick Google search will reveal many blockchain analysis tools.Community & Docs — The communities and foundations that build and sustain blockchains and cryptocurrencies will build websites and publish “whitepapers” that hold all of the pertinent information on the project. Read them.Principles of the blockchain — You are going to want to make sure that the blockchain/cripto in question is very sound when it comes to the basics like decentralization and that they have a sound roadmap in place to iron out any issues.
NFT projects can be very tricky when trying to evaluate pricing and your possible return on investment. Many in the NFT community are big proponents of only buying into projects that you actually like.
Creators — Successful NFT projects most often have well-known creators, but that isn’t always the case. Sometimes things just take off. But in general, try to look for project creators who are fully doxxed and transparent with their projects. They should have a following and a glowing reputation among a growing community.Utility & Contracts — What will the NFT actually give you as a holder? There are as many answers as there are projects. Some are as simple as digital ownership of a jpeg, others provide you with special abilities in blockchain games, and some even provide you with real-life entry to events (like bored apes). Smart contracts can also make things possible like collecting royalties when a work is resold — make sure you research the contract itself before buying in.Pricing — You may be tempted to “ape in” to the top collections of the past week on OpenSea, but make sure you DYOR before doing so. “Floor prices” for NFT projects can be wildly different, so you want to make sure the project isn’t overvalued. If you choose a more modestly priced project that has solid fundamentals in all other areas, you’ll have a good shot at selling your NFT at a premium.
If you are putting a lot of your cripto assets into earning strategies on DeFi, how do you know which platforms are good and trustworthy, and which platforms are looking to rugpull their users for a big heist? If it can happen to Mark Cuban, whose investing talent has landed him around 4 billion, it can happen to you.
TVL — Total Value Locked is a very good indicator of a successful DeFi platform. This number is telling of how many people have found the platform trustworthy, reliable, and rewarding. You can check out TVL and other metrics for DeFi platforms on sites like DeFi Pulse.Community — If there is one common denominator of good cripto, NFT, and DeFi projects, it’s an active and thriving community on social platforms. In places like Discord and Reddit, there should be active conversations and collaboration between devs, users, and other interested parties who all have the DeFi project as a top interest.Safety — Safety, of course, should be the top priority for DeFi users. Web3 is still working some things out when it comes to security. If a DeFi protocol offers insane APYs on its products, it may not be sustainable and it could collapse.
I got hit like everyone else. Crazy part is I got out, thought they were increasing their TVL enough. Than Bam.
— Mark Cuban (@mcuban) June 16, 2021
Some organizations in web3 blur the lines between traditional investing and cripto. Take, for instance, Binance. The Binance ecosystem is very interesting because it is the largest cripto exchange in the world and also has a highly valued and highly traded cryptocurrency, Binance Coin (BNB).
To gauge the value of web3 companies, it’s a great idea to rip a couple pages out of the venture capitalist handbook.
Who’s on the team? — If web3 companies are going the centralized route, you need to ensure they can be held accountable. For instance, if you are investing in Coinbase via their public stock (COIN), you want to know they are jumping through all the right hoops laid out by the SEC and other regulators. To this point, Coinbase has not only some very bright minds leading the operation, they more than likely have a small army of lawyers protecting the company.What is the product? — There are so many different projects and sectors now within web3. You need to see where a project’s products are positioned within the overall market. If their product appears to solve a very real problem in web3 (or IRL), and they have few or no competitors, it could be a good sign to look more closely.Why is it special? — Unique products are hard to find, but the company should actually be doing something better than its competitors. If this unique selling point is too hard to find, it could be a bad sign.
In cripto, no one knows everything, even if they think they do. It’s important to be careful so you don’t lose it all when going for that Lambo.
So, take all the tweets and FOMO posts (and even this article) with a grain of salt and always DYOR.
This article is here only to inform web3 users on ways to express caution before getting involved in any project. This article is not investment, financial, or any other advice. Always DYOR.
