THE DEFINITIVE GUIDE TO
Assessing blockchain projects
Best practices from Launchpads, VCs, CeX/DeX, and crypto-currency trackers.
TL;DR — Scroll to the end of the article to view and download the protocol due-diligence framework for novel and ascending blockchain projects.
There can hardly be a single model able to evaluate every blockchain project. That is because each project may be at a different stage of development (idea, testnet, IDO, early days post-TGE). But also because of its DNA(industry, use case), the nature of the token utility, its position in the J-curve or the point of view from which it is assessed: VCs, retail VCs, traders, IDO platforms, exchanges, government institutions, hodlers, institutional investors, etc..
Each of these has a different target and timeframe. And most importantly, though several financial evaluation methods have been put forward, none gives mathematical certainty, or at least a reliable expectation on the returns, their growth rate and timeframe.
What can be done, however, is minimizing the probability of investing in or speculating on projects that show signs of a possible scam, that still need to prove themselves (good product-market fit, professionalism, transparency, good team, good traction, and sustainable great fool’s theory mechanisms), or which might be on a path to leave the scene soon.
With this in mind, a sensible approach is to first determine the stage of development of the project/blockchain we want to assess, and the timeframe of our investment/speculation. We can then define 2 overlapping, and yet distinct, evaluation frameworks: one for the primary markets and one for the secondary markets.
Framework A looks holistically at the project in a similar fashion as you would for more traditional startups, trying to figure out the potential of the idea, of the technology used and of its likely network effect, while looking out for red flags within the team, the implementation to date and anything else that can either be discovered from the literature, inquired directly or through secondary research.
Framework B can include all the research that is conducted for Framework A but now with the advantage of being able to assess the code deployed, on-chain data and whether initial traction has increased and fueled a healthy and prosperous network effect both from the community, retail/institutional investors, and the government. Also, governance now assumes a larger role compared to the early stages of the project.
This article, and the resulting due-diligence questionnaire, focus on Framework A for novel blockchain projects that belong to primary markets or that still need to consolidate their reputation in secondary markets.
Two leading examples
If we look at the leading VC firms for blockchain projects, at centralized and decentralized IDO platforms, or at crypto exchanges, very seldomly the key evaluation criteria and framework adopted to evaluate new projects are openly declared. At best, some of them may be drawn from the questionnaire that is posed to prospect projects that are seeking to be funded or listed. In some other rare instances instead, they may be obtained from interviews and posts by their core team.
The exception to this norm is two leading launchpads: Polkastarter and DAOMaker.
Polkastarter
As a tool for helping prospect projects prepare for being considered on this platform, but also to build trust with their retail VC investors, Polkastarter has written an article that explains their evaluation process and key selection criteria. Here is the link.
Although very thoughtful, what could really further boost confidence for their retail VCs is if they could condense and publish their research and assessment /rationale for each project they end up listing.
[Update: Since the beginning of October, Polkastarter has introduced protocols research papers in the same fashion as DAO Maker, looking at product, use-case analysis, business model, market, investors, team, and token utility.]
DAO Maker
One of my favourite launchpads for their overall approach to adding value to both onboarded projects and retail VCs that use this platform, DAO Maker does not explain their selection criteria, but for each proposed investment, it puts together a research report, summarizing key information, all in one page.
Most of what is published is a screenshot/copy&paste from the project’s website and there is no assessment of this information. Nevertheless, this structured summary allows gaining an understanding of the key components of the project without the need to sift through all the literature on the official website.
A thorough approach
To understand what best practices are currently in use by the industry leaders, I looked at all I could find on the topic from entities belonging to these 4 categories:
- Launchpads
- Crypto VCs
- CeXs / DeXs
- Crypto-currency trackers
(See full list in the Airtable below)
With the information gathered, and some more business acumen, I have compiled a due diligence framework, structured in the following categories:
Identikit and technologies used
An overview of what the protocol is about, its stage of development, its available literature and the technologies it is based on. This section helps identify, at first glance, whether we are dealing with an interesting project that holds the macro premises for a smooth ride in the future.
Use case & business model
An in-depth analysis of what the project and its offerings are about and how they generate value for the users and the protocol itself. This section is fundamental to fully understanding the value offered and whether how it is structured actually makes sense.
Fundraising and tokenomics
This section inquiries on who is supporting the project, the weight they carry, what the team wants from investors and how/when they intend to deploy the received funds, on-chain metrics when available, but also the monetary dynamics of the protocol’s token/coin.
Core team, Partners, VCs and Endorsers
Contrary to the belief that the code is the law(which it is, but let’s face it, even experienced programmers might miss out on a voluntary exploit), most platforms do value a declared, experienced and motivated team, and want to see support from other known industry partners.
Communication, Social Channels, and Community
A mix of questions on the protocol’s communication m.o. to understand the care and commitment given to the communication strategy, UX, Investors Relations, the media and what the community thinks about the protocol.
Audits, Security, and Code
While VCs tend to look only for 3rd party code audits as a control against major code issues, other entities such as crypto exchanges also give a lot of importance to how the code was developed, tested and documented. Looking at these aspects can give a good understanding of the approach used to program the protocol and the professionalism and expertise level of the team behind it.
Marketing, development & progress
This section encompasses a few checkmarks that show the level of commitment from the core team in developing the project and communicating it transparently to the public.
Considerations on competitors and other potential threats
A brief consideration of the position of the project in relation to competitors and potential threats.
Legal and regulatory status
As for the considerations on dealing with a non-Anon team, most launchpads as well as crypto-exchanges favour registered entities that comply with the regulations or that steer clear of them altogether.
On misconduct
A parameter that is not declared, but hopefully checked by all, is whether the team or the protocol have some dark spots or ghosts in the closet. This section requires conducting a background check on the core team and on the protocol, as well as reporting any incongruency that has been noted during the due diligence.
Questions for the team
A collection of varied questions to ask directly to the protocol’s team to capture a feeling of the people, and their rationale, behind what they are doing.
Final thoughts
This section finally collects a rating of all the previous sections and asks to summarize the opinion that formed after the whole inquiry.
You can view and download this due-diligence framework questionnaire below.
Conclusions
This framework is far from being a complete tool to assess new blockchain protocols, and we also need to bear in mind that some of the sources taken into consideration might not necessarily disclose all of their selection criteria or have the retail investor’s interest always at heart. However, the questions they ask seem to follow a common theme: innovation, transparency, excellent communication, and sound business proposals and management.
This tool enables you to research a protocol in detail and, following an all-round structure, emphasize some key aspects that can function as red flags. Answering all the questions posed therein will help you to understand thoroughly the protocol and have a clear idea of its sustainability as a business/network and of its fallacies.
Next up: IDO application questionnaires — What launchpads expect and ask from from projects
Please feel free to share your comments, suggestions and corrections. You can reach me on Linkedin! Thank you for reading :)
