Do Your Own Research – What To Know Before Investing In A New Crypto Project

But to spot a good project, we first need to do our homework. What should we keep in mind before investing in a new project?

Who’s Behind the Project

Getting to know the team behind a cryptocurrency or DeFi project is essential to know the product’s legitimacy. Check out their profiles, background, previous projects, connections, and more. It will be useful for future investments.

DeFi protocol developers would usually create foundations to fund their project, while some of them might be new individuals to the space who want to launch a new product. These can range from a yield farming protocol to a P2E (Play-2-Earn) blockchain-based game.

Community

Communities are complicated. Across the crypto/DeFi space we can see members from all kinds of projects and cryptos who aren’t always the most friendly. Some communities are maximalists, while others are more flexible when it comes to talking about other protocols or coins.

Check out the community to see how well they manage themselves and how the protocol can change in the future.

Some DeFi projects will have DAOs (Decentralized autonomous organizations), which are a type of government system where all the rules and protocol changes are made by the project’s community through a voting process, which depends on the amount of tokens each member holds.

Whitepaper

Whitepapers are tremendously important in a crypto project that wants to make an impact in the industry.

Whitepapers are a type of digital document containing technical information about the product itself and its core features. It’s specially made to provide a roadmap users and investors on how the protocol expects to grow and succeed in the near future.

However, we should be careful if the whitepaper is just not another copy-paste of another project. We can take Tron, for example —heavily criticised for “plagiarizing” Ethereum’s whitepaper and its virtual machine —EVM (Ethereum Virtual Machine). While Justin Sun, founder of Tron, has rejected the accusations, it was pretty harsh at the moment considering the rise of Ethereum in the crypto space.

Current Market Capitalization and Market Supply

Market capitalization is the number of circulating coins multiplied by their current price. Knowing a project or currency’s market value and the number of circulating coins is essential to predict how far the price can go.

Checking a project token distribution can also give you valuable insights about the development team. If the team behind the protocol has 50% or more of the token distribution, it’s likely a scam.

How to Avoid Getting Scammed

Finding a project is easy. There are hundreds, and even thousands of DeFi projects out there wanting to gain ground in this sector. But you should be cautious —there are a lot of scammers too.

Anonymous Development Team

This is the first red flag to rise when you see a project with an anonymous team or a shady background.

Is it logical to invest in a cryptocurrency or DeFi protocol developed by an anonymous team? Not really, and statistics show the absurdity of this. Over $12 billion have been lost in DeFi scams so far in 2021, as per data from blockchain analytics firm Elliptic, and all of these projects had shady members behind it, or an anonymous team.

Shady Whitepaper

Is the whitepaper more promotional than technical? Skip it. There are hundreds of whitepapers that look more like marketing strategies than actual technical information, so look out for this.

If it looks like the team is trying to sell something rather than contributing anything innovative to the space, it’s probably worth skipping.

Exaggerated Yields

Some DeFi protocols will offer you exaggerated yields of over 18% – 20%. Yield farming is already risky, but legitimate protocols will never offer you such a high rate in rewards.

Takeaways

There are many exciting crypto/DeFi projects being developed at the time of writing, but always make sure you do your own research before investing in them. Remember that the crypto industry is here to stay, but you should always take everything with a grain of salt.

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