Home Crypto What fundamental analysis do you do when deciding to commit funds to a Defi project?

What fundamental analysis do you do when deciding to commit funds to a Defi project?

What fundamental analysis do you do when deciding to commit funds to a Defi project?


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Ok so it’s been a tough month for quite a few well known defi protocols and it’s highlighted again just how risky defi can be and how important it is to have a very clear understanding of any defi project you’ve committed funds to. DYOR is the one cliché that you really need to take seriously. And I know that even after performing rigorous due diligence there’s still no guarantee that things won’t fall apart. Such is the nature of the game we play. But the latest developments got me thinking about how you actually investigate Defi projects enough, to be confident that you’re making the right decision investing in them.

I wonder how many people do any research at all and how many just follow the herd or the guy on Youtube?

I’ll be the first to admit that when I started in Defi I was definitely guilty of following the crowd and jumping into projects after just looking at their website or seeing tons of people shilling something on twitter and praising how wonderful it was. Not only is it much easier than doing the work yourself but I’m sure most people don’t feel confident enough that they would be able to sift through all the available data, presuming they could even find it in the first place, and then still be able to accurately digest that data and turn it into actionable information. And even if you do put in all that effort, there’s still no guarantee you make the right decision, or that things will work out how you expect them to.

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So, what’s the answer? How do you approach such a complex process?

I guess by its very nature there is no standard answer, and a lot will depend on various factors including your intuition, luck and obviously having the clearest possible understanding of the fundamentals of what you’re getting involved in. So, I’m gonna share a few of the things I look for and how I go about doing my own research.

The first and most important thing I want to know is who is the team behind the project. Who are the people that I’m relying on to make this a success. Can I check their history, what else have they done in web 3 and have they had previous success or failure. Do people speak well or negatively about them, do they have a good reputation? Another important factor for me is how accessible they are to the community. Do they interact, chat and update the community regularly? Is there a way of getting hold of them easily?

Next most important for me is how strong the community is. The ultimate success of any project comes down to the community, so I want to know how big is the community and how much or how quickly is it growing, or how much room for growth is there still? Joining all the social channels and spending time in them, interacting with people is the only way to go about figuring this out. Also important for me is how the community treats newcomers. A thriving project breeds a happy community, and a happy community becomes a welcoming and helpful community.

Nodes, miners, ROI platforms, gamified staking apps, trading bots, ponzi’s? Will your investment be a sunk cost or easily withdrawable whenever you want? Does that fit into your personal goals and risk criteria? It’s crucial to understand exactly how the mechanics of the system work and where the returns come from. This is where you really need to use common sense and your intuition to guide you on whether you think the structure of the product is realistic in what it’s promising, and if it can be sustained long enough for you to get your money back and then make profits. Are there similar projects that you can compare to and how did they fair? Also, you have to accept that most Defi projects will have elements of ‘ponzinomics’ to some degree. Meaning that they will always rely on new money coming into the system to support it. This isn’t necessarily a bad thing, ponzinomics can still work and projects can be successful depending on how they manage it. Are they continuously adding to the ecosystem to increase real yield and reduce ponzinomics? Remember Bernie Madhoffs ponzi went on for 30 years!!??

Now we start getting into the nitty gritty. This is the technical part of my DD and the most painful. Understanding tokenomics is easy but trying to forecast how all these variables will ultimately play out is not so simple. Again, use common sense, if something is paying 5% a day and you can’t figure out where its coming from, it’s probably gonna land up being the ‘too good to be true’ nightmare that comes back to haunt you. Just always keep in mind that inflation is the silent killer that destroys token prices and ultimately the projects behind them. If there’s too much inflation in the token, you better make sure there will always be enough new money to come in and soak up all that excess supply. Ask yourself, where are the returns coming from and how will new money be attracted or incentivized to enter?

It all really boils down to this. How long will it last because we know nothing lasts forever. So, I will take all of the above data and try figure out if the project can be sustained long enough to ROI and make profit. It’s obviously not an exact science, if it was no one would ever lose, but I think I’ve become better at picking which projects to go into and which to avoid and it’s all based on what I’ve written above. Hopefully this helps you make better decisions going forward and if you have any other criteria that you look at, or techniques you use to evaluate projects, I’d love to hear about them. Leave a comment or come chat in my telegram channel.

Losing funds in Defi can be a blessing in disguise if the losses don’t take you out of the game and teach you valuable lessons that prevent you from making the same mistakes again. I’ve obviously also lost plenty in Defi over the years, just like anyone else, but it has spurred me to continuously improve my game and research strategy, to become a better devils advocate, so to speak, before taking the plunge.

Thanks for reading

Onwards and upwards!!


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