Much to the chagrin of crypto advocates calling for immediate mass adoption of blockchain technology, there are many ‘digital mines’ that exist in the crypto ecosystem, such as rug pulls and protocol hacks that can make new users have the experience of being lost at sea.
Investing is more than just technical analysis and intuition. Over the past year, a handful of blockchain analytics platforms released dashboards with metrics that help provide a greater understanding of the fundamentals that support – or lack thereof – a cryptocurrency project.
Here are three key factors to consider when evaluating whether an altcoin or decentralized finance (DeFi) project is a solid investment.
Check the project community and developer activity
One of the basic ways to know a project is to look at the statistics that show the level of activity of the user base and the community of developers of the platform.
Many of the industry’s leading protocols offer analytics to track the growth of active users over time. On-chain dashboards, such as Dune Analytics, offer a more detailed view of this metric, such as the following graph showing daily new users to the Olympus protocol.
Other pertinent data points to consider when trying to assess community activity include the average number of active portfolios on a daily, weekly, and monthly basis. Investors should also look at the number of transactions and volumes traded in the protocol, as well as social media metrics, such as mentions on Twitter, which can help gauge investor sentiment on a particular project.
Alert systems like Cointelegraph Markets Pro provide up-to-date notifications about a project’s Twitter mention volumes and unusual changes in trading volume that can be an early sign that cryptocurrencies are turning bullish or bearish.
In terms of project development and developer activity, GitHub has been the place to go for upcoming updates, integrations, and where the project is on the roadmap.
If a protocol boasts of “soon to be released” features but shows little development in progress or commits submitted, it could be a signal to steer clear until activity is better aligned with the claims.
On the other hand, spotting a little-known project with constant development activity and an engaged user base could be a positive sign.
Look for constant increases in the total locked value
A second metric to take into account when evaluating the overall robustness of a project is the sum of all assets deposited in the protocol, also known as total locked value (TVL).
For example, data from Defi Llama shows that the total value locked in the DeFiChain (DFI) protocol has increased lately following a major protocol update, and the TVL has reached new all-time highs on several days in December. This indicates that momentum and interest in the project are increasing.
DeFi aggregators, such as Defi Llama and DappRadar, allow users to drill down into the data and look at statistics for different blockchain networks, such as the TVL on the Ethereum or Binance Smart Chain network, as well as for individual projects such as Curve and Trader. Joe.
Protocols with a higher TVL tend to be more secure and trusted by the community, while projects lower on the list generally carry more risk and tend to have less active communities.
Identify who are the majority holders of tokens
Other factors to take into account are the benefits that token holders receive for being holders and active in the community. Investors should also examine how the token was launched and who the dominant holders of the token are today.
For example, SushiSwap allows users to stake the native SUSHI token on the platform to receive a portion of the exchange commissions generated, while Uniswap, DeFi’s leading decentralized exchange (DEX), does not currently offer this feature.
While other factors such as trading volume and daily users have made Uniswap a legitimate investment for many holders, some traders prefer to keep SUSHI for its revenue sharing model and multi-chain trading capabilities.
On the other hand, one must be careful when offering excessive returns due to low liquidity protocols and anonymous management with little community activity, as this can be the perfect scenario to suffer catastrophic losses. At DeFi, these losses are called “rug pulls,” and they typically occur after a large amount of money has been deposited into smart contracts controlled by a single anonymous party.
Examining the protocol’s token distribution, as well as keeping an eye on the percentage of tokens allocated to developers and founders versus tokens held by the community, can give some useful signal as to whether a platform could be a victim of a rug pull or the whim of the mercenary capital.
If most of the available supply is in the hands of the creators and sponsors, there will always be the possibility that these tokens will be subsequently sold at market price if the first investors decide to abandon their position.
The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph.com. Every investment and business move involves risk, you should do your own research when making a decision.