Much to the chagrin of cryptocurrency advocates calling for immediate mass adoption of blockchain technology, there are many "digital landmines" that exist in the crypto ecosystem, such as carpet strip and protocol hacks that can give new users the experience of being lost at sea.
Investing involves more than just technical analysis and hunches. Over the past year, a handful of blockchain analytics platforms launched dashboards with metrics that help provide a greater understanding of the fundamentals behind, 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 read a project is to look at the statistics that show the level of activity of the platform's user base and the developer community.
Many of the top protocols in the space offer analytics that track the growth of active users over time. On-chain dashboards such as Dune Analytics provide more detailed information on this metric, such as the following graph demonstration new daily users of 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 on the protocol, as well as social media metrics, such as Twitter mentions, which can help gauge investor sentiment on a particular project.
Alert systems such as 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 a cryptocurrency is turning bullish or bearish.
With regards to project development and developer activity, GitHub has been the go-to place for upcoming updates, integrations, and where the project is on its roadmap.
If a protocol boasts of "next release" characteristics but shows little continued development or commits are sent, it could be a sign to stay away until activity is better aligned with the claims.
On the other hand, detect a under the radar 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 consider when evaluating the overall robustness of a project is the sum of all assets deposited in the protocol, also known as total value locked (TVL).
For example, the data from Defi Llama shows that the total value locked in the DeFi DeFiChain (DFI) protocol has been growing Lately after a major protocol update, with TVL hitting new multi-day all-time highs so far in December. This indicates that momentum and interest in the project are increasing.
DeFi aggregators like Defi Llama and DappRadar allow users to drill down into data and view statistics from different blockchain networks like TVL on Ethereum Network or Binance Smart Chain, as well as individual projects like Curve and Trader Joe.
Protocols with a higher TVL tend to be more secure and trustworthy for the community, while projects that rank lower on the list generally carry more risk and tend to have less active communities.
Related: Point of no return? Crypto investment products could be key to mass adoption
Identify who are the majority token holders
Other factors to consider are the benefits token hodlers receive from maintaining and being active in the community. Investors should also analyze how the token was launched and who the dominant token holders currently are.
For example, SushiSwap allows users to stake the native SUSHI token on the platform to receive a portion of the exchange fees generated, while Uniswap, the leading decentralized exchange (DEX) on DeFi, does not currently offer such a feature.
While other factors such as trading volume and daily users have made Uniswap a legitimate investment for many holders, some operators prefer to keep SUSHI due to its revenue sharing model and multi-string negotiation capabilities.
On the other hand, caution is warranted when offering excessive returns for low-liquidity protocols run anonymously with little community activity because this may be the perfect setup for catastrophic losses. At DeFi, these are called carpet pulls and typically occur after a large amount of money has been deposited into smart contracts controlled by a single anonymous party.
Examining the token distribution for the protocolAs well as keeping an eye on the percentage of tokens allocated to developers and founders versus the tokens owned by the community, it can give a useful signal as to whether a platform could be the victim of a carpet pull or the whim of mercenary capital.
If most of the available supply is in the hands of the creators and backers, there will always be the possibility that these tokens will later be sold at the market price if the first investors decide to exit their position.
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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.
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