Before you buy a cryptocurrency: How to evaluate blockchain projects

6 min readJun 4, 2022

If you go and search on CoinMarketCap, you’ll find more than 10,000 blockchain projects in the ecosystem. But is every project worth it?

The answer is NO. One of the metrics we use is ‘Tokenomics’ to describe the math and incentives governing crypto assets. Tokenomics include the fundamentals about the working of assets and factors that could affect the token value. It is essential to know that tokenomics play a vital role in incentivizing buying and holding their token.

Similarly, blockchain projects with poor tokenomics are doomed to failure, as people rapidly sell the tokens at the first sign of trouble. Let’s understand some of the key metrics we will use to determine the value of a project.

Key Takeaways

Supply doesn’t mean the number of tokens; it is based on several factors that will help us understand the project’s essential characteristics.
Emission schedules are present in the project documents and would not be available on surface-level websites.
Return on Investment is essentially the income or cash flow the token can generate for you when you while holding the same.
Counterparty risk is the probability that one of the parties involved in a transaction might default on its contractual obligation.

Supply: Distribution, Token Supply, Vesting, and Emissions

Supply doesn’t mean the number of tokens; it is based on several factors that will help us understand the project’s essential characteristics.

Market Cap and Fully Diluted Valuation

Market cap is the circulating supply multiplied by the token’s price, and FDV is the current price of the token multiplied by the max supply. If a project has a big difference between FDV and market cap, it becomes essential to investigate how tokens will enter the market in upcoming years.

In short, you need to check the Market Cap vs. FDV ratio to get some hints about the token’s supply. After that, we will move forward to circulating supply and max supply.

Circulating Supply and Max Supply

Max supply is the total supply of the token and circulating supply is the number of tokens being circulated in the market. Let’s understand this with the example of the Curve project.

The curve has an FDV of about 9x their market cap. In simpler terms, they have only 11% of circulating tokens. However, when you dig deep, you will get to know that tokens are locked in various contracts. It means that tokens will go out on set schedules in the market.

Emissions Schedules

The emissions schedule will help us to figure out the present and future supply and how the supply will reach there. You can find the emissions schedule after deep-diving into a project’s whitepaper and other docs. If you want to go heavy on the project, check the emission schedules to gain answers.

Initial Distribution and Unlock Schedule

If you plan to provide liquidity to a protocol, you can stake that liquidity to earn a steady stream of tokens. In some projects, in the initial phases, the early adopters use it to increase the share of their tokens dramatically.

Unlock schedule is vital to check for the projects that have locking mechanisms. For example, many users lock their CVX tokens in Convex, which the protocol released after 17 weeks. It resulted in a significant market movement that makes it critical to understand when there will be a large unlock of the circulating supply.

Demand: Value of Project, ROI, Memes, and Game Theory

Demand has a lot of factors that shall affect the value of a project. It includes the token utility, project utility, return on investment, memes, and game theory.

Project’s Value

Not all projects are solving a real-life use case. Some of the projects cater to issues present in the ecosystem, while some are present to merely generate some money. A classic example is the squid game token built on no use case, yet the founders duped millions of people.

Similarly, it is essential to understand the purpose of the token. Nowadays, some projects run two tokens (utility and governance) for easy access. However, you need to check the projects with a single token to determine whether it is a utility or cash flow token. Also, check for any additional perks that the token promises.

Return on Investment

ROI is essentially the income or cash flow that the token can generate for you while you are holding it. For example, in centralized exchanges like Binance, you can stake your tokens to earn extra income.

Rebasing is also a form of ROI where you get more of the particular token as the protocol inflates its supply. Olympus works on similar lines as their heavy inflation rate provides you with extra tokens.

Memes

If a token doesn’t have a real value and still people want the token, it could be because of memes or bullish beliefs in the future. In short, you need to make sure how the project’s community is operating. It can involve visiting their Discord, activity on Twitter, and other specific activities.

A classic example is Dogecoin. It has no cash flow or rewards. Still, people want to accumulate DOGE. Another example is Shiba INU which doesn’t have any real value, yet it has a lot of popularity.

Let’s understand the following element: Game Theory.

Game Theory

Even if a project has the most talented team, the best marketing strategy, and perfectly solves an existing issue, there is still no 100% guarantee that the project will succeed. The reason for that is that often success of a project to some extend depends on the actions of other market participants, which is impossible to predict. For example, a project’s success may depend on which blockchain it is deployed to, or how other projects within the same ecosystem will evolve. Thus, there is a factor of randomness that determines the project’s market share and how the market share will get distributed.

One standard example of game theory is lockups which creates incentives for locking your tokens in a contract. For example, you can lock your CRV tokens to earn a share of the protocol revenue. The longer you plan to lock your tokens (for up to 4 years), the greater you will reap the rewards. However, it is impossible to predict the lockup period that other participants will choose.

Team Members

A successful project needs to establish a team that not only has the required skills, but also puts complete faith in the product. Essentially, to deliver the product and burn the midnight oil, a team should be bullish on what they are precisely building.

Similarly, the founding team should also comprise management with a clear-cut understanding of market needs. It will help solve the current pain points so that the product can rapidly flourish in the market. In short, you need to check the team members who are building the product while evaluating the project.

It is crucial to understand one more metric before getting a true essence of a blockchain project. Let’s learn more about counterparty risk.

Counterparty Risk

Counterparty risk is the probability that one of the parties involved in a transaction might default on its contractual obligation which can lead to a failure of the whole project. Generally, it shows how one project relies on another project/party for their work.

It is very similar to how one bank relies on the solvency of the another bank. A recent example is LUNA, as it crashed badly because of reliance on UST stablecoin. Also, some other sable coin suffered after the USDT crash, since they have used USDT as a collateral. In short, you need to examine all parties involved in the project’s operations and its future development, how well those counterparties are doing their job, as well as what is the chance of those parties to fail and what can be the consequences of that.

Conclusion

It is essential to perform your own research and search for projects that fulfill the above criteria. Do not blindly follow or take advice from anyone; simply DYOR. Even if people invest in specific projects, you need to stick to the fundamentals, as not all tokens need to be appreciated, even if they are great products.