DeFi has brought about a permissionless and trustless financial system, it has also drawn the attention of investors. So many DeFi projects have been launched, many of which are scam projects, aiming to defraud investors of their money, so it's important to analyze these DeFi projects effectively before investing.

To understand DeFi analysis better, we need to get down to the basics.

What is DeFi?

Our financial systems today offer so many (centralized financial) CeFi services like money exchange, insurance, borrowing, lending, saving plans, etc. these systems are controlled by the government which can warrant unauthorized access to our funds, delayed processes, and restrictions due to their policies, and it could be frustrating at times.

But what if there was a decentralized system?

Well, that is where DeFi comes into play.

DeFi (decentralized finance) is an emerging model that harbors money exchange, insurance, borrowing, lending, and saving plans in blockchain. It is a decentralized system (not controlled by anyone) which is what sets DeFi apart from CeFi. to understand more about DeFi check

In DeFi analysis it is more of what you know than what you have, so one needs a clear understanding on how to analyze a DeFi project, before investing to avoid being scammed,

which is why we are here.

How to analyze DeFi project

1. Research the project:

Identify a project that resonates with you and then conduct a thorough research on it.

Website: The page should be able to give a detailed explanation of what the project is all about, who the founders are, what are their brand goals, and their reviews, what are people saying about them.

The website should be 80% educative of the project itself and 20% sales. if the website looks all fake then it is.

Team: Who are the founders, who are their advisers, here you may want to conduct in-depth research on their Twitter, Facebook, Instagram, discord, and LinkedIn profiles; have they been active? What have been their recent activities on these platforms?

Their online presence speaks a lot about them so be sure to conduct thorough research on their profile and beware of fake social media profiles as that's a bad sign.

2. Community:

I recently went through a DeFi project. When I checked their page on Twitter, they had many followers and followed few which was ok, they were actively posting updates and had a good amount of positive one-word comments which was quite fishy, so I checked the profile of those commenters and discovered that they were all new on Twitter and all their engagement on Twitter was to comment on that project's update. I still went further to research the team and the website and I discovered that it was a scam project.

The community is the lifeblood of DeFi, as it provides feedback, support,and innovation, By following the community, you can get a sense of the engagement, enthusiasm, and loyalty of the users, as well as the challenges, and opportunities, You can also identify the sentiment and reputation of the project, and see how it responds to criticism, feedback, or events.

Whitepaper: This is a document that shows the goal, vision, mission, history, detailed description of the project, and information about the founders and team members. When Bitcoin posted its white paper, this attracted many investors because they saw that the blockchain currency had a bright future.Go through the project's white paper to see if it aligns with your goal and if there is a future in the project.

3. Tokenomics and governance:

Tokenomics: This is a combined word for token and economics, it gives detailed info on how the tokens are utilized and how the distribution model works. If the token isn't properly distributed then it could affect the market capitalization, decentralization, and governance of the project.

Governance: The majority of the DeFi projects are governed by DAO's decentralized autonomous organization which has been more effective.Poor governance could lead to centralization, poor financial growth, and difficulty in upgrading, etc.

4. GitHub presence

GitHub is one of the biggest communities for coders, where tech savvies come together to learn, solve issues, and build profitable tech platforms. Look out for the DeFi project on GitHub and see their progress and engagement. If they have a low profile then that's a red flag.

5. Smart contract

This is a program in which the whole DeFi project operates on, it is a self-executing agreement that controls the borrowing, lending, insurance, saving plan crypto exchange, etc.

Now here's the catch, after this smart contract has been launched, it can't be updated, so if there are any errors in the contract it could lead to the DeFi project being vulnerable and prone to hackers attack.

So make sure their smart contract has been approved by a verified firm or posted for public review that way you are sure of your safety.

Conclusion

Like I said earlier, to excel in DeFi, it is more of what you know than what you have, so make sure you do proper research before investing.

Research the project, its founders, their goals and mission through the white paper, and look out for fake comments on their page that way you can tell if that page is fake or not. Don't forget to go through their GitHub community, check the token economics to see the supply rate.

The importance of due diligence before investing can never be overemphasized, so trade with caution and also be on the lookout for the TVL (total volume locked), market cap, 24-hour volume, inflation rate, etc. also, follow your instincts, Remember if a project is too good to be true then it is.