I stumbled on my former journal today, and I found where I wrote what I would call a painful loss. In 2018, when I first joined a community, we were educated on the importance and benefits of DeFi. With my businesswoman mentality, I just decided to invest my salary in the coin. I would never forget how the coin dumped and my whole salary went down the drain. This is because I didn’t carry out thorough research; it was very painful, but I learned my lesson in a rather hard way.

The DeFi space is one fueled with so much enthusiasm and passion. I see that some investors do not look into a project well when the hype is on; they remember to do that when the token starts dumping. Do your research first.

A project is considered profitable when these metrics are fulfilled:

TVL: There are so many acronyms in Web3; TVL stands for Total Value Locked. This stands for the amount of digital assistance that a particular DeFi project has secured, i.e., the amount of money that has been invested by investors. A high TVL means that the project is credible and that the public supports it. I use DefiLlama for most of my TVL research.

Market capitalization: The market cap of a project is a basic metric every investor should look into because it shows the total value of all the tokens that have been mined. It is calculated by multiplying the number of coins in circulation by the current market price of a single coin. For example, if a cryptocurrency has 2 million tokens in circulation and is selling at $10 per token, its market cap would be $20 million. You can always find the market cap of any protocol on CoinMarketCap.

24-Hour Volume: It depicts the total volume of the cryptocurrency that has been traded in 24 hours. While volume is essential for traders to know the future profitability of a coin, it is also an invaluable tool for investors to know how well the token is accepted by the public. A low volume would show a decline in the token, and it would be a big red flag for any experienced investor.

Unique Address Count: This represents the number of unique addresses that were successfully active either as sender or receiver on the blockchain. Again, it’s advisable to use this metric with other ones because it can be manipulated.

Price to Sales Ratio: The price to sales ratio is a value that compares a project’s market cap to its revenue. It helps investors know undervalued projects to invest in. A lower value, preferably lower than zero, is considered favorable as it depicts undervaluation, while a higher value greater than two depicts overvaluation, and it is not advisable to invest in that kind of token. It can be calculated by dividing the latest closing share price by its sales per share as of the latest reporting period.

Having known all these, it is essential that you always look over the hype and try to gain insight about the project. Ask questions like:

What problem is this token solving?
Why do I want to invest in this project?
What technology is it built on?
Who are the founders?
Are their project goals realistic?

These are must-dos that you don’t want to overlook while investing in any DeFi protocol:

Supporting Documents:

Think of it like this: before you join any organization, you are required to undergo some key verification processes, like the submission of your identification card, reference letters, and other means of identification. The same is true on the blockchain; every project has a legal tender. Various documents, such as the whitepaper, project road maps, and incentive structure, show the credibility of a project. You should check through these documents before investing.

Networking:

The saying goes that your network equals your net worth. It also applies to the DeFi space. Endeavor to join the Discord and Telegram communities community, follow all of their social media pages.

Communicating with people in the community will help you identify a fake project because it is easy for a project to build a huge follower base on social media and scam people at the end of the day.

Do more research for the anonymous team, especially. Who is their key opinion leader?

They must also have a working project and be exceptionally knowledgeable. The project must solve a problem that resonates with me if I am to invest.

Tokenomics

Token and Economics in one word. Tokenomics is the study of the creation, distribution, and management of tokens or cryptographic assets. It tells you everything about a token: the utility, which is the problem it is solving; the total supply of a token; how the token is allocated; and it gives you insight into how the gain is distributed between the key decision makers and the members of the public. It also helps one know the token burning mechanism; a token can be burned when there is too much in circulation to prevent inflation. With reduced circulation, the price would effectively increase.

It also reveals the security audits; popular auditors include Certik and Hacken. Here, you can also verify their code using GitHub if you have the technical know-how. Their blockchain addresses can also be verified.

Team Members

It is essential to do quality-based research on each of the members on board for a project. This will lead you to make certain decisions regarding investing. You need to know who the founder is, the developers involved, and everyone who has a signature on the supporting document. It proves the credibility of team members and gives you insights on how they have handled projects in the past.

Conclusion

Having said all these, I’m now confident that you can do so and invest in profitable projects. Make sure to research team members, technology, tokenomics, and community engagement.

Don't forget the popular quote: ‘Do not invest more than you can lose’.

#web3 #DeFi #tokenomics #tvl #DYOR