Web3 has grown from a nascent community to an emerging industry. Over the past year, we have witnessed a massive influx of talent and capital into the Web3 ecosystem, resulting in a lot of innovation in the underlying infrastructure as well as consumer-facing DApps.
As the concept of Web3 has become popular, many startups have emerged, but there are also good and bad ones. Therefore, it is crucial to have a strong due diligence process to evaluate these projects. Whether you are just starting to step into Web3 or looking to expand your investment portfolio, it is necessary to establish an investment evaluation framework. In this guide, we will deeply build a blockchain project analysis framework from both qualitative and quantitative aspects, aiming to help people with non-technical backgrounds complete Web3 project research more smoothly step by step.
This framework is divided into two parts: the first part is qualitative analysis, in which my main goal is to understand aspects such as project vision, project community, token economics, etc. The purpose of this part is to ensure that you do not invest in a Rug project. The second part is quantitative analysis, which aims to express it with specific data to achieve the purpose of project analysis and comparison.
Part I: Qualitative Analysis
Generally speaking, here are four factors you should consider when researching a Web3 project:
1. Project Community
2. Project Team
3. Token Economics
4. Value capture capability
Project Community
The community plays a pretty important role in Web3, in fact, I would even go as far as to say that it is the main driving force for all Web3 projects. So I focus on the project's community first. By interacting with the project community on platforms such as Twitter and Discord, we can measure the project's community size and observe community users' views on the project founder and the future potential of the project. Usually, the higher the Twitter attention of a project, the more comments and interactions, the more popular the project is. Blockchain projects usually use Twitter as the main promotion channel. In addition, we need to pay attention to the communication atmosphere of the project discord community. Active projects will regularly hold Twitter Spaces, Discord Chats, AMA, etc. Community users continuously exchange ideas and discuss how to improve the project.
project team
As with web2 startups, the team is the core of a blockchain project. A strong founder can guide the project to success in adversity, so it is particularly important to evaluate the founder and the founding team. The main members of the project are generally found from the project's official website and white paper. Whether the team has a certain influence in the industry and whether it has successful project experience in the past will also add points.
In addition, it is also important to check the institutional lineup of the project. It is better to have the endorsement of larger head venture capital institutions such as a16z, coinbase, and binance.
Token Economic Model
Well-designed token economics models lead to long-term success for projects because they do a good job of token enablement and token distribution.
Like traditional finance, everything in token economics depends on supply and demand. Three factors, such as the maximum supply, market circulation, and inflation rate, will indirectly affect the price of the token. This means that if the demand for a project's token exceeds the supply, the price will rise and investment opportunities will increase.
You actually need to think about token supply and demand from four perspectives:
Deflation: Projects burn more tokens than they issue, which reduces the token supply.
Staking incentives: Tokens in a locked period cannot provide liquidity.
Application scenario: Create consumption scenarios for tokens in the corresponding protocol, or a series of scenarios that can cause demand to exceed supply
Governance privileges: Token holders can propose and vote on protocol changes.
Regarding project token distribution, I think a healthy and sustainable project token has a large portion allocated to the ecosystem/community (e.g. more than 50%), the core team's benefits do not exceed 15-20% (unlocked in 3 years or more), and the total allocation to investors usually does not exceed 20%. This is because web3 is community-oriented, and most projects will find it difficult to get support from the web3 project community if they give too many benefits to investors and core teams.
Project value capture capability
Similarly, the project's ability to capture value is also important. Value capture is a form of public financing, which can be simply understood as the ability of token holders to gain profits from the growth of the entire project's value. Projects are not limited to public chains, exchanges, application protocols, etc. For example, tokens such as BNB and Flow have very strong value capture capabilities. Holders not only enjoy the benefits of rising token prices, but also receive additional benefits as the ecosystem develops.
Usually, the means of value capture by the project party are transaction fees, absenteeism fees, loan interest rate spreads, etc. A typical example is the Binance exchange, where transaction fees are an important means of value capture. In addition, Binance has also launched the Binance Chain, providing more BNB application scenarios, linking project parties to build an ecosystem on its public chain, and attracting more users. This is a relatively benign and sustainable means of value capture.
How can project parties achieve value capture? For public chain projects, sufficient security, rich ecological construction, and easy ecological development can maximize the value generated by user transactions. For DeFi or DEX, more value capture opportunities are obtained through openness, such as anyone can inject liquidity, allow trading pairs to be listed, etc.
In the second part of this guide, I will show how to build and analyze Web3 project data to determine the development potential of the project. Stay tuned.
