Here's the free mini-course I wish I had when I started...
How to evaluate crypto protocols in 2023:
(so you don't have to rely on influencers)
How to evaluate crypto protocols in 2023:
(so you don't have to rely on influencers)
What I'll be Covering:
1. Product
2. People
3. Financials
4. Tokenomics
5. Risk Management
5. Catalysts
6. Pumpnomics
7. Profit Strategies
Length - 35 concise tweets
Reading time - 10 minutes
Here's your edge 🗡️
1. Product
2. People
3. Financials
4. Tokenomics
5. Risk Management
5. Catalysts
6. Pumpnomics
7. Profit Strategies
Length - 35 concise tweets
Reading time - 10 minutes
Here's your edge 🗡️
The Process
Your process of evaluating investments is more important than the outcome.
Anyone can get lucky with a few good trades - being consistently profitable (and keeping it) is by design.
You won't have ANY edge if you rely on the analysis of other people.
Your process of evaluating investments is more important than the outcome.
Anyone can get lucky with a few good trades - being consistently profitable (and keeping it) is by design.
You won't have ANY edge if you rely on the analysis of other people.
Product
You need to know why this protocol needs to exist.
1) What problem is it trying to solve?
2) Is this an idea, or is there a working product?
3) How does it solve the problems better than the competitors?
Take the protocol for a test drive - what's the experience like?
You need to know why this protocol needs to exist.
1) What problem is it trying to solve?
2) Is this an idea, or is there a working product?
3) How does it solve the problems better than the competitors?
Take the protocol for a test drive - what's the experience like?
Conduct a SWOT Analysis
A SWOT analysis helps you identify strengths and weaknesses in an organization.
(Strengths, weaknesses, opportunities, and threats)
Traditionally it's used internally for businesses to improve.
You can use this to help analyze protocols.
A SWOT analysis helps you identify strengths and weaknesses in an organization.
(Strengths, weaknesses, opportunities, and threats)
Traditionally it's used internally for businesses to improve.
You can use this to help analyze protocols.
More Product Questions
• How big is the market?
• What are its weaknesses?
• Is there a product/market fit?
• How has their execution been so far?
• What are users saying about the product?
• Daily active users - how fast is it growing?
• How big is the market?
• What are its weaknesses?
• Is there a product/market fit?
• How has their execution been so far?
• What are users saying about the product?
• Daily active users - how fast is it growing?
The Founding Team
Protocols live or die with by founders.
Look for:
• The founder's skillsets
• What's their experience?
• Team - product - market fit
• Is there long-term financial alignment?
Listen to interviews for clues.
QUIZ: What do you think makes a good founder?
Protocols live or die with by founders.
Look for:
• The founder's skillsets
• What's their experience?
• Team - product - market fit
• Is there long-term financial alignment?
Listen to interviews for clues.
QUIZ: What do you think makes a good founder?
The Others
• Who are the early backers of the protocol?
• Are there any well-regarded seed investors or VCs?
• Does the protocol have any significant partnerships?
Early backers & partners can do deeper diligence than you can (in theory).
This is important if they're anon.
• Who are the early backers of the protocol?
• Are there any well-regarded seed investors or VCs?
• Does the protocol have any significant partnerships?
Early backers & partners can do deeper diligence than you can (in theory).
This is important if they're anon.
Financial Metrics
VC money, ponzinomics, & token inflation can hide unsustainable protocols.
Ultimately, all protocols are businesses.
They need to generate revenue to survive in the long haul.
This is where you start analyzing the metrics to see if it's a sound business.
VC money, ponzinomics, & token inflation can hide unsustainable protocols.
Ultimately, all protocols are businesses.
They need to generate revenue to survive in the long haul.
This is where you start analyzing the metrics to see if it's a sound business.
Financial metrics
• TVL
• Profit
• Volume
• Revenue
• TVL traction (is it growing?)
• How much is in treasury? What's the runway?
• What tokens are in the treasury? You don't want too many native tokens.
Use protocol dashboards, Dune, Token Terminal, and DeFiLlama.
• TVL
• Profit
• Volume
• Revenue
• TVL traction (is it growing?)
• How much is in treasury? What's the runway?
• What tokens are in the treasury? You don't want too many native tokens.
Use protocol dashboards, Dune, Token Terminal, and DeFiLlama.
Beware of Mercenaries
Protocols can get a burst of activity if there are short-term incentive programs: airdrop hunters, contests, or reward bonuses.
The problem? These users disappear once the bonuses are gone.
Ex. Look at what happened once Optimism's Quest program ended.
Protocols can get a burst of activity if there are short-term incentive programs: airdrop hunters, contests, or reward bonuses.
The problem? These users disappear once the bonuses are gone.
Ex. Look at what happened once Optimism's Quest program ended.
Tokenomics
This is the part where most newbies fail.
A protocol can do everything right but can fail as an investment if the Tokenomics suck.
You can use this Tokenomics thread if you're unfamiliar with the basics.
This is the part where most newbies fail.
A protocol can do everything right but can fail as an investment if the Tokenomics suck.
You can use this Tokenomics thread if you're unfamiliar with the basics.
Key Tokenomic Details
• Token Emission Rate
• Fully Diluted Valuation
• Why does this need a token?
• When do insider tokens unlock?
• What % is allocated for insiders?
• How does value accrue to the tokens?
• How does protocol reduce sell pressure?
Watch out for traps.
• Token Emission Rate
• Fully Diluted Valuation
• Why does this need a token?
• When do insider tokens unlock?
• What % is allocated for insiders?
• How does value accrue to the tokens?
• How does protocol reduce sell pressure?
Watch out for traps.
Steelmanning
When you're in love with a protocol, it's easy to get sucked into echo chambers.
Seek out the FUD - you should be able to argue the project's faults better than the biggest distractors.
This is how you build conviction.
When you're in love with a protocol, it's easy to get sucked into echo chambers.
Seek out the FUD - you should be able to argue the project's faults better than the biggest distractors.
This is how you build conviction.
Risk Management
• How well audited is the protocol?
• What are the unknown, unknowns?
• Is there enough runway in treasury?
• What regulatory risks could they face?
• Is there a multi-sig guarding the treasury?
Good investment involves good risk management.
• How well audited is the protocol?
• What are the unknown, unknowns?
• Is there enough runway in treasury?
• What regulatory risks could they face?
• Is there a multi-sig guarding the treasury?
Good investment involves good risk management.
Future Plans
Prices increase when OTHERS buy, and others buy when interesting catalysts or stories drive it.
Theory: It should be laid out in a roadmap.
Reality: Dapps are not organized. For clues, you must dig into their mediums, Twitter, discords, and founder interviews.
Prices increase when OTHERS buy, and others buy when interesting catalysts or stories drive it.
Theory: It should be laid out in a roadmap.
Reality: Dapps are not organized. For clues, you must dig into their mediums, Twitter, discords, and founder interviews.
Examples of Catalysts
• New key hires
• New products
• Listing on a CEX
• Tokenomic revamps
• Ambassador program
• Ecosystem growth fund
• Expanding to a new chain
QUIZ: What are some other catalyst examples?
• New key hires
• New products
• Listing on a CEX
• Tokenomic revamps
• Ambassador program
• Ecosystem growth fund
• Expanding to a new chain
QUIZ: What are some other catalyst examples?
Not all Catalysts are Equal
Screw a website rebrand - you want to find POWERFUL catalysts.
Examples:
1) Tron announcing that it will provide a payment framework for A.I. systems
2) Amazon wants to enter NFTs. Whichever blockchain lands the deal will gain a huge price boost.
Screw a website rebrand - you want to find POWERFUL catalysts.
Examples:
1) Tron announcing that it will provide a payment framework for A.I. systems
2) Amazon wants to enter NFTs. Whichever blockchain lands the deal will gain a huge price boost.
Pumpnomics
A protocol with ZERO fundamentals can skyrocket in price. At the same time, a protocol with great fundamentals may flatline.
What's the difference? Pumpnomics.
Pumpnomics is not simply marketing - it's all the forces that can cause a buying frenzy.
A protocol with ZERO fundamentals can skyrocket in price. At the same time, a protocol with great fundamentals may flatline.
What's the difference? Pumpnomics.
Pumpnomics is not simply marketing - it's all the forces that can cause a buying frenzy.
Look for these patterns:
• Cult leaders
• A good story
• Good branding
• Tribalistic communities
• Riding real-world hype like A.I.
• Influencer / Shillfluencers backing it
• Us vs. them (this is an organic Layer 1 with no VCs!)
• Cult leaders
• A good story
• Good branding
• Tribalistic communities
• Riding real-world hype like A.I.
• Influencer / Shillfluencers backing it
• Us vs. them (this is an organic Layer 1 with no VCs!)
Pumpnomics and Cycles
In a bear market, look for tokens with solid fundamentals (Ex. Frax, GMX, GNS).
In a bull market, it's better to be an idiot because Hype + Pumpnomics matters a lot more. The average retail investor can't grasp complex mechanics.
They want simple STORIES.
In a bear market, look for tokens with solid fundamentals (Ex. Frax, GMX, GNS).
In a bull market, it's better to be an idiot because Hype + Pumpnomics matters a lot more. The average retail investor can't grasp complex mechanics.
They want simple STORIES.
The Investment and You
I gave you some criteria when evaluating projects.
Ultimately, the protocol is here to serve YOU as an investment.
Here are some things to watch out for.
I gave you some criteria when evaluating projects.
Ultimately, the protocol is here to serve YOU as an investment.
Here are some things to watch out for.
Portfolio Construction
Think about how this investment fits into your overall portfolio.
• Are you overallocated to a sector?
• How does this investment affect your risks?
• Is your bet size appropriate for the risk bucket?
QUIZ: what's wrong with this portfolio?
Think about how this investment fits into your overall portfolio.
• Are you overallocated to a sector?
• How does this investment affect your risks?
• Is your bet size appropriate for the risk bucket?
QUIZ: what's wrong with this portfolio?
Your Trade & Your Mind
• Are you being too overconfident?
• Are you FOMO'ing into this trade?
• Are you in the right mental state to be investing? You don't want to invest if you've lost money and are revenge trading.
• Are you being too overconfident?
• Are you FOMO'ing into this trade?
• Are you in the right mental state to be investing? You don't want to invest if you've lost money and are revenge trading.
Cognitive Biases
These are the systematic errors in thinking that are easy to make.
2 common ones:
1) Authority bias - "A big VC is invested in it - it must be awesome!"
2) Anchor bias - "This token is -95% down from its all-time high!"
These are the systematic errors in thinking that are easy to make.
2 common ones:
1) Authority bias - "A big VC is invested in it - it must be awesome!"
2) Anchor bias - "This token is -95% down from its all-time high!"
Your Timing
Your thesis might be correct, but you won't profit if you don't have the right entry price.
1) Where are we overall in the current cycle?
2) How early are you to this narrative?
Your edge is knowing information that will take other people time to realize.
Your thesis might be correct, but you won't profit if you don't have the right entry price.
1) Where are we overall in the current cycle?
2) How early are you to this narrative?
Your edge is knowing information that will take other people time to realize.
Is this an investment or a trade?
The main difference is the time horizon and risk tolerance.
I don't care if ETH drops by 50% because it's a long-term investment - I might add more at that point.
But if this is a short-term trade, I might exit if it drops -15%.
The main difference is the time horizon and risk tolerance.
I don't care if ETH drops by 50% because it's a long-term investment - I might add more at that point.
But if this is a short-term trade, I might exit if it drops -15%.
Profit Strategies
What's Your Stop Loss?
• "If this drops -15%, then I'm selling my position"
When Will You Take Profits?
• "When it doubles, then I'll sell half into USDC"
Determine your system before you enter battle. If not, you'll be making emotional decisions.
What's Your Stop Loss?
• "If this drops -15%, then I'm selling my position"
When Will You Take Profits?
• "When it doubles, then I'll sell half into USDC"
Determine your system before you enter battle. If not, you'll be making emotional decisions.
What's the Thesis?
All research should boil down to a 30-second thesis.
Here was my thesis for investing in GNS over the summer:
"Undervalued metrics compared to GMX. Differentiation through Forex + more leverage. Catalyst = going multichain to Arbitrum. Team is expanding."
All research should boil down to a 30-second thesis.
Here was my thesis for investing in GNS over the summer:
"Undervalued metrics compared to GMX. Differentiation through Forex + more leverage. Catalyst = going multichain to Arbitrum. Team is expanding."
The Art and Science
Evaluating projects is HARD.
Science = the hard numbers such as TVL and usage growth.
Art = You're judging if the founder & team can deliver. Will the catalysts drive interest from buyers?
Find the balance.
Science 🧑🔬 + Art 🎨 = Magic 💥
Evaluating projects is HARD.
Science = the hard numbers such as TVL and usage growth.
Art = You're judging if the founder & team can deliver. Will the catalysts drive interest from buyers?
Find the balance.
Science 🧑🔬 + Art 🎨 = Magic 💥
Comparing vs ETH
Some people get rekt'ed by trading & using leverage - they would've made more money if they bought spot ETH and held.
You're wasting time and mental energy if your trades won't outperform ETH.
Everything has to outperform ETH due to its risk/reward.
Some people get rekt'ed by trading & using leverage - they would've made more money if they bought spot ETH and held.
You're wasting time and mental energy if your trades won't outperform ETH.
Everything has to outperform ETH due to its risk/reward.
Your Next Steps
1) These criteria aren't equal. Figure out how to weigh each one according to your system. Rather than a checklist, consider a weighted matrix.
2) Create a checklist in Excel or Notion.
Add, delete, & make it your own.
1) These criteria aren't equal. Figure out how to weigh each one according to your system. Rather than a checklist, consider a weighted matrix.
2) Create a checklist in Excel or Notion.
Add, delete, & make it your own.
Slowing Down to Think
Going through this checklist will help you avoid simple mistakes.
It's not meant to cover every single scenario possible.
There's no guarantee in Crypto - everything's a probability bet & research will increase your odds of winning.
Going through this checklist will help you avoid simple mistakes.
It's not meant to cover every single scenario possible.
There's no guarantee in Crypto - everything's a probability bet & research will increase your odds of winning.
I hope you find this thread helpful in building your frameworks.
Are there any protocols you feel score highly on this list?
I'm looking to research and write about some new projects.
Reply and let me know if you have any suggestions.
Are there any protocols you feel score highly on this list?
I'm looking to research and write about some new projects.
Reply and let me know if you have any suggestions.
By the way, I have a free course coming out.
1) It'll be a starter guide on researching projects - it'll go into more detail than I could with a thread.
2) It'll be exclusively for people in my newsletter, so don't miss out.
Launches next week
Join thedefiedge.com
1) It'll be a starter guide on researching projects - it'll go into more detail than I could with a thread.
2) It'll be exclusively for people in my newsletter, so don't miss out.
Launches next week
Join thedefiedge.com
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