Defi is a big innovation in the blockchain space, it amounts for over 80% of the financial activities that goes on in the blockchain space.
What are the things I look out for during my research
Find out in this article:
As a Defi researcher, I look out for quite some fundamentals when making research on particular protocol/project
Lets dive in...
I look out for SEVEN (7) research indicators/marks when doing my research on a Defi protocol
1. The Protocol Overview
2. Product/feature/category
3. Team/People/Community
4. Financial Metrics & On-chain data
5. Tokenomics
6. The Protocol's
Safety
7. Research Score
Let's break them down;
1. PROTOCOL OVERVIEW: A protocol overview is the first thing I look out for when doing my research, it gives me a bigger picture of what kind of protocol I am about to dive into, it could be broken down into the protocol category and its features. Having an overview of the protocol gives me an idea of what to look out for in other indicators.
2. PRODUCT/FEATURES: A protocol product is one key data I look out for after having an overview of the protocol. A simple example of a protocol product could be seen below;
a. For decentralized Exchange protocols: I look out for how the swaps, liquidity pool, governance voting & vesting were designed on the smart contract, this helps in knowing how slippage and impermanent loss could occur in a any of the pools.
b. For lending protocols: I look out for supplied asset, collateralized asset, the borrowing rate & the reserve were designed.
c. For Derivatives: I look out for the impact price swap, long/short position limit, and liquidity pool.
d. Liquid staking derivative: I look out for APRs and support chains.
My watch out is different for various Defi categories, but these are the few protocols I have done more research on.
3. TEAM: What makes a successful project is the people. I watch out for people working within the project and the people supporting it outside.
I break them down into 3
i. Team & Founders: founders are the people that launched a project, while the team is employed to help the founders execute and deliver on the project’s promises. I check if they are doxxed or anonymous and also if they are new or experienced.
ii. Backers/Venture Capital: Venture Capital firms (VCs) are a type of financing that investors provide to startup companies that has long-term growth potential. They are big investors who are experienced in assessing businesses
iii. Partnership: Like the saying goes - 'Two heads are better than one Partnership means trust & it’s a good indicator of the project’s current future success
iv. Community: The size and health of a project community are an indicator looking at community, I look at the community as the consumer side (of a business structure) I like checking through Discord, Twitter & telegram groups to gauge how the sentiment on the project is across these channels.
4. FINANCIAL METRICS: Financial metrics indicates a project's performance. I look out for TWO metrics - Total value locked & Revenue usually compare the TVL & revenue of a crypto project, looking out for how they generate/or aim at generating their revenue.
For Dex protocols (revenue should be from trading fees)
For lending (revenue should be from interest)
For Options ( premiums), for staking derivatives (block rewards & transaction fees), yield aggregator ( all of the above)
The TVL is the amount of money (in dollars) deposited into the protocol, the higher the TVL means(means more users are coming in).
Other key financial metrics for crypto projects are a. market capitalization b. Fully diluted valuation c. Price to earning ratio (P/E)
5. TOKENOMICS: Tokenomics is everything that affects the value of a token such as token creation and distribution, token burn schedule & incentive mechanism
Tokenomics = Token + Economics
We can break tokenomics into 2 categories
SUPPLY & DEMAND
i. For Supply: I look out for the total supply, circulating supply, and Max supply. I check how much of the initial allocation goes to the team & early investors. Also, I check when are the tokens supplied & when are unlocked ( also check if the unlocked is held by early investors).
Other things I look out for in supply are - if the token was/will pre-mined or released on a fair launch, the emission rate ( if it’s deflationary/fixed and lastly buys and sells taxes.
ii. For Demand: demand is how much of a token the market wants and the reason why they want it. I check out what could affect the demand for the token (positively or negatively), firstly;
a. Can the token be used to earn yield ( I check if the yield is inflationary i.e. the yield that comes from the emission of new tokens.
b Real yield (this is common with most defi protocol today) yield that comes from the revenue the protocol generates e.g tx fees & others
I also check out the utility of the token, a token with utility means it has a use case such as a discount on exchange, payment from gas fees from transactions in blockchain & boosted rewards.
Lastly, for demand, I check if the protocol uses the token for governance right - to vote for changes to the protocol. I look out for what kind of changes can be done through the governance token & also check if the token holders are using the votes.
6. PROTOCOL'S SAFETY: Protocol safety means checking out for some technical details attached to the protocol such as its code and all(for smart contract risk and other associated defi risk).
I look out for;
a. If the smart contract is easy to find
b. Well-documented software architecture & whitepaper.
c. If the code was tested before deployed
d. If it's sufficiently audited or not
e. If the protocol oracle is sufficiently documented ( to determine flash loan risk and how it's mitigated)
7. RESEARCH SCORE: The above indicator I just discussed vary base on the kind of protocol I am researching on, for protocols like Dex and lending I always make sure. I look for all of the 6(six) discussed indicators. For some other protocols I watch out for only 4-5 of them to give ma go ahead
Note: this isn’t still a pass mark that the project shouldn’t rug, but having this on my palm as a researcher helps me understand protocols better and guides me in navigating through them.
