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How to conduct Due Diligence:

17 min readArticles

Ah, the good old due diligence. You either love to do it or dread it with passion.

If you’re not familiar with the term, due diligence is the work of investigating, auditing, or review performed to confirm facts or details of a matter under consideration. When it comes to investing, this process is done to see whether the assumptions under which a decision is being considered are true.

Due Diligence In Traditional Finance Vs. Cryptocurrency Due Diligence

In finance, due diligence often revolves around studying the developments of a particular project, as well as external factors (economics, politics, other assets’ prices) that cause fluctuations on the price of the asset. One can compare the business plan of a startup with the blockchain’s whitepaper.

Cryptocurrency adds an additional layer of complexity to this. Although blockchain due diligence closely relates to its Traditional Finance (TradFi) counterparts, those performing it have to be acquainted with the intricacies of the crypto market and its colourful community. This implies, as well, a deep understanding of the technology at hand.

However, this doesn’t come without rewards. A savvy investor that manages to recognize an underlooked project with great potential can see considerable gains. One good example of such investments is Chainlink (LINK) that spotted a fundamental problem within blockchains and created a product to solve it, reaching an almost 400% increase in price within 2021 alone. Another is Solana (SOL). Solana’s investors trusted a novel platform in a highly competitive niche with the right timing and unique differentiators and saw the price almost grow to 50 times in value in 2021.

Ok, there is profit to be made. But, how do I conduct due diligence in blockchain?

First of all, make sure they’re for real.

It’s easy to get lost in the excitement of cryptocurrencies’ high gains and extremely emotional rides. However, investing in a project turning out to be a scam (or rug pull, as crypto-ers call them) can result in catastrophic loss, which can only amplify if you add institutional reputation to the mix.

To illustrate what to look for, it’s helpful to see what well-known scams have in common. For instance, in 2014, One Coin famously raised millions with almost no information concerning its technology but making big claims and flaunting buzzwords. Soon after, its investors found themselves in a four billion dollar Ponzi scheme, and the now super-rich founder, known as doctor Asia disappeared, never to be seen again.

In this clip from our Blockchain People podcast, Erica Stanford, author of a book on crypto scams and deceptions, talks about the OneCoin story and its ramifications.

Another recent example occurred in 2019. This scandal arose as investors discovered that Paycoin did not hold the 100 million dollar reserve it announced to its investors. The project’s leading developer was sentenced to 21 months in prison as a result.

If anything, these stories highlight the importance of correct, professional diligence in cryptocurrency and blockchain.

Identify projects that meet the regulatory aspects of blockchain.

Blockchain and cryptocurrency compliance is a beast of its own. The most common legal issues of blockchain projects range from being classified as securities in certain jurisdictions to being completely outlawed in their jurisdiction of choice.

In any case, a good combination to shoot for is a project with enough runway and experience to protect itself (should trouble arise), set in a jurisdiction that’s flexible but friendly towards blockchain initiatives.

You do NOT want your target project to go through the hell that Ripple encountered as it faced court for allegedly running an illegal securities offer.

There are abundant examples of projects that have faced regulatory scrutiny. However, some outstanding cases have been Ripple, which met the SEC in a suit for offering a currency labelled as a security, and The DAO (Decentralized Autonomous Organization). The latter suffered a breach when an attacker drained over 3.6M ETH (worth $50 Million at the time) from the crowdsourced investment fund. Since the DAO then sat in a regulatory grey area and cryptocurrencies were still novel at the time, the attention the case received had an impact that could have torn down the crypto industry as a whole.

Identify what makes a cryptocurrency project valuable

As we said before, there is a question that riddles everyone that enters the crypto industry: “how can I identify gems in the blockchain space?

However, even experienced players might struggle to develop metrics to predict success in the crypto industry. This is because, unlike rational markets (that tend to exist more in the imagination of economists rather than reality), crypto projects can be Black Swans of their own.

An example of this is Bitcoin itself, which was considered a worthless asset initially (2009). After 11 years, BTC is valued at over $30,000, rocketed to up to $66,000, and is even considered legal tender in El Salvador. Another is the king of memecoins, DOGE, born as a parody of Bitcoin and going from $0.0054 to an all-time-high of $0.74. Both of these cases were completely unpredictable and have made those that understood their potential early on incredibly wealthy.

Back To The Real World: Who Needs To Perform Due Diligence In Crypto?

Professional investors and funds

As blockchain technology popularizes, institutional adoption slowly begins to arrive in the public and private sectors. This has caused more governments to invest in implementing the technology and more funds to take advantage of cryptocurrencies’ volatility as investments.

For example, on one side, IOHK (the foundation behind Cardano) recently agreed with the Ethiopian government to use Cardano’s blockchain for providing digital identity services for their education system.

On the other, Microstrategy is a prime example of how private entities can benefit from adopting cryptocurrencies as a store of value. Its CEO, Michael Saylor, insists on exclusively investing in Bitcoin with the company’s excess funds. The result has been an astounding 100% return on some of their purchases.

In either of these cases, investors need to carefully assess their entrances, value, and possible risk scenarios. The fact that established, well-known funds are incursioning into cryptocurrencies signals that, as time passes, TradFi comes to accept and embrace the value and potential of blockchains.

Cryptocurrency exchanges and token platforms

In the blockchain environment, exchanges constantly need to whitelist new tokens that have recently conducted Initial Coin Offerings (ICO) events or similar fundraising mechanisms leading to a token’s launch.

These processes are designed to audit a project through a compliance process that questions legal specifics for the token or coin, if it can generate traffic for the exchange, if it has a good reputation, a community supporting it, whether it could represent a risk, etc. In this regard, cryptocurrency platforms and exchanges have a higher incentive to perform due diligence.

It’s also important to know that even DEXs, which could be by default permissionless, sometimes require a degree of due diligence. This is because particular tokens might be subject to faulty smart contracts requiring an inspection, among other problems.

Cryptocurrency startups themselves

There are two ways in which a crypto startup can benefit from performing due diligence: One of them is by examining themselves to spot their strengths and weaknesses. The other is by examining the general market to find valuable associates and strategic partners.

Since the first case is self-explanatory, we can take a look at the second one. It’s also important to note that crypto partnerships do not necessarily need to happen within the blockchain realm. For example:

  • One of the most important partnerships in 2021 has been the collaboration between Reddit and the Ethereum Foundation in January, with the goal of creating a scaling solution for the Ethereum blockchain to distribute community points to its 430 million monthly users, a step towards decentralised social media.
  • Visa, Circle, and partnered to make it possible for clients to make payments in USDC (Circle’s stablecoin) using their Visa crypto debit card.
  • Paypal, through its due diligence process, gauged the opportunity and implementation costs of connecting to the crypto market. Paypal then unexpectedly announced its incursion into cryptocurrency. This partnership, which also accepted minor players such as Litecoin and Bitcoin Cash, was considered to also translate into substantial gains for the holders of these coins, as well.

Your Due Diligence Checklist For Cryptocurrency.

What are common problems of cryptocurrency projects?

Although, as we mentioned, analysis in the crypto environment should be nuanced and relates to many different moving factors, there are specific categories that any investor must analyse. In particular, to try and spot red flags in particular areas.

These, along with their key questions, are:

Market conditions and competition: Who is who in the ecosystem?

Most DLT/blockchain companies use the same underlying technology, which doesn’t mean that the applications that they all create serve the same purposes or focus on the same industries and markets.

Some projects try to apply blockchain solutions to create programmable Decentralised Apps (dApps). Others use it to build data solutions, consumer products or to create governance systems for low-level politics. Some projects use tokens to issue shares of their company on the blockchain. Just as companies are all different, have different goals, and cater to industries/markets, a project’s adaptation and market/community-fit process can vary wildly.

When it comes to this category, your job is to determine whether the solutions a project proposes match existing problems and can be implemented efficiently.

Technology: Is this truly revolutionary?

Perhaps the most difficult subject to tackle for new investors, since it takes a long time to get acquainted with technical nuances. Analysing blockchain projects (happily) doesn’t necessarily require a programmer-level understanding of blockchain, but it does need you to get familiar with the principles behind it, particularly decentralisation and token dynamics. However, critical thinking should suffice to help you figure whether a given project needs blockchain presence.

Investors can also rely on endorsements, partnerships and audits by third parties to form a judgement about the technology powering a project. While some investors attained significant gains investing based solely on whitepapers and websites during the ICO 2017 bubble, retail crypto investors are now savvyer and knowledgeable enough to avoid this. In general, there are enough platforms for analysis of projects online to easily spot projects with no fundamental value, which in turn has made it harder for low-value projects to go to market.

Founders and Team: Can I trust this team to deliver?

Just like in any business field, blockchain projects often need to juggle limited resources, human capital and technology to multiply their potential impact. The people working in a company or project (particularly if they have a proven track of solving similar problems, or even better, building successful companies), as you might know, play a critical part in this regard.

A particularity of the blockchain industry is that it is relatively small: Projects would often have well-known advisors and executives with established reputations (either positive or negative) broadly discussed online. A quick Internet search can also reveal the exact level of involvement of the most prestigious names and advisors in the enterprise. In these technologic fields, past projects and their results are often also clearly visible online, making it fairly easy to assess competence.

Legal and Compliance Specifics: Is this blockchain project compliant?

The regulatory grip is tightening around blockchain and cryptocurrency, and arout the financial options available through these technologies. As such, projects that raise funds need to have a legal team that can adjust to the changing landscape and conduct the company’s operations seamlessly. The jurisdictions within which a project launches and collects funds also play a fundamental regulatory part.

Token economics (tokenomics) and business model

Blockchains, broadly speaking, exist to organise societies through incentives and predetermined rules, not necessarily, but often economic. The organisation/management of these incentives and the internal economies supporting a project constitute the term often known as ‘tokenomics’.

Understanding every aspect of tokenomics to its fullest capacity would take more space than this whole guide, so for simplicity, let’s focus on the rewards and values within a system: Blockchains are a relatively new invention, and many of their implications and virtual applications haven’t been tested on a broad scale. Tokenomics refers to the aspects that make a project valuable and therefore are crucial to their success. Still, investors can only look at available facts and speculate in this regard until the assumptions are tested against the real world.

Therefore, projects with Minimum-Viable-Products (MVPs) that are used in real settings have an edge against those that haven’t launched any of their proposed solutions. This category also refers to the distribution of tokens, their intended price, supply, etc

5 Items To Add To Your Crypto Due Diligence Checklist

Join investor groups in social media and forums

If you want to go fast, go alone. If you want to go far, go together.

Most likely, several communities of investors online are thinking about investing in the project you’re examining. Thanks to this article, you now can discern between those looking for a true signal and those listening to noise. Therefore, you now only need to know where to start looking. Two of the leading platforms you can leverage these days are Reddit and Discord.

Reddit is basically a modern version of old-school Internet forums (yeah, remember those?) It’s full of communities directed towards anything that you can think of: Memes, The Simpsons fans, dog memes, architects, cat memes, hard-core gamers, hard-core bodybuilders and… crypto. Within Reddit, multiple communities are devoted to cryptocurrencies, each with their own spin, and some of them with user counts in the millions.

Reddit’s importance for the crypto world is undeniable, and its continued growth in significance and inspiration is inevitable. The social media platform, unlike others that have (briefly) occupied a greater place in the spotlight, has become what’s known as a Live Player.

Discord was initially designed for gaming communities to interact via text and audio channels. However, its remarkable security features appealed to people in finance communities, translating to the crypto space.

Just like Telegram, there are plenty of chats surrounding all kinds of topics in Discord, which means that each community might have its internal quirks and rules. Finding valuable Discord chats (or Reddit forums) can be a game-changer for you, as you’ll continue to grow your areas of expertise, interact with new people, and be exposed to ideas outside your comfort zone.

Visit blockchain conferences and meet other crypto nerds in person

Devcon is the world’s largest Ethereum conference. Devcon Bogotá will be held in Bogota, Colombia, some time this 2021. 

Another great way to perform your cryptocurrency due diligence is by… walking up to people and talking to them?

Pre-COVID (and hopefully post) crypto conferences used to be magical places where like-minded individuals would gather to meet others in the ecosystem. These events are not only fun to see your favourite crypto celebrities in person, but they also often provide all kinds of entertainment and plenty of networking opportunities.

More than one great crypto project has been born thanks to one of these events, and you’re likely to take home a great deal of information by asking questions directly to founders.

Interact directly with the team through their official channels

One of the most beautiful things in the crypto ecosystem is the transparency and openness that it upholds.

Blockchain projects dedicate a lot of time to clearing out uncertainties around their ideas (and if they don’t, that’s a red flag!) and responding to users’ questions. Therefore, it’s easy for you to get in touch with a project’s team or even founders through these channels. One of them, as we’ve covered, is Discord. The other is Telegram. 

Telegram is one of the most used instant messaging platforms globally for its simple usage and tons of features like multi-platform support, unlimited server storage, voice and video calls—around 500 million users connected to the application worldwide in 2021.

To get in touch with the steering team behind a project, you can simply search out their official channels through their website and ask questions openly. You can also use the Telegram search bar, although we’d recommend you not to: open search can return an impersonator or a scam group and make you liable.

Subscribe to a high-end subscription service by a fund or market research company

If you’re in the business of investing or facilitating others to do so, this might be the most convenient option for you. Having a subscription to the products of a firm that constantly and professionally performs due diligence can allow for high-volume output and will enable you to go past your personal biases.

For example, at D-CORE, we generate investment reports that you can access on a subscription basis. These reports go out often, most of them behind gated Internet doors, and detail our due diligence process for several crypto projects.

Hire a research company to conduct due diligence on your behalf

Possibly the best option on this list, although one we understand might not be equally easy to access for everyone. Having a firm dedicated to helping you with your particular needs is, without a doubt, a premium choice. It’s also one option that might let you let go of the wheel and focus on steering your business or investment practice while someone else takes care of advising you.

Unlike a subscription, this option would also allow you to choose which projects you want the firm to investigate. Depending on your needs, this could turn out extremely attractive.

What Are The Best Due Diligence Services In The Blockchain Space? Well, Let Us Tell You About One.

If you need an All-Star team, you now know where to find it. 

D-Core is a research firm powered by a distributed team of crypto researchers worldwide.

Our proprietary system for research, designed by PhD scientists, comprises a set of measurable parameters to determine a project’s value. Through a powerful engine, specialists scattered around the world are incentivised to solve a set of questions regarding every particular project, which are then compiled into investment reports. This allows D-CORE to produce the highest-quality information possible to spot tomorrow’s crypto disruptors.

Who can benefit from this service?

Currently, we offer specialised research and due diligence services for a variety of needs. We aim to put the D-CORE engine at your service by leveraging our different customers to build a system that feeds upon itself and provides each of them with the best possible results.

For investors, depending on your needs, you can access the D-CORE platform, a subscription service dedicated to serve you with our latest reports (currently and for a limited time free to use), or hire our services to research projects directly.

For crypto exchanges or launching platforms, we offer specialised due diligence services geared towards eliminating the risk of getting involved with less-than-ideal projects. Using this service, your platform can focus on growing its user base and project access range instead of endlessly reviewing and safelisting.

For crypto projects, the D-Core engine can help you spot potential partnerships, as well as strengths and weaknesses within your project. This process is particularly beneficial when going to market or before raising funds since it avoids your project being perceived negatively, helping you tailor your presence to meet the needs of investors.

Crypto projects can also benefit from the additional media opportunities we offer them, as well as our connections to exchanges.


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