The main drawback for institutional and non-retail investors to enter the blockchain/DLT industry is the amount and diversity of information and time it requires. Just as in the VC ecosystem, seriously investing in blockchain requires countless hours researching and conducting diligence, on top of the time necessary to familiarise with entirely new industries and technologies.
This juxtaposition creates a key challenge for investors: How can they take advantage of the potential returns of blockchain and DLT without immediately double-sizing their to-do list?
Climbing the familiarity ladder.
To know if a project will succeed in the blockchain/DLT (terms that are not equal but, for this article, we’ll use interchangeably) environment, an investor needs to understand the context and subtleties of this sphere. From the industry’s marketing and social media know-how to regulations, latest news, applications, underlying fundamentals, and other micro-cultural nuances. All of this, of course, assuming they completely understand the technology behind every particular project—a daunting and seemingly impossible task to balance with a successful capital management career.
Key points and high-impact factors.
At D-Core, we specialise in analysing companies and issuing recommendations. We’ve created a unique decentralised organisation to seamlessly produce a high volume of easy-to-consume insights on the cryptocurrency and blockchain industry through detailed reports.
When creating reports, we focus (with eventual exceptions) on a set of categories that we believe are vital for understanding a DLT/blockchain project. If you are researching a project and are unsure of which details to pay attention to, we encourage you to follow this framework and let it guide you across all of its fields.
Note: Before making any decisions based on research using this list, however, remember that our team is comprised of a broad set of professionals with a proven track on the blockchain industry, all held to high editorial and quality standards. They might interpret publicly-available information differently than you, which makes our list, however comprehensive, still dependent on base knowledge and experience.
The D-Core checklist.
Market and Product
Just because all DLT/blockchain companies use the same underlying technology, it doesn’t mean that they all use it to the same extent, or concentrate on the same industry and market. Some companies try to apply blockchain solutions to supply chain problems. Others try to build decentralised apps and tools to create new governance systems in existing industries. Others just want to issue shares of their company as crypto tokens on the blockchain.
Just as companies are all different, have different goals, and cater to different markets, their adaptation and market-fit process can vary wildly. Your job is to determine whether their solutions fit existing problems and can be implemented efficiently.
Key questions for this subject: What problem is this product solving, and is there a big enough market that cares enough about this problem to use this solution? Is it easy for them to do it?
Just like in the start-up field, with limited resources, blockchain projects often need to leverage capital and technology to multiply their potential impact. The people working in the company (particularly if they have a proven track of solving similar problems, or even better, building successful companies), as you might know, are critical in this regard.
A particularity of the DLT 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.
Key questions for this subject: Would I hire this exact set of people to solve the problem they propose to solve? Are they doing what they claim to be doing?
DLT projects require incentives to operate and remain decentralised. These incentives take the form of crypto tokens, which reward people for performing the tasks that interest their particular blockchain. And, while a good token design cannot guarantee the success of a project, it can certainly break the project apart. We recommend that you, therefore, develop at least enough blockchain literacy to understand what the token design of your reviewed project entails.
Key questions for this subject: Does this token design make sense within this context? Can it provide additional value? Is the token even needed (pro-tip, most aren’t)?
Perhaps the most challenging subject to tackle for unfamiliar investors. Analysing blockchain projects doesn’t necessarily require a programmer-level understanding of blockchain technology, but it does require an understanding of the principles behind it, mainly decentralisation and token incentives. Critical thinking should suffice to answer the all-too-common question of the need for DLT in a given project.
Investors can also rely on endorsements and audits by trusted third parties to form a convincing judgement about the underlying technology of a project. This makes it easy to discard projects with no existing technology, users, or products, since, while it may have been profitable to invest in projects based solely on whitepapers and websites during the 2017 bubble, retail investors have become wary of these practices.
Key questions for this subject: Do I understand/is there any valuable technology behind this project? Is it trusted and has it been audited/endorsed by prominent institutions that have conducted due diligence?
Legal and Compliance
The regulatory grip is tightening around blockchain and cryptocurrency, and about the financial options available through these technologies. As such, projects that raise funds need to have a legal team that can adequate to changing landscapes and conduct the company’s operations seamlessly. The jurisdictions within which a project launches and collects funds also play a fundamental regulatory part.
Key questions for this subject: Does this project have a competent legal team? Does it comply with the regulations of the jurisdiction it’s launching in?
Blockchains, in a broad sense, exist to organise societies through incentives. The organisation of these incentives and the internal economies of the project constitute the umbrella term ‘tokenomics’. An entire essay could be written without covering all the individual variables that a tokenomics analysis should include, without reaching a satisfying end.
DLT is a relatively new invention, and many of its implications and virtual applications haven’t been tested in a broad scale. Tokenomics refer to the core aspects that make a project valuable and therefore are key to their success. Still, investors can only look at available facts and speculate in this regard.
Key questions for this subject: What incentives does this project create for its users? How does it distribute them? Does it propose a valuable way to organise communities and markets?
Social, Virality, and Community
Social media and DLT projects are intrinsically connected. Cryptocurrency communities started in Internet forums, and over time transitioned to social media. Projects that have managed to create an impact have strong advocates on social media and, although their communities can be as biased as political ones, they reflect their potential.
On a negative side, blockchain projects constantly try to ‘hack’ the social media hype factor to increase perceived enthusiasm, so investors should verify the legitimacy of their following.
Key questions for this subject: Does this project have a broad community backing it? Is it legitimate?