How to Research a Cryptocurrency Project Before Making Investments
Not everyone in Web3 is friendly. But hey, it’s not all bad — you also have endless resources at your fingertips to do your own research. Most crypto projects will have their own White Paper, Discord Channel and of course, a detailed account of their underlying smart contract on a blockchain explorer such as Etherscan.
Web3 might be an attractive environment for scammers — but it also empowers you to look beyond the hype and verify a few things for yourself. In this article, we explain the key resources you have at your fingertips for doing just that.
1. Analyze Smart Contracts Using Etherscan
Let’s start with blockchain fundamentals. Every crypto project, token or platform has a smart contract at its base. Since smart contracts are blockchain-based instruments, all of their key data is recorded and available for you to inspect.
You might be wondering how exactly you can access this data — this is where blockchain explorers like Etherscan come in. Blockchain explorers are sort of like search engines built specifically for blockchain; they can parse through the huge amount of on-chain data for a specific blockchain, and show you results for different queries about the project you’re researching.
Learning from Smart Contracts
You can build a pretty clear picture of a project by looking at a few key metrics on a blockchain explorer like Etherscan. These include:
- Contract creation date: this allows you to see when the project’s underlying smart contract was created, so you’ll have an idea of how long the project has been running for. This could be useful in helping you to spot a rug pull, since you’d expect this type of project to have a short duration.
- Total token supply: looking at the total token supply for a project gives you the big picture, and indicates how much of a share in the project each individual token will buy. Buying a thousand tokens might seem like a lot, but if the total supply is 50 million, you’ll soon get some perspective on your influence within the project.
- Token distribution: similarly, looking at how those tokens are distributed will also give you important insights. A token supply of 50 million might seem standard — but if you notice that 10 million of them are all in the same wallet, it might indicate a volatile project, or even a rug pull, since just one individual has so much influence.
- Wallet transaction history: looking at a project’s smart contract data will also show you the history of all the transactions ever made on that project, and which wallet IDs were interacting with it. If lots of transactions were really just tokens circulating through the same few wallets, it might indicate wash trading to boost the price and profile of the project, for example. Similarly, if you’re checking out a token you’re thinking of buying from a big collection, and its smart contract transaction history indicates just a few recent contract interactions, chances are it’s a fake smart contract. In either case, a look on Etherscan will give you insight on what’s going on behind the curtain of the project you’re eyeing up.
How to find the smart contract
Before you can parse any of this data, you’ll need to find the smart contract ID for the project you’re dealing with. It will appear either on the project’s official website, the project’s OpenSea page, its white paper or even its GitHub page. It may also appear on the relevant CoinMarketCap or CoinGecko page.
Once you’ve copied this ID, you can go to a blockchain explorer (compatible with the project’s underlying blockchain) and enter your copied smart contract address. You’ll be able to access all of the above metrics, and many more, to help you build a picture of your prospect.
2. Using Discord to Check with the Community
Discord started life as a social hub for gamers and developers, but has risen to become one of the central communication platforms in Web3. More or less every crypto project has its own Discord server, acting as a hub for its community to ask questions, collaborate and share information.
Learning from Discord
But on a more basic note, Discord is a hive of information, where you can get a feel for a project’s community — and even do some digging on its founders.
- Assess the team’s project: For example, if you have some questions about the project’s outlook or technology, this is a great place to ask. A responsive team, willing to answer your questions and concerns, is what you’d expect from a genuine project with diligent founders. On the other hand, questions that go unanswered, or a central team that is totally unresponsive might suggest a project with no vision, or worse still, a scam.
- Gauge the community’s sentiment: Skimming through the community’s comments can also reveal a lot about a project. If the majority of comments seem to be shilling the project, or urging you to buy in quickly, you might find the project isn’t quite what it seems. Discord is about genuine community, not shilling. Similarly, you can gauge how the community feels about the project — whether they are engaged, disappointed or have key information to share about upcoming drops for example.
In any case, looking at the activity on Discord is another great way to gather information about your prospective project, and should absolutely be a part of your research.
3. Read the Project’s White Paper
The third key resource for doing your own research is the white paper. In Web3, the majority of projects have their own white paper, and the point of this document is to provide a look under the bonnet at the project’s underlying technology, its specific use case (if any), the road map for the future and founding team. All of these will help you assess whether the project has a bright, realistic future.
Here are the important questions that must be answered in the white paper:
- Is the platform/technology useful?
One of the first things you should look for is the project’s use case — does it have an application within an existing business or industry? Who are the competitors — and does the project even need to be blockchain-based? If the answer to these is unclear, you may want to consider whether the utility of the project will endure past the hype.
- Who are the founders?
Often, white papers will name their founding team, and this can be valuable information. If a founding team already has a successful legacy in DeFi or the NFT space, the project might seem more appealing. On the other hand, if the founders aren’t named or don’t have an obvious track record when it comes to crypto, business or the project’s underlying use-case, you might want to consider digging a bit deeper before you make up your mind.
- Is there a realistic road map?
And finally, every white paper should present a road map indicating how the founders aim to develop the project in future. This is your chance to understand their intentions and decide whether you think the plan is realistic before jumping in.
These are just a few key resources for understanding the Web3 space and interacting safely — but there are hundreds more you can find if you diligently search the internet. In return, you’ll make better investment decisions.
Only you know your financial goals and tolerance for risk, and you need to develop your own investment hypothesis. That way, you’ll have confidence as you hold through any lows, or know if it’s time to sell. Ultimately, it’s your hard-earned cash, and only you can make decisions about what to do with it.