Investor’s Guide to Due Diligence in Web3

We’ve all been there… racing into a project because we caught a piece of hype or saw the price pump, only to realise that there wasn’t much substance underneath the (temporary) excitement.

Jumping in because of FOMO is a perfect recipe for losses in web3, so we need to be more purposeful in our token purchasing. Which is why I have put together a short guide to run through before making your investments in that latest shiny token you are excited about.

I’ve divided this guide into five sets of questions, to help you consider different elements in turn before zooming out to the bigger picture. These sections are:

Team / Vision / Community / Tokenomics / Strategy & Security

By going through these sets of questions and making sure you can answer them, you can arrive at a more informed decision about whether or not to buy into a project — and how you might buy in, if you do.

This is also why this an Investor’s Guide and not a Degen’s Guide, because we all know that Degen’s don’t do proper DD… and it’s time to #ditchthedegen.

Set 1: The Team

Gone are the days when anonymous teams are the norm, we now rightly expect more information about who we are handing our money to. There’s also an increasing number of professionals from other industries moving into web3 — so the opportunities for early investment in what will become significant companies is growing…

1.1 Are the Team Doxx’d?
Let’s start with the basics… do you know who the team are behind the project? Can you verify their CVs and are they specific about their experience? Are the team willing to put their reputations on the line or are they hiding in the shadows?

1.2 Does the Team have Relevant Experience?
Just because someone is good at marketing, for example, doesn’t mean they know how to deliver a gaming project… and likewise just because someone has delivered web3 projects, doesn’t mean they’ll be good at connecting with traditional business sectors. What are the team trying to deliver and does it match with their professional experience?

1.3 How Many of the Team are Full Time?
Most entrepreneurs have multiple projects going, so it’s important to know how committed the team members are to the particular project you are looking at. Is this something they put their name to, but are rarely seen? One of five projects they have running? How much are they giving to this specific project?

Set 2: The Vision
Successful projects are founded on a strong vision of what they want to be — and why they want to get there. This is something that has both overt and subtle indicators.

2.1 What Does the Project Want to Achieve?
Different projects explain their vision differently, and some purposefully take the mysterious route, but you should always be able to answer the question: what do they want to achieve? What does success look like for this project? Are they trying to achieve something that already has solutions in the market?

2.2 Do they have a Detailed Strategy to Achieve it?
The roadmap question. Have they outlined a plan for how they want to achieve their vision? Do you have a clear sense of what milestones can be expected from the project? Where do they want to be in six months or two years? Some projects do keep things mysterious to generate engagement… but after the first few months, the road ahead should be clear.

2.3 Does the Output Match the Vision?
Once you can see the roadmap and strategy laid out, then you can check whether or not the project output is living up to expectations. Are they meeting dates on the roadmap, or are there always delays? When they deliver on announced items, are they at the level expected? As a project exists for a longer period of time, it should become clear whether their output is matching the vision they present. If not, then why not?

Set 3: The Community
We often hear that web3 is all about community, but how many of us spend time to check out a community before buying into a project? This is an important step in DD that is well worth the time spent.

3.1 Does it have a lively and engaged community?
This has little to do with the numbers of followers or members, which are easily faked or inflated by giveaways, but when you look at the community how active is it? Are there more mods talking than community members? What creative output is coming from grassroots community efforts? How many twitter threads, articles, write-ups, artworks, memes etc. are being produced by an excited community?

3.2 Is the community moderated properly?
Every community needs good moderation, not only to keep things organised and on topic — but to ensure that scammers aren’t allowed to infiltrate and do some damage. Does the project have enough moderators, that are available in different timezones? Are the moderators fair and treat all members the same? Is there a mix of volunteer and paid moderators?

3.3 How does the community navigate criticism?
Related to the above question, every project will receive criticism and so how the community deals with it is an important indicator. Does the community have open discussion about the pros and cons of the project? Does it often descend into arguments or is the debate constructive? How heavey-handed are the moderators with banning people who criticise the project? Sometimes people need to go, because often they are trolling, but if a community bans any sign of criticism it’s a big red flag.

Set 4: The Tokenomics
Tokenomics can mean a lot of different things, so it’s important to consider how the project creates value — both for holders and for the team so that the project can deliver its stated goals.

4.1 What is the value proposition for the holder?
Beyond speculative gains, what does the project offer to the holder for their participation? This is often in the form of access, yield or future drops/mints of some kind — all of which should be factored into the price of the token when you consider buying. The flipside of this question is also important: what value are the project owners getting out of their community? Because often holders are only seen as wallets to engage for future mint payments or other funding streams.

4.2 What revenue streams does the project have?
Related to the above, aside from the initial mint and royalties (which are becoming difficult to enforce), what are the revenue streams for the project? How much funding do they have to operate without any revenue? If the only revenue opportunities they have are future mints, you might want to reconsider your involvement.

4.3 Are the Tokenomics easy to understand?
There are a lot of different kinds of tokenomics — but the important thing is that they are easy to understand and communicate. We’ve all seen those tokenomics flowcharts that look more like a maze… these are usually hiding the fact that there’s little value underlying the token beyond the complexity of its system to keep people’s money locked up. Are the tokenomics clear and without unnecessary complexity? Do they rely on external factors that might be outside the control of the team? Do they rely on a constant source of new owners/funds coming in to operate?

Set 5: Strategy & Security
Once you have answered all the above questions — along with others you will consider along the way — there are a few questions you want to ask about your own involvement. Planning is an important part of any successful investment strategy, so we need to ensure we are acting as rationally and carefully as possible.

5.1 What are your entrance and exit points?
There are few projects that you should consider a ‘forever hold’. Perhaps some genesis passes that give access to an ecosystem with significant ongoing value… but for most everything else, what is your decided entrance price and target for exit? Are you buying multiple tokens, so that you can take profits on the way? What price would the project have to drop to before you cut your losses and leave?

5.2 Does the project have enough liquidity?
NFTs have a serious issue with liquidity. So, does the project have enough liquidity for you to happily enter/exit when you wish? Is that liquidity organic or reliant on initiatives/purchases from the team? Has the initial volume hype of a new project calmed down so that you can see where the demand truly lies?

5.3 Have you taken adequate security precautions?
Finally, but perhaps most importantly, have you taken the appropriate security measures before making your purchase? Is the site you are using legitimate? Have you been coerced into buying by ridiculous offers or promises of quick riches? Is it possible you could be using a fake link or scam contract? Take your time, slow down, and put in place as many security measures as you can. Because the world of web3 is currently pretty unforgiving and cruel when it comes to the amount of scams out there.

Conclusion
I hope the questions above are helpful when you are looking into a new project. It’s easy to get excited about new things, that’s part of the psychology of web3 that draws people to it — but it’s unfortunately the part that also causes us to make the most mistakes. Taking our time and slowing down with our decision-making is one of the most important steps we can take when it comes to our investments in web3 projects.

If nothing else, going through the fifteen questions above means that you have taken the time to act based on information and not emotion. Remember that the best projects aren’t ones that will make you huge profits overnight, but the ones that are consistently building to achieve their vision and are keen to bring along their community for the ride.

Good luck out there with your web3 investments — with the proper due diligence and careful approach, this highly risky sector can become profitable and comfortable for you to be part of for the long term. But it all starts with asking the important questions and being honest with ourselves when answering them.