Know The Project's Values And Goals
Blockchain projects are, nowadays, being applied to all manner of real-world problems and industry needs, and knowing what your potential investment is supposed to help with can give you a good idea of its long-term viability. Whether it's in financial services, logistics, retail, entertainment and digital media, or otherwise, make sure that you understand the mission statement of any project that you want to invest in, and that it strikes you as a viable entry in that field. Strong projects have clear use cases, a well-defined market, and measurable benefits over the systems that are already present in the industry. Read over the whitepaper of any blockchain project to see if the solution really does benefit from the technology or if it's just using hype around the industry to no real end.
Evaluate The Credibility And Competence Of The Team
Just as important as the solution itself is the team behind it. They are the backbone of the project and, if they don't have the expertise, connections, or track record to indicate that they're able to bring it to fruition, then you should be a little more skeptical of the project overall. Take the time to research any of the founders as well as the core developers, doing your research through the professional networks available to you, as well as prior projects they have worked on, or any open-source projects they have contributed to. A team that does not transparently share details on those who are a part of it is worth additional skepticism.
Analyze Token Distribution
One of the most promising signs about any blockchain project is that tokens are distributed evenly. If they're not, and only felt by a few wallets, then it could be a sign that a project is too centralized, or even that it's prone to manipulation, as a small number of holders might be able to more easily influence the price of tokens. Get qa good idea how tokens are spread across holders and see if there are any patterns of high concentration among small numbers of individuals. Token holder growth over time is a good indicator that the project is being picked up by a community rather than just being held onto by speculators who are likely to drop when they make their “bag.”
Look For Validator Diversity
Just as you want to make sure that the tokens are distributed as widely as possible, you also want validator distribution to be wide, as well. If there are only a few validators on the network, then it could potentially be open ot governance and security vulnerabilities. Using the right tools to monitor validator participation, you can make sure that there is enough legitimate validator activity on the network, with high validator uptime and participation rates. Health, active validators are also a good sign of a community that is truly engaging with the blockchain.
Keep An Eye On Transaction Patterns
One of the most important things for any blockchain project is that real users are engaging with the project. If the blockchain has already been created, then you can use tools like an explorer as a service to take a closer look at metrics that indicate real usage, such as transaction frequency, wallet growth, and contract interactions. You're looking for a steady rate of engagement, or one that rises over time, primarily. If there are sudden spikes in activity, followed by long periods of inactivity, then it could suggest that there is artificial engagement on the chain. Network utility is a vital indicator that a blockchain project is in real demand and is not just resting in the hands of those aforementioned speculative investors.
Take A Closer Look At Its Ecosystem
Successful blockchain projects tend not to succeed alone and in darkness, but rather through the strategic partnerships that they build with other developer companies, existing companies, and Web3 protocols. As such, keep an eye out for these collaborations, looking beyond the fluff that tends to get put out in press releases. You should look to see if there are any active integrations in the blockchain project, for instance, or third-party products and services that are already using the project's tech. The aforementioned explorer as a service tools can also see if the named and proposed partners are taking part in any on-chain activity. Real partnerships translate into utility, while fake or exaggerated ones are a common red flag.
What Do They Do To Build Trust?
The blockchain world is one that's steadily growing and, as such, is rife with potential scams and projects that can vanish into mist. The truly good and well-intentioned projects are aware of that fact and, as such, do a lot to build trust. For instance, they will have reputable firms audit their smart contracts and make those audit reports publicly available. They will also operate using open governance models, public roadmaps, and community feedback channels. Effectively, the more that a blockchain project does to establish trust and give a closer look into its inner workings, the more likely it is to be legit.
There is no way to 100% know the investment risk associated with any blockchain project, just as there is for just about any other asset out there. However, with the tips above, you can learn how to spot the more promising projects.
