Tokenomics

Stablecoin less preferable form of tokenized money, BIS paper finds

Bearer instruments such as stablecoin harken back to the days of pre-central bank “free banking,” with all the risks that imply, a Bank of International Settlements working paper says.

The singleness of money is the assurance that public and private money trade at the same rates. Even small differences between public and private money rates can have a ripple effect across transactions. A Bank of International Settlements (BIS) working paper compared models of private tokenized money in terms of their singleness as a complement to a central bank digital currency.

Tokenization is “the process of representing claims in a digital form that allows them to be transacted on programmable platforms using smart contracts,” the paper said. Tokenized money can be a bearer instrument, where the claim on the issuer is transferred without affecting the issuer’s balance sheet. Stablecoins are an example of this.

Bearer instruments were prevalent in the days of “free banking” in the United States before the creation of the Federal Reserve, when money could be discounted by its receivers, the authors of the paper wrote. They drew a parallel between that situation and stablecoins depegging on permissionless exchanges.

Related: BIS head describes ideal ‘unified ledger’ for central banks and other financial users

Alternatively, tokenized money can be a non-bearer instrument, where the sender is debited and receiver credited on their respective balance sheets as the settlement is made in central bank money. The commercial banking system currently operates on this model.

The use of central bank money to settle tokenized money that is a non-bearer instrument guarantees a consistent exchange rate, with the proper design, as “this model requires that both public and private forms of tokenised money are available on the same platform.” Maintaining singleness between digital money and cash would depend on regulation:

“Singleness between private tokenised money and cash would be supported in the same way it is now for commercial bank deposits, provided all private tokenised money issuers comply with the same regulatory standards and have access to the same safeguards.”

Another short BIS working paper was released simultaneously that examined tokenization and found a continuum of challenges and benefits from the process, depending on the nature of the underlying assets.

Magazine: Are CBDCs kryptonite for crypto?

5 reasons why the Aptos (APT) rally could still have wings

Aptos’ star-studded founders and the market’s disbelief in the rally could further fuel the rise in APT price.

Aptos’ APT reached a new all-time high of $20.39 after posting gains exceeding 400% since the start of 2023. While the rally could just be a pump-and-dump event due to the perception of weak fundamentals, increasing negative sentiment toward the token will likely fuel the prices in the short term.

Let’s explore some of the factors that could be propelling the Aptos price rally.

A rich history and strong investor backing

Aptos is a byproduct of Facebook’s attempt with the Libra blockchain, which regulators forcibly shut down. Two of Libra’s leadership team members, Mo Shaikh and Avery Ching, later found Aptos, a decentralized version of the abandoned blockchain project.

The project is based on the Move programming language and introduces a new class of layer-1 blockchains that will compete against the likes of Solana and Cardano. The primary reasons behind the tailwinds for the APT token include investors’ hope for a technological breakthrough that could finally provide a scalable, secure, decentralized blockchain.

Aptos raised $350 million in 2022, which included a $200 million seed round led by Andreessen Horowitz and a $150 million Series A funding round led by FTX Ventures and Jump Crypto. Later, Binance made a follow-on strategic investment to help boost the Aptos ecosystem.

FTX Ventures’ prominence induces the risk of a sell-off from the defunct entity. In this regard, some investors might be reassured by the involvement of other venture capitalists like Multicoin Capital, Blocktower Capital and Coinbase Ventures. High-volume exchanges like Binance could also soften the blow dealt by FTX and Alameda Researc.

Steady ecosystem development

The Aptos blockchain was launched in October 2022 and is still in the nascent stages of ecosystem development. There are few decentralized finance or nonfungible token projects on the blockchain, and smart contract activity is currently limited. More than 94% of the blockchain transactions are for APT transfers, showing negligible decentralized application activity.

Aptos transaction volume by purpose of transactions. Source: Pinehearst

Development activity has been around average on the blockchain. The number of active developers on Aptos is more than Avalanche and Tezos but behind Solana, Polkadot, Cardano and Ethereum.

Number of active developers working on blockchains and dApps. Source: token terminal

Aptos is not the first project to build a hefty market capitalization without significant on-chain activity. Cardano and Polkadot are prominent examples, where the rise in their native token’s price is primarily led by the superior technology narrative.

However, even in this respect, the total size of the Aptos community is smaller than top layer-1 projects. Cardano and Polkadot have more than 1.3 million Twitter followers on their accounts. At the same time, Avalanche has over 855,600 followers, and Tezos has more than 470,000. Aptos is lagging behind, with a 364,500 follower count.

Moving forward, the efforts of the business development team of Aptos and the performance of the blockchain will likely catalyze future price movements.

Traders’ disbelief could push APT price higher

Given the lack of activity and limited ecosystem growth, the rally in APT has taken the market by surprise. It is not difficult to find tweets hinting at the overblown market capitalization of the token.

However, going against the trend can be risky for sellers. The short-side trade for APT perpetual swaps is getting crowded, as the token has surpassed its October 2022 peak of around $15, which is evident in the negative funding rate for APT.

Funding rate for APT perpetual swaps. Source: Coinglass

It provides an opportunity for buyers to hunt sellers’ liquidation levels by pushing the price up. And in crypto markets, the short squeeze of short orders is realized more often than not.

The sell pressure on APT is limited

APT’s tokenomics limits the selling pressure on the token for the first year from its launch in October 2022. The release schedule of APT delays investor unlocks until October 2023, after which there will be a steep rise in the circulating supply of APT tokens. Until the unlock begins, the only source of inflation is from staking rewards, which is 7% for staked tokens.

Initially, the foundation distributed 2% of the supply to early users and developers. In all probability, users who wanted to sell their APT would have already sold in the three months since its launch.

Kimchi premium

Significant buying interest for APT is coming from the South Korean won trading pair on the UpBit crypto exchange. The exchange constitutes nearly 40% of Aptos’ trading volume. The price of APT on Upbit is trading around 1%–3% higher than the market price, which indicates high demand in the region — hence, the same Kimchi premium.

Aptos spot trading data. Source: Coingecko

There’s a chance that the volumes of Upbit are inflated from wash trading, or it could be an attempt to manipulate the markets. The exchange’s owners have come under the purview of regulators many times in the past. Nevertheless, the buying pressure will likely persist until the Kimchi premium resolves.

While the prices may have started due to a broader positive trend in cryptocurrency prices, it’s taking the shape of a disbelief rally by proving sellers wrong. Until the negative sentiment and Kimchi premium dissolve, the chances of Aptos moving higher are considerable.

The views, thoughts and opinions expressed here are the authors’ alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.

SushiSwap CEO proposes new tokenomics for liquidity, decentralization

The new tokenomics intends to boost liquidity and decentralization in the platform, enabling SushiSwap to continue operations.

Jared Grey, CEO of the decentralized exchange SushiSwap, has plans to redesign the tokenomics of the SushiSwap (SUSHI) token, according to a proposal introduced on Dec. 30 in the Sushi’s forum.

As part of the new proposed tokenomics model, time-lock tiers will be introduced for emission-based rewards, as well as a token-burning mechanism and a liquidity lock for price support. The new tokenomics aims to boost liquidity and decentralization in the platform, along with strengthening “treasury reserves to ensure continual operation and development,” noted Grey.

In the proposed model, liquidity providers (LPs) would receive 0.05% of swap fees revenue, with higher volume pools receiving the biggest share. LPs will also be able to lock their liquidity to earn boosted, emissions-based rewards. The rewards are forfeited and burned, however, if they are removed before maturity.

Also, staked SUSHI (xSUSHI) won’t receive any share of the fee revenue, but emissions-based rewards paid in SUSHI tokens. Time-lock tiers will be used to determine emissions-based rewards, with longer time locks resulting in bigger rewards. Withdrawals before the maturity of time locks are permitted, but rewards will be forfeited and burned.

The decentralized exchange will use a variable percentage of the 0.05% swap fee to buy back and burn the SUSHI token. The percentage will change based on the total time-lock tiers selected. The proposal notes:

“Because time locks get paid after maturity, but burns happen in ‘real-time’ when a large amount of collateral gets unstaked before maturity, it has a sizable deflationary effect on supply.”

The tokenomics redesign comes after SushiSwap’s disclosed to have less than 1.5 years of runway left in its treasury, meaning that a significant deficit was threatening the exchange’s operational viability. As reported by Cointelegraph, SushiSwap experienced a $30 million loss over the past 12 months on incentives for LPs due to the token-based emission strategy, leading the company to introduce the new tokenomics model.

What is tokenization and how are banks tapping into its design principles?

Financial services organizations can use tokenization to solve several friction points and have better risk management in place.

Tokenization is the process of converting something with tangible or intangible value into digital tokens. Tangible assets like real estate, stocks or art can be tokenized. In a similar vein, intangible assets like voting rights and loyalty points can be tokenized, too. We see Avios as an example of tokenized loyalty points by the traditional credit card industry.

However, when tokens are created on a blockchain, they add a level of transparency that previous iterations of tokens couldn’t achieve. There are several banks that are experimenting with tokenization. But, before diving into the use cases in banking, it would be useful to understand the qualitative advantages that tokenization brings to financial services.

As major financial institutions enter the crypto space, they pay special attention to issues like custody and Anti-Money Laundering analytics and compliance. Now, with the dramatic collapse of FTX, the key qualitative benefits of tokenization are in the spotlight yet again. 

Liquidity

Real estate is one of the most illiquid asset classes. When a property is worth a few million dollars, buying and selling the property can take time. Now, imagine a $1 million home is tokenized, with each token representing property ownership. When these tokens are available for purchase in the market, 100 buyers can each invest $10,000 to buy ownership of the property.

This naturally increases the ease with which illiquid assets can be sold, as fractionalized ownership is possible with tokenized assets. Fintech firms like Yielders already implement fractional ownership of real estate without using blockchain tech. Also, illiquid asset classes like private equity and venture capital can benefit from tokenization.

When an illiquid asset like real estate or art is tokenized, the entire asset class benefits from the liquidity created. It also allows for a healthy secondary market and creates more data for better valuation of these assets. Platforms like Reinno and Realt offer global investors access to tokenized real estate.

As a property owner, this opens up options of selling just part of the property through tokens instead of selling the entire property. From an investor perspective, someone in Brazil with $1,000 can invest in property in Manhattan.

For instance, Realt offers investors tokenized properties. While the properties listed on their platform cost from several hundred thousand dollars to a few million, they are tokenized and each token can be valued at less than $50. This makes it extremely affordable for interested investors in most places of the world.

Similarly, fractional ownership of nonfungible tokens (NFT) is being rolled out for the more expensive NFT and art collections. As a result of a liquid secondary market for an illiquid asset, pricing also becomes easier due to transparent supply and demand dynamics.

Liquidity risk management

In addition to these benefits, liquidity risk management within financial services organizations can also benefit from tokenization. That benefit is a lot clearer from the FTX collapse and how tokenization could have helped there.

The FTX collapse had several underlying issues, not the least of which came from its business model using the volatile FTX Token (FTT) as collateral. However, if there were checks and balances in place that were transparent for customers to see, mitigating actions could have been taken in time.

Recent: Festivals in the metaverse: How Web3 projects are taking culture virtual

At no point in their journey did FTX create transparency around how much liquid assets they had to service their liabilities. As a result, FTX managed to repurpose user funds (liabilities) for their investments (illiquid assets). Tokenizing both assets and liabilities would have shown a liquidity gap in real-time and cautioned the market of the looming crisis.

After the FTX collapse, there has been a rushed effort to provide proof of reserves from several centralized crypto exchanges. However, proof of reserves only shows that a firm has some assets to service its debts.

An equally important capability is proof of liabilities. If a firm can transparently demonstrate that it has $1 billion in reserves/assets, but its liabilities, which could be $10 billion, are not clear for everyone to see, its solvency is under question.

The challenge in creating transparency around liabilities is that, often, firms capitalize themselves through debt raises in fiat currencies. As these instruments are not tokenized, real-time solvency cannot be demonstrated. Therefore, in order to avoid an FTX-like incident in the future, exchanges will need to provide proof of assets and liabilities.

One of the key qualitative aspects of tokenization that is apparent from the FTX saga is the “proof of solvency.” The transparency that tokenization brings can also help assess the solvency of a firm in real-time. If both assets and liabilities of a bank can be tokenized, on-chain analytics can be used to understand if the firm has enough assets to service its liabilities.

Democratization

The tokenization of assets makes them more accessible to retail investors. In the example given earlier, an investor with $10,000 could own a share of a million-dollar property in a prime location and benefit from a rise in its value. Without tokenization, they wouldn’t be able to participate in big-ticket assets that offer good returns.

This is particularly true with high net worth individuals who want access to products that are only available for private banking clients. In the past, products with attractive returns profiles were offered exclusively to institutional investors. Even high-net-worth and sophisticated investors would struggle to get access to these assets. 

Efficiency

As financial services firms and banks tokenize their asset base, the instant finality that blockchain offers can help them see where they stand with their capital health in real-time. Settlements which used to take two days, referred to as (T+2), can now be instant. This offers both operational and capital efficiencies.

Organizations can assess their precise level of capitalization and make quick and profitable decisions to deploy their capital. In times of market crisis, the same capability can help manage capital and reduce risks.

With all these purported benefits, what are banks and financial services firms experimenting with tokenization? 

JPM Coin

JPM Coin is JPMorgan’s version of a United States dollar stablecoin. JPM Coin is currently in its prototype stage and is being trialed and tested for money transfer across JPMorgan’s institutional customers. JPM Coin may be launched in other currencies should the dollar prototype prove successful.

As described by the bank, institutions that participate in this exercise typically follow a three-step transaction process. 

  1. Institutions open a deposit account with JPMorgan and deposit USD in it. They receive an equivalent amount of JPM Coins. 
  2. Institutions can transfer JPM coins globally to other institutions that are JPMorgan clients. This can be just a currency transaction or a security transaction paid in JPM Coins.
  3. The recipient institution can redeem JPM Coins for USD.

Regulators are yet to approve JPM Coin. Only after comprehensive regulatory approval is obtained can it launch for retail use.

The Depository Trust and Clearing Corporation (DTCC)

The DTCC is a U.S.-based organization that acts as a centralized clearing and settlement company for different asset classes.

In Q4 2021, the DTCC announced a platform to streamline the issuance, transfer and servicing of private market securities through tokenization. Apart from implementing the platform, they also provide a common market infrastructure and standards across private market assets.

As discussed in the qualitative aspects of tokenization, asset classes like private equity and venture capital can be quite illiquid and inaccessible. As a result, the secondary market for private securities is quite nascent. 

Tokenizing these securities and providing market standards could help improve liquidity within these asset classes and also help with efficiencies in settlements. The DTCC has started with the Ethereum blockchain, but the platform can be blockchain agnostic. It plans to offer both public and private blockchain support based on market demand.

ADDX

ADDX is a Singapore-based blockchain startup that is currently pioneering efforts in tokenizing private market securities for which both accredited investors and institutional investors are eligible to participate.

Recent: How stable are stablecoins in the FTX crypto market contagion?

Assets include venture capital funds, private credit funds, real estate funds, ESG bonds and more. Access to such institutional investment vehicles was limited to a select few in the past. Thanks to fractional ownership through tokenization, accredited investors with a net worth of 2 million Singapore dollars ($1.47 million) can participate in these assets.

The end of banks?

Some claim that digital assets and Web3 are going to be the end of banks, but it is unrealistic to expect that such financial institutions will be relegated to the past. And yet, while banks are likely to remain strong, banking as we know it today is likely to change for the better.

There are several elements of banking that could undergo operating and business model changes over the next couple of decades, largely inspired by digital assets and their underlying design principles.

‘Performing as expected’ — Aptos Labs defends day 1 criticism

Aptos’ blockchain claims to handle three times the amount of transactions per second than Solana but day one of its launch saw the network transacting a much lower amount.

After four years of development and millions in funding, the layer-1 blockchain Aptos (APT) finally launched its mainnet on Oct. 17, albeit to somewhat mixed reception.

The proof-of-stake (PoS) blockchain has seen millions invested in it from venture capital firms and has previously claimed the ability to process 160,000 transactions per second (TPS).

However, some members of the community have pointed out that the claimed TPS is falling far short of expectations on the mainnet.

According to Aptos’ blockchain explorer, the network is seeing around 4 TPS at the time of writing, while some users on Twitter have reported not being able to send transactions.

Others on Twitter noticed the Aptos Discord was closed for a few hours after the launch of the mainnet, accusing the team was attempting to stop discussion around potential launch issues.

Cointelegraph reached out to Aptos for comment and was directed to a “Day one update” tweet by Aptos on Oct. 18. 

In the tweet, Aptos said the network is “performing as expected” with activity increasing as more ecosystem participants join. Cointelegraph was able to view a variety of transactions from users using its blockchain explorer.

Aptos also said it closed comments on its Discord and Telegram channels to “protect the community from scams” and they will “return to normal when appropriate.”

The tokenomics of Aptos is not yet publicly available, leading some to cite concerns that cryptocurrency exchanges such as Binance and FTX are listing its token without such information available to their customers.

Related: Court partially denies Aptos Labs’ motion to dismiss Glazer’s $1 billion lawsuit

Aptos has seen millions invested from venture capital firms, with the most recent round of funding in July netting Aptos Labs $150 million. A prior round in March raised $200 million with participants including Andreessen Horowitz (a16z), FTX Ventures and Coinbase Ventures.

Aptos Labs was created by former Meta employees Mo Shaikh and Avery Ching, who were involved in the failed Diem blockchain project, which wound down ​​in February of this year and sold its intellectual property and other assets.

The blockchain is built on a programming language originally developed for the defunct Meta-built Diem blockchain.

What is veTokenomics and how does it work?

Users lock up their tokens and turn them into veTokens, which control the protocol’s governance, according to the veTokenomics model.

All facets of a token’s production and management, including its allocation to various stakeholders, supply, token burn schedules and distribution, are managed through tokenomics analysis. Tokenomics help to determine the potential value of decentralized finance (DeFi) projects. Since the law of supply and demand cannot be changed, tokenomics dramatically impacts the worth of each nonfungible token (NFT) or cryptocurrency.

Related: What is Tokenomics? A beginner’s guide on supply and demand of cryptocurrencies

However, there are various loopholes in the tokenomics design, such as a substantial initial supply allocation to insiders, which may be a pump and dump warning sign. Also, there is no manual on how founders, treasury, investors, community and protocol designers should split the tokens optimally. 

As a result, DeFi protocols, such as Curve, MakerDAO and Uniswap, lack a carefully planned initial token distribution, which results in sub-optimal token distribution because higher contributors might not always get the best allocation or vice-versa. To solve these issues, the Curve protocol introduced vote-escrowed tokenomics or veTokenomics. In this article, you will learn the basic concept of veTokenomics; how veTokenomics works and its benefits, and drawbacks.

What is veTokenomics?

Under the veTokenomics concept, tokens must be frozen for a set period, which encourages long-term participation and lowers the tokens’ market supply. In return, users receive veTokens that cannot be sold and are non-transferable. That said, to participate in the governance mechanism, one needs to lock their tokens over a fixed time period, which will cause an organic token price increase over time.

One can already lock up your tokens in some DeFi initiatives to receive a portion of the protocol revenue. However, the veToken architecture differs in that owners of these locked tokens can control the emission flow, increasing the liquidity of a particular pool. 

The rate at which cryptocurrencies are created and released is called emission. The cryptocurrency’s economic model, specifically whether it is inflationary or deflationary, affects the emission rate.This leads to better alignment between the protocol’s success and the incentives earned by the tokenholders because whales cannot use their votes to manipulate the token prices. 

How does veTokenomics work?

To understand the working of vote deposit tokenomics, let’s see how Curve implements veTokenomics. Similar to other DeFi protocols, liquidity providers (LPs) earn LP tokens for offering liquidity to Curve’s pools. These LP tokens can be deposited into the Curve gauge to get the Curve DAO token (CRV), which liquidity providers can enhance by locking CRV. The liquidity gauge calculates how much liquidity each user is contributing. For example, one can stake their liquidity provider tokens in each Curve pool’s unique liquidity gauge.

Curve protocols gauge mechanism

Additionally, veCRV holders and LPs share the fees generated by Curve Finance. One must lock their CRV governance tokens for a fixed time period (one week to four years) and give up their liquidity to obtain veCRV. This means that long-term stakers want the project to succeed and are not in it merely to earn short-term gains.

veCRV holders can increase stake rewards by locking tokens for a long time, decide which liquidity pools receive token emissions and get rewarded for staking by securing liquidity through swaps on Curve. However, the length of time tokenholders have locked their veTokens affects how much influence they have in the voting process.

Consider Bob and Alex, who each have the same amount of CRV. Bob locked his tokens for two years, while Alex only had them for one year. The veCRV, voting power and associated yields are doubled for Bob because he locked his tokens for a longer period than Alex. Such a dynamic promotes long-term engagement in decentralized autonomous organization (DAO) projects and assures that the token issuance is conducted democratically.

Other examples of veTokenomics include Balancer, which introduced veBAL tokens in March 2022 with a maximum locking time of up to one year. Frax Finance also suggested using veFXS tokens, letting owners choose gauges that would distribute FXS emissions among various pools on different decentralized exchanges (DEXs).

What are the benefits and drawbacks of veTokenomics?

From understanding the basics of veTokenomics, it is evident that tokenholders get rewarded for blocking the supply of veTokens, which reduces the supply of LP tokens and thereby selling pressure. This means tokenholders holding a substantial amount of tokens cannot manipulate their price. Furthermore, this popular tokenomics model promotes the addition of more liquidity to pools, strengthening a stablecoin’s ability to keep its peg.

Since there was no market for tokens of liquidity providers other than exercising governance rights and speculating, the initial DeFi governance tokens had little to no impact on the price. However, locked veTokens positively impact the supply dynamics because the community expects enhanced yields, valuable governance rights and aligning the priorities of all stakeholders.

Despite the above pros of the vetoken model, there are various drawbacks of veTokenomics that stakeholders must be aware of. Since not everyone invests for the long-term, the protocol following the veTokenomics model may not attract short-term investors.

In addition, if tokens are locked for longer, the opportunity costs can be too high as one can’t unlock them till the maturity date if they change their mind. Moreover, this model diminishes long-term oriented incentives and weakens the decentralization of governance if the protocol offering such tokens has the majority of veTokens.

The future of the veTokenomics model

In the traditional tokenomics model, governance tokens that only grant the power to vote are considered invaluable by Curve Finance (the pioneer of the veTokenomics model). Moreover, it believes there is little reason for anyone to become fully committed to a project when “governance” is the only factor driving demand.

The new tokenomic system called veTokenomics is a significant advancement. Although it lowers the supply, compensates long-term investors and harmonizes investor incentives with the protocol, the veTokenomics model is still immature.

In the future, we may experience additional protocols incorporating veTokenomics into their design architecture in addition to developing novel ways to build distinctive economic systems that use veTokens as a middleware base. Nonetheless, as the future is unpredictable, it is not possible to guess how tokenomics models will evolve in the upcoming years.

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A step-by-step framework to evaluating crypto projects

Understanding the project’s vision, tokenomics, white paper, use cases, roadmap, etc., is essential prior to making an informed investment decision.

When it comes to cryptocurrencies, you need to consider a few key factors before you decide whether to invest. Whether you’re just beginning to get on the ground floor of new crypto projects or are looking to expand your portfolio, it’s helpful to have an evaluation framework handy for crypto projects. 

This article will explain a step-by-step framework to assist you in evaluating various crypto projects.

How do you evaluate a crypto project?

During your analysis of a crypto project, it’s important to examine the different aspects of the project to make an informed investment decision. You should generally veer away from making impulsive decisions based on emotions, as this could lead to financial loss.

Mull over the following aspects instead:

These are just some of the questions you need to ask during your cryptocurrency evaluation. We’ll discuss them in greater detail throughout this guide, which will give you a framework for evaluating crypto projects.

By the end, you should have a pretty good sense of what to look for — and how to make an informed investment decision. Remember that there is a lot of speculation in the crypto world. So, do your research before you begin investing.

How do I research a new crypto project?

There are a couple of platforms that can help you find high-quality crypto projects to invest in, such as Binance Launchpad, OK Jumpstart and Gate.io Startup. These are all initial exchange offering (IEO) platforms, which provide their users with opportunities to invest in startup blockchain projects.

There are also initial coin offerings (ICOs), which are fundraising mechanisms for crypto projects. However, it’s important to note that ICOs are generally considered riskier than IEOs. This is because ICOs are hosted on a cryptocurrency project’s website, making them a more fertile ground for fraudsters and scammers.

IEOs, on the other hand, are launched on exchange platforms like the ones we mentioned previously. They are generally more secure because most startups that submit their projects to these platforms undergo a vetting process before they are allowed to launch their token sales.

However, even when going through an IEO platform, you should still conduct independent research. Doing so will help you to determine whether a project is the right investment opportunity for you and if it’s something you can invest in long-term.

How to evaluate a blockchain project?

Generally, here’s what you should consider when looking at the main aspects of a crypto project:

The vision of the project

When evaluating a crypto project, it’s important to ensure that it has a strong and achievable vision. In crypto, there’s such a thing as “vaporware,” which often refers to projects with all the bells and whistles — but are unlikely to get off the ground. When evaluating a crypto project, be wary of those that seem too cool and promise too much without having a solid plan or foundation to back it up.

Visionaries in the industry come up with many groundbreaking project ideas, but only a few are ever feasible or practical enough to be implemented.

Background and team

Another key thing to consider is the team behind the project. This is important because, at the end of the day, it’s the people working on a project that will make it successful (or not). When looking at the team, consider things like:

  • The team members’ experience;
  • Their history and level of expertise in the crypto space; and
  • How cohesive the team is.

The above factors will give you some insight into whether a team is strong and likely to make their project successful.

Quality of the white paper

The white paper is a document that typically outlines everything you need to know about the project, including the vision, the problem it intends to solve, the solution, the tokenomics and more.

Related: What is Tokenomics? A beginner’s guide on supply and demand of cryptocurrencies

A good white paper will be well-written and easy to understand without being too technical. It should also be clear about the problem the project aims to solve and how the solution will work.

If a white paper is vague or uses too many obscure terms you don’t understand, it may not be worth your time (and money) to invest in that project. If you don’t have the time or patience to go through multiple white papers, you can also check out the projects’ litepapers. These are abridged versions of white papers but are just as informative.

Potential market and use cases

When considering a project, it’s also important to consider the potential market and whether there is a need for the solution the project is offering. For example, if a project is trying to solve a problem that doesn’t exist or has already been solved by another project, then it’s unlikely the project will make a dent in the crypto space.

It’s also important to think about the potential use cases for a project. For example, if a project is trying to solve a problem that concerns only a small group of people, then the market for that project will be very limited.

Tokenomics

Tokenomics refers to the economic model of the project and how the token will be used within the ecosystem. For example, if a token is only being used as a means of payment, then its value will likely fluctuate along with the market.

However, if the token is being used to power a decentralized application (DApp), then the tokenomics will be more complex, and its value will be more stable. It’s important to understand the tokenomics of a project before investing, as it can give you some insight into the potential value of the token.

Potential for growth

Growth potential refers to the likelihood of the project increasing in value over time. For example, if a project has a strong team, a good roadmap and a solid tokenomics model, then it’s likely that the project will grow in value over time. Researching a project thoroughly before investing is important, as many factors can affect its growth potential.

The product

The product refers to the actual solution the project is offering. Again, it’s important to ensure the product is actually needed and that it solves a real problem. Take Ethereum (ETH), for example, which was built based on the need for a platform that could support smart contracts and expand the capabilities of blockchain technology.

Solana (SOL), on the other hand, is a blockchain that uses proof-of-history, a unique consensus mechanism. Built on the premise that an “internal clock” can greatly benefit transaction speed, Solana succeeded in becoming one of the best blockchains when it comes to transactions per second.

Community traction

Community traction refers to the level of interest and engagement the project has generated in its community. A good way to gauge community traction is by looking at the number of social media followers, blog subscribers and forum posts. The more active the community, the more likely the project will be successful.

It’s also important to consider the quality of the community, as opposed to just the quantity. For example, a project with a large number of social media followers but very few active users is likely not as strong as a project with a smaller number of social media followers but an active user base.

Market capitalization

Market capitalization is the total value of all the tokens that have been mined. It’s a good way to gauge the overall size of a project. In the case of crypto that isn’t mined, the market cap can also refer to the total value of a company’s shares. It’s a good indicator of asset stability, given that crypto can be volatile. Generally, cryptos with larger market caps tend to be more stable than those with smaller market caps.

The platform

A project’s platform refers to the underlying technology the project is built on. For example, Ethereum is built on the Ethereum blockchain, while BNB is built on the BNB Smart Chain (BSC). Each platform has its own advantages and disadvantages, and it’s important to research a project thoroughly before investing. For example, Ethereum is the most popular platform for building DApps, while BSC is designed to offer high performance and low fees.

Transparency

Transparency refers to the level of information that the team makes available to its community. A transparent team will regularly communicate with its community and provide updates on the project’s progress.

A non-transparent team, on the other hand, will be secretive and withhold information from its community. It’s important to invest in projects that are transparent, as it’s a good sign that the team is confident in the project and willing to be open about its progress. Additionally, it will keep you safe from various scams like rug pulls.

Related: Crypto rug pulls: What is a rug pull in crypto and 6 ways to spot it

The roadmap

The roadmap should outline a project’s business plan and give you some insight into how the team plans to execute its vision. A good roadmap will be well-thought-out and realistic, with clear milestones that the team plans to achieve. It should also be updated regularly to reflect its current status. If a roadmap is outdated or unrealistic, then it’s likely that the project won’t be successful.