DeFi

In November 2021, DeFi total value locked reached an all-time high of over $274M. DeFi is flourishing and numerous projects are sprouting out every week. All cryptocurrency investors know that getting into the game early could earn you extremely high gains. But what parameters should you use to evaluate a project?

Read on for 5 tips (and bonus ones!) to identify legitimate projects and avoid scam ones.

1. Check Their Website And Social Media

You can start small - visiting the project’s official channels. Scam projects may set up a website to appear legitimate, but they are often ‘low-effort’. They may have multiple pages stating “Work in progress” or have incorrect elements on the page. Check if they have an active Support Centre with regular updates on tutorials, FAQs and announcements from the project.

The same goes for their social media. If posts are only calling for pumps and there are no efforts to engage the community e.g. Educational content, Community Features, Polls & Feedback, you should be curious why.

Bonus tip: Be wary of people impersonating project moderators in community groups like Telegram. Don’t let your guard down.

2. Make Time To Research The Project

Some DeFi projects truly want to solve existing problems, such as aiding the wider transition from CeFi to DeFi, managing scalability issues, promoting cross-chains and more. Others do not have as much utility.

Take time to research about the project and the team. Refer to established listing sites like CoinMarketCap and CoinGecko to check if the project is listed. Ask yourself: What problems are they trying to solve? What new innovations are they introducing into crypto? What is their unique value proposition? Do they have strong technology behind the project?

Another factor that many people consider is the origins of the founding team. Having the founding team doxxed is reassuring to many investors. If this is important to you, it’s up to your own discretion whether to invest in a project whose founders are doxxed, or not.

Bonus tip: With the increasing shift to DEX, more products are available decentralized. This means no intermediaries and you own your own keys. If you want to have more autonomy, I say start investing decentralized.

3. Look At Who’s Holding And Trading

Every DeFi project with its own token should have tokenomics published. Before you invest, you should understand the token distribution and use cases.

Consider tracking token holders and trading activity. You can make use of tools like Dextools (available for use with Binance Smart Chain and Ethereum). If you see no sell activity or very low sell activity, it is probably a scam. Beware of high trading frequency from the same addresses too. The project owners could have manipulated the code so that you are unable to sell the token after buying. They might also whitelist only certain addresses so that the token seems to be trading normally.

Example screenshot of trading activity on Dextools

Another useful tool is a block explorer like BscScan or EtherScan. Note that these are blockchain specific. Block explorers contain all information about token contracts, token creator addresses, all transactions regarding the token and more. You can even check whether liquidity has been removed from the pool.