How to Evaluate New Web3 or Blockchain Projects Before Investing?

Introduction

In an ever growing world of the internet, Web3 has introduced the users with innovations like NFTs, blockchain platforms, DeFi (Decentralized Finance). These projects are exciting, and provide financial freedom to its users. However, there are risks and hesitation attached to them which makes the users less confident. With an abundance of projects coming up, it makes it hard for them to differentiate between legitimate platforms and frauds. With proper evaluation and assessment, these risks can be avoided. Let’s take a dive in to learn more.

What is Web3?

Before getting started with web3, it is important to be aware of the parts it evolved from. Web1 refers to the ‘read only’ segment of the internet which gives the user the access to information and only that. Web2 refers to the ‘read and write’ segment which includes platforms like WWW(World Wide Web) which not only provides information but also an opportunity to engage with it for the users. The newest innovation in the internet world has been Web3 which gives the users an opportunity to engage with the internet in a way where they can own and control data and assets through decentralised platforms. This includes blockchain platforms, NFTs and DeFi. This is the ownership segment of the ecosystem often called ‘read-write-own’ representing an evolution in the virtual world. 

Reasons to invest in Web3

1. Decentralization 

• The emergence of these platforms provide a system to users own and control assets on their own with removal of the centralised institutions and the middlemen. 
• This enables investors a chance to generate income with power in their own hands through blockchain platforms while maintaining transparency.

2. Accessibility

• Technologies which are decentralised makes it easier for a wider audience to engage in the market, which not only acts as an incentive to the investor but the overall economic growth for the market.

3. Growth of DeFi

• A revolution in the finance market has been DeFi which makes lending, borrowing and trading easy with no dependance on traditional ways. It is emerging and steadily growing, introducing new innovations within it. 
• New generations of DeFi are coming up with protocols that make the system scalable and sustainable. 

Know more about DeFi 2.0 - What is DeFi 2.0 : The Future of Decentralized Finance Platforms

4. Innovation in AI

• With the use of AI, blockchain platforms continue to grow with more opportunities for the investors. 
• With a combination of AI and IoT, they offer newer investment opportunities with stability and reliability.

Key insights to keep in mind while evaluating web3 projects

While investing, it is important to consider all aspects and be responsible. There is a risk attached to web3 among people. This brings in context the awareness about how to evaluate a project correctly. Let us see a guide for it.

1. Research and understand the project thoroughly 

• It is important to read about any project before investing. This includes learning their problem to solve, goal, competitor space.
• This also includes a preliminary check of the platform. Make sure they are reliable, trustworthy. 
• White paper is another aspect which makes the aforementioned things clear.

2. The Token Economics

• In the digital coin world, tokens are a medium to do transactions making it necessary to review them before investing
• One should look at their distribution for early investors and the team. 
• Utility of the token also needs to be checked. This means if it allows any governance or platform privileges.

 Find out about TransFi’s Ramp to make digital asset transactions easier, quicker and safer!

3. Assessing the technology and security

• In order to safeguard your funds, it is crucial to assess the rules and regulations that the platforms follow. This comes down to reliability and trust through audit reports.
• Any vulnerabilities to scams or hacks also need to be looked at.
• Regulations and risks also need to be assessed. Blacklisting of platforms needs to be checked. Compliance of the platforms with the regulations needs to be there. 

4. Market and liquidity

• The correct value of the project in the market needs to be assessed through past performances and overall place in the market.
• Liquidity also makes it clear if the project is investable. Market manipulation through thin liquidity needs to be looked at. One can check this by project listings, trading volume.

5. Check roadmap and the progress

• Their trajectory for success is another important aspect. The platform should be successful in achieving milestones with minimum risks.
• The growth of the platform continuously improving and upgrading is a good sign.

6. Testing the product yourself

• To gain confidence, this step might be necessary. Interaction with the platform, its user experience makes the user gain trust over the platform more.
• Trying a small amount first can be beneficial to invest without any hesitation in the future.

Red flags to look out for while investing

1. Unverified teams and Platforms : Scammers often create fake identities. If the team is anonymous or has no identity on platforms like Linkedin, it may be a red sign.

Tip: Look for past projects they have worked on. Check if they are doxxed (publicly verified)

2. No clear goals or whitepaper : If the project doesn’t state a real problem, it may not have any value. There should be a whitepaper, stating goals and mission.

Tip : One should check whether the product is live along with the whitepaper. Real use cases should be looked for.

3. No security measures : Unverified of projects with low security often get hacked. Unverified smart contracts can also leave space for vulnerabilities. 

Tip : Look for security audits as it may be hiding vulnerabilities. Research if there are any past security breaches. 

4. Unrealistic Promises : Often phishing scams are done by promising guaranteed and unrealistic returns within a short period of time. Overhyping of the product or fake engagement is another red flag.

Tip : Look for reliable sources of discussion for the product. Engage with the community instead of going for the promised reward.

5. Legal and regulatory compliance : Violating security laws or listed regulations is immediately a sign to refrain as the project would suffer legal actions. It may result in future bans or lawsuits.

Tip: Look for any past legal action that the project has faced. Verify if they comply with all the necessary rules and regulations.

^{"Security breaches and regulatory non-compliance can cripple a Web3 project overnight. Investors should verify audits, security measures, and compliance standards before engaging." - Rahul Sahni, COO & CPO TransFi}

Why is due diligence important while investing?

1. Protection against scams : No one wants to lose their assets and funds while falling for scams. There have been cases where the project has been abandoned and resulted in losses for the investor. It becomes necessary to be aware of the project’s background to ensure safety.

2. Understanding the market : Many risks are associated with poor understanding of the current trends and the competition. To assess a project’s viability and the ability to yield profit one should be through with research. 

3. Ensuring long term viability : Determining a project’s worth and predicting its performance ensures the investor’s confidence to be able to keep it for a long time. 

Conclusion

As exciting and lucrative, web3 opportunities may seem, they come with risks. By conducting research, keeping up with trends, engaging with the community one can become confident. Evaluating its worth in the market through token economics, liquidity can help in planning long term investment strategy. It also becomes necessary to beware of scams and rug pulls by going through security checks for the project and verifying it thoroughly. These projects are a strong component in finance and with caution, critical thinking and correct evaluation they can make you navigate the blockchain seamlessly.

Frequently Asked Questions (FAQs)

1. What is Web3?

Web3 is the ‘read-write-own’ segment of the internet which gives user the ability to control and own digital assets within a decentralized system ensuring more freedom along with security.

2. Why invest in Web3?

• Decentralization of the ecosystem along with transparency
• Accessibility to a wider audience
• Growing opportunities in DeFi
• Use and innovation in AI
  

3. What things to keep in mind while evaluating Web3 projects?

• Research and understand the project thoroughly 
• Assessing the Token Economics
• Assessing the technology and security
• Understanding market and liquidity
• Checking the roadmap and the progress
• Testing the product yourself

4. What are some red flags while evaluating?

• Unverified teams and Platforms
• No clear goals or whitepaper
• No security measures
• Unrealistic Promises
• Weak legal and regulatory compliance

5. Why is due diligence necessary?

• Protection against scams
• Understanding the market 
• Ensuring long term viability