In the 2017 cryptocurrency bull market, we experienced too much nothingness hype and fanaticism. Token prices and valuations are affected by too many irrational factors. Many projects have not completed the planning on their roadmaps, and the announcement of the partnership and the Shanghai Stock Exchange can push the price of tokens up.

But now the situation is different. Rising token prices require support from all aspects such as actual utility, cash flow and strong team execution. The following is a simple framework for investment evaluation of DeFi tokens. Examples in the text include: $MKR (MakerDAO), $SNX (Synthetix), $KNC (Kyber Network)

Valuation
Since the total supply of cryptocurrencies varies greatly, we choose market value as the first standard indicator:
The price of each token * total supply = total market value

Based on standardized valuations, the following indicators based on psychological expectations are proposed to benchmark the market:

1. $ 1M-$ 10M = seed round, uncertain features and mainnet products. Current examples in this range include: Opyn, Hegic, and FutureSwap. If you want to capture the highest Alpha value, you can choose the items within this market value range. But direct purchase due to liquidity is not simple, and the team is not necessarily willing to release a large number of tokens.

2. $ 10M-$ 45M = Find a clear and suitable product market, and have data to support the project feasibility. For most people, buying such tokens is easy. Although the other major risks (team, execution) are already small, there is still a risk that the product data growth will be weak or even fall at this stage.

3. $45M-$200M = Leading position in their respective markets, with clear growth points, communities and technology to support the project to achieve its goals. Most of the normally constructed projects in this range are not very risky, but their valuation requires a large amount of institutional funds to climb a class, the market has expanded significantly, or many new holders.

4. $ 200M-$ 500M= Absolutely dominant. The only token I can think of that fits this range is $MKR, because it has a wide range of usage bases and institutional investors (a16z, Paradigm, Polychain). The main reason for buying tokens in this valuation range is to earn income from the next round of bull market volatility.

Code rating
For most decentralized protocols, code quality is extremely important, too many risk vulnerabilities will cause the protocol itself to be hacked. Any successful large-scale hacker attack will put the agreement on the verge of bankruptcy and greatly damage future growth. The following are the key indicators for evaluating the quality of protocol codes:
1. The complexity of the architecture. Smart contracts are very delicate procedures, because they can handle millions of dollars in funds. The more complex the corresponding architecture, the more attack directions. The team that chooses to simplify the technical design may have richer software writing experience, and reviewers and developers can more easily understand the code base.

2. The quality of automated code testing. In software development, it is a common practice to write tests before writing code, which can ensure the high quality of writing software. When writing smart contracts, this approach is crucial because it prevents malicious or invalid calls when writing a small part of the program. Special care should be taken for code libraries with low code coverage. For example, the bZx team did not go to the test, which resulted in the loss of $2 million in investor funds.

3. General development practices. This is not necessarily a key factor in determining performance/security, but it can further illustrate the team’s experience writing code. Code formatting, git flow, management of release addresses, and continuous integration/deployment pipeline are all secondary factors, but the author behind the code can be prompted.

4. Evaluate the audit results. What key issues were found by the auditor (assuming that the review has been completed), how the team responded, and what appropriate measures were taken to ensure that there were no duplicate vulnerabilities in the development process. A bug bounty can reflect the team’s confidence in security.

5. Protocol control, main risks and upgrade process. The higher the agreement risk and the faster the upgrade process, the more users will need to pray that the agreement owner will not be kidnapped or extorted.

Token indicator
Since there are locks in the total supply of tokens, it is necessary to understand the current circulation and the potential total supply. Network tokens that have been operating smoothly for a period of time are more likely to be distributed fairly, and the possibility of a single investor dumping a large number of tokens and causing damage to the project becomes very small.
In addition, it is equally important to have a deep understanding of how the token works and the value it provides to the network, because the risk of speculative operations alone is high. So we need to focus on the following key indicators:

Current liquidity
Total supply
Tokens held by the foundation / team
Lockup token release schedule and unreleased stock
How are tokens used in the project ecosystem and what kind of cash flow can users expect?
Whether the token has inflation, how is the mechanism designed
Future growth
Based on the current currency valuation, investors should track which key indicators to evaluate whether the token can continue to appreciate:
Market size opportunities
Token value acquisition mechanism
Product growth and leveraging its development
team
This is a part that is often overlooked and usually tells you more about the team’s future execution capabilities and how the product will perform in the future.
We need to pay attention to investing in cryptocurrencies. While the team has the experience of building traditional technology products (websites, applications, etc.), whether it really integrates the expertise in the field of encryption. Some teams will be biased in these two areas, but this imbalance will prevent the team from finding suitable markets and roads for products.

In my opinion, those teams who have too much experience in establishing Internet technology business but do not understand the dynamics of encryption technology will:

Due to lack of sufficient understanding of the market and lack of confidence, they will quickly change their minds
Lack of careful trade-offs between security, user experience and business model
On the other hand, those teams who do not have any pure encryption technology experience in establishing Internet technology business will eventually:
Paying too much attention to what ideals should be in the field of encryption, but not enough time to figure out what users want
Lack of marketing of related products, weak ability to enter the market and the brand cannot win trust, so it is more difficult to establish products that fit the market
Having said that, it is difficult for every team to be strong in both aspects at the beginning. However, as an investor, whether the team has the appropriate expertise in two areas should be included in its investment considerations and pay attention to the corresponding risks.