Block chain Projects Valuation
In this article I want to provide methods to help you independently evaluate blockchain projects, which can be also applied by non-technical readers. Specifically I will discuss of projects related to public blockchains, that are freely accessible and participable (permissionless).
Below I will describe a generic evaluation framework for such blockchain projects, being them:
- an ICO (Initial Coin Offering) / STO (Security Token Offering) with related token issuance;
- an Extension Layer built on an existing blockchain;
- a new blockchain network.
I will also introduce considerations based on the maturity of the project, being it in the funding phase or already operational.
The effective evaluation of a blockchain project requires interdisciplinary skills, that combine business and technology aspects. My advice is not to limit yourself to check the score of a project on specialized rating sites, but to integrate these searches with a #DYOR (Do Your Own Research) approach.
Main aspects of a project
The main factors to be evaluated to estimate the quality of a blockchain project are listed below and will be detailed in the following sections. It is always recommended to deal with them in the order presented.
- Vision: the long-term vision of the project, the type of impact it will build on its target market.
- Product: the product or service object of the project.
- Tech Stack: the platform and network on which the product relies, if applicable.
- Team: the group of people who follows the operations of the project in all aspects.
- Advisors: a group of people who support the team in the decision-making, networking and scaling operations of the project.
- Community: the extended group of individuals and companies that contribute directly or indirectly to the project.
- Business Plan: the project development plan.
- Market Cap: the capitalization status of the project.
The first approach to have a quantitative score on the quality of a project can be found in the main rating sites, perhaps comparing it with the score issued by the same rating site for another project that is already known.
However these sites do not always cover all the projects, moreover they may prefer aspects not always aligned with our criteria.
Some ICO / STO evaluation sites.
Some STO specialized sites.
To learn more about the various resources available on ICO / STO rating you can consult this article.
The vision defines the scope, objectives and inspirational aspects of a project. In the blockchain sector, the vision of a project should fully answer the following questions.
- What kind of market is the project going to challenge?
- What kind of problems does it solve?
- How does it compare with incumbents and competitors?
- What kind of economic benefits are there for the occasional user?
- What kind of economic benefits are there for the token holders?
- How does it relate to other blockchain technologies?
- How does the overall business work? This question will be better addressed in the Business Model section.
The first thing you need to understand is the nature of the project you are examining, struggle at this stage should turn on an alarm bell. Blockchain projects can generally be divided into the following categories, sometimes combined with each other.
- Tokenization projects: plan the tokenization of a Business Model, through the issue of utility (ICO) or security (STO) tokens. They usually focus on the creation of a main digital product or service and use an existing blockchain platform for the automation of economic aspects, with levels of complexity ranging from the simple token issue to any advanced economic scenario.
- Extension Layers: add advanced features on an existing blockchain, without it being affected or aware. These projects mostly aim to solve scalability problems affecting almost all blockchain platforms and to build completely decentralised services on them.
- Blockchain: the most ambitious projects, which foresee the development of a new blockchain platform, they are also the most difficult to evaluate.
Once understood the project type, try to evaluate the hype, risk and potential factors.
- Communication and impression: how the website and all the informative and popular material of the project is presented, level and quality of communication, documentation and graphics.
- External reviews: the average score level that is recorded in the benchmark sites, even if the scores are often inaccurate, a high score is very important to guarantee public visibility and attention.
- Partners: the level of prestige of the partners participating in the project, especially if inherent in the business sphere.
Now it is time for project-specific questions.
Tokenization projects are among the most common, let’s start verifying that the business plan is consistent and that the use of the token is sound.
Some questions to ask at this stage.
- Is the token indispensable or is it just a fundraising tool?
- > Indispensable: the value of the token will grow as the value of the project grows.
- > Not indispensable: the value of the token could be canceled even as the value of the project increases.
- How does the Token Model integrate with the Business Model?
- Is buying something part of the Business Model? Is selling something part of the Business Model?
- > It is interesting to check in this case the sustainability of the revenue streams, the traceability of the same and the possibility of automating a return for the stakeholders.
- Is the token linked to the use of the product / platform, i.e. does it provide the user with exclusive access or does it provide interaction rights with the product?
- Is the token the exclusive payment unit for the use of the product / platform, or are there others?
- Does the token guarantee ownership of resources?
- Does the token generate rewards that are monetizable on product / platform user actions?
- Are any rewards generated automatically distributed by the on chain code or do they go for human governance?
- What are the incentives for token holders?
- What incentives are there for customers, partners and project suppliers to purchase the token?
- Does the token grant governance rights?
- Does the token enable interactions between users?
An Extension Layer adds specific functionality to a blockchain, such as a scalability solution. In order for these projects to work properly they usually define an economy based on a usage token or a fee on the token of the main blockchain, therefore placing themselves with a value proposition similar to the tokenization projects of digital assets.
If the project does not include a tokenization / revenue model, it does not support an economy that can incentivize it and therefore loses relevance in terms of investment potential.
Finally, an Extension Layer is as robust as the underlying blockchain is.
Examples of Extension Layer projects are the various Sidechains built on the main blockchain as well as various scalability solutions such as Lightning Network, a layer on Bitcoin stack that supports micro transactions with instant micro fees.
By Blockchain we mean all those technologies to build decentralised ledgers. Building a new network from scratch is an operation that requires a huge expenditure of resources and a high risk of implementation. A significant part of the costs lies in the construction of a reference community that will support and contribute to the new network.
It must therefore be assessed whether this blockchain has appropriate economic coverage and effective traction by an ecosystem. It takes an initial investment that can be estimated in the millions of euros to set up all the indispensable aspects of a decentralized ledger operating with a community of a few thousand users and a few hundred nodes.
Il may be more effective to build specialized solutions designed as Extension Layers on a consolidated blockchain with an existing community, than creating a general purpose infrastructure.
An effective strategy already tested by several projects to develop a new network is the issue of tokens for the capitalization of the project in a crowdfunding, relying on an existing platform, from which the traction and security aspects are inherited, and then migrate with well-defined phases on a completely independent platform (e.g. EOS).
Evaluating the effectiveness and usefulness of a new blockchain is very complex, among the questions to be asked are the following.
- Solves a specific (e.g. file storage) or generic (e.g. Smart Contract execution) problem, how does it deal with similar projects?
- What are the incentives for token holders? Possible answers are:
- > access to infrastructure;
- > access to profits;
- > access to infrastructure governance.
- What are the incentives for nodes (all those who provide infrastructure)? What kind of relationships are there between the different types of node?
- The relationship between nodes and between nodes and token holders.
- What Consensus model do you propose?
- > Most common networks are based on Proof of Work(PoW), Proof of Stake (PoS) , reputation (PoA) or other.
- What kind of governance does it guarantee?
- Is it decentralised enough?
- How active is your community? How many developers are following this project?
- What kind of partnership did the project establish?
- What market cap do you want to reach or have you reached?
A blockchain network and its community relies on two aspects, the business models of contributors (miners, developers, stakeholders) and the decentralisation technology. In this section I’m going to provide some basic tools to evaluate such technology.
The technology underlying a blockchain project is usually described in one or more technical papers. Some fundamental aspects to consider in the technical evaluation of a blockchain project are related to the limitations of the platform used or built, below we report the main ones.
- Which is the transactions per second limit of the platform?
- > The scalability of the blockchain platform could directly impact the scalability of user’s business model, so users have to be aware of this limitation.
- What is the average latency for finalizing a transaction?
- > Depending on the application, a user needs to be able to finalize a transaction in a reasonable time (30/40 seconds) in order not to compromise the user experience.
- Do transactions support programmability mechanisms like Smart Contracts? Can Smart Contracts perform tasks of arbitrary complexity (are they Turing complete)?
- > Is the blockchain able to implement on-chain all the functions required by our value proposition? Otherwise we need to centralize some logic, reducing the advantages introduced by the use of a decentralized solution.
- Are we using programmability features based on consolidated technology (such as the Ethereum Virtual Machine)?
- > Using brand new technology for Smart Contracts means undergoing technological risks, a lack of skills and off-the-shelf solutions, a lack of support and traction by the community of reference.
- Are there any fees for executing transactions?
- > If the use cases foresee frequent transactions with low economic value, it is necessary to understand how much the average transaction cost becomes expensive for the average user.
- Are fees fixed or variable?
- > Variable transaction fees can make some use cases unpredictable and therefore inapplicable.
- What factors do affect the transaction fees?
In general, the use of a platform with fees, especially if they are variable over time, can limit the scalability of the project (what happens when the number of users increases exponentially?) and robustness (what happens when the fees increase suddenly in the underlying platform?).
The Consensus algorithm used by the network is the main indicator of the level of security and decentralisation. Always remember that blockchain technologies must find a compromise between decentralisation and latency: greater decentralisation means greater latency.
The first aspect to consider in the evaluation of the Consensus is how the project is facing the Blockchain Trilemma.
This trilemma in fact defines the logical limitations that affects any blockchain when looking for a compromise in terms of:
- security: how robust the blockchain is to attacks from the outside in relation to the consistency of the operations performed on it;
- scalability: how many operations it supports in the unit of time, and therefore how many users the network can satisfy at the same time,also causing increased usage costs;
- decentralisation: i.e. how much decision-making power is distributed evenly among all active supporters of the network (miners and other types of nodes).
The Blockchain Trilemma is a corollary of CAP Theorem, which defines the limits of a distributed database in terms of consistency, availability and partition tolerance. An article explaining the connection between CAP Theorem and Blockchain Trilemma can be found here.
So if you want to increase the scalability of a blockchain without sacrificing the security aspects, in compliance with the Blockchain Trilemma, you can only reduce the level of decentralization.
Another aspect to consider to measure the scalability of a blockchain network is the relationship between its Bandwidth and Adoption: greater bandwidth means greater number of transactions supported per time unit, but also means larger blocks which means greater HW requirements for the participating nodes and therefore less adoption.
Another relationship to analyse is the Decentralisation over Latency: greater decentralisation guarantees greater security, but also entails greater latency in confirming transactions.
To overcome these scalability problems, various Consensus solutions have been introduced, which can be divided into two main types.
- Distributed Consensus: like Bitcoin and Ethereum, all nodes participating in the network have the same weight in verifying and indicating the validity of transactions.
- Hierarchical Consensus: like EOS, there are sub-networks whose consent is managed in a peculiar way, however these sub-networks are supervised by a first-level network that guarantees uniformity.
The Platform (or substrate) is the technological stack on which the project is built. A project can rely on an existing platform or build a new one, in both cases it is possible to evaluate the technological reliability of the same based on the functionalities proposed by the underlying Business Model.
The recommended guiding principle to evaluate a Platform is to understand how often the token is used, in fact one of the fundamental aspects that will determine the effectiveness of a project is the scalability of the platform with respect to its Business Model. If the platform expects the user to perform several dozen transactions per day, this platform cannot be implemented on a blockchain with a transaction cost of more than a few cents and with throughput limited to a few tens of transactions per second.
If the Business Model requires transactions to be instantaneous, a scalable solution must also be used in this case.
A Business Model requiring users to perform numerous transactions per day, although at the beginning may exhibit a sustainable performance, could not be able to resist the growth of the user base, leading to a project failure.
Another aspect to evaluate in a blockchain project is the development roadmap. The roadmap is the temporal plan for the release of the features, defined as milestones, and describes functions and priorities.
If the project is underway, it is extremely important to check whether the past milestones have been respected or not. An indication of compliance with the planned roadmap is a good assessment of the operating team and perhaps the evidence of a good budgeting.
In the event that the project involves the development of an Extension Layer or in any case of an infrastructure that is based on an existing blockchain, it is important to understand the level of integration with it and the level of maturity of this integration.
The most part of the quality of a project is given by the team. Team analysis is a fundamental indicator for understanding the execution capacity of the people that are going to build the project that we’re evaluating. The main aspects to be considered are:
- experience and success stories: some team members have experience and perhaps success stories in the context of the project;
- integrity: team members have no questionable background, positions or conflicts of interest that could compromise their work;
- network: team members have a network which is consistent with their mission.
A practical way to conduct a qualitative analysis of a team is to check their LinkedIn profiles, investigating in particular on previous work activities, social connections, published articles, media, etc.
Among the most relevant members of the team there are advisors, who, although not covering an operational role, provide insight and support to the project. It is essential that the advisors have a relevant background in blockchain or in the project’s field and that they have interesting success stories.
A community is a group of individuals and companies who, for ideological, cultural or economic reasons, dedicate commitment to the development of a project, generally open source.
The blockchain paradigm introduces economic factors to the classical open source community, enabling new types of actors such as stakeholders, miners and service providers (wallets, explorers and other services).
The size and activity of a community is essential for evaluating the adoption and health status of a blockchain project, in fact the size and effort committed by a community allow to measure:
- the level of adoption;
- the level of maturity;
- the speed of evolution.
One of the most effective ways to measure a community’s activity level is to look at the code repository. The repository is an online tool that coordinates the effort of creating and modifying the source code of a project.
The repository is usually maintained by a dev team that has permissions to make changes to the code, this team is supported by a number of external developers who can propose changes that must be accepted by members of the dev team.
Major open source communities now use the same coordination tool, GitHub, a cloud solution for Git code repositories.
From the analysis of the GitHub repository you can extract the following informations:
- number of project stars, indicating the popularity of the project;
- number of forks or clones, indicating the interest in reusing or modifying the project;
- number of devs of the team dev and total contributors;
- number of pull requests / number of merged pull requests, which indicates the effort of the community, external to the development team, in proposing changes;
- number of issues / active issues, which indicate the number of problems encountered by the community and the speed with which the team solves these problems;
- frequency, amount and date of last commits, which indicate the overall community health.
In the evaluation of the business plan there are various aspects, these are the most relevant.
- Value proposition: defines the high level objective of the project and the “product” of effort.
- Financial plan: numeric quantification of the expected effectiveness of the project, even if its presence is not very useful (no financial plan really comes true) its absence should be an alert.
- Market size: indicates the potential market reachable by the product, usually for blockchain projects we always think in a worldwide context.
- Token Model: when applicable, describes the main parameters of the / of the tokens issued by the project, quantity and modality of issue, distribution and rights granted to the token holders.
The Token Model is closely linked to the Business Model, if you want to learn more you can find here an article on how to tokenise a Business Model.
A Business Model describes the logic of how an organization creates, provides and acquires value in economic, social, cultural or other contexts. The process of building and modifying the business model is also called innovation of the Business Model and is part of the corporate strategy. [Wikipedia]
A Business Model involves iterative and incremental phases ranging from the ideation to the marketing of a product. When validating a Business Model, it is advisable to ensure that all these phases have been considered appropriately.
The Token Model defines the type of token, how tokens are issued, how they are distributed among stakeholders, what type of rights they guarantee and how they relate to the Business Model.
The Token Model must remain consistent with the Business Model in all the development phases of the latter, therefore it must be clear what the operational functions of a token are from the funding phase to the launch phase of a project and for all phases of expansion.
Specific details on how to build and therefore how to understand a Token Model can be found in the article How to build an ICO / STO.
The main aspect of the Token Model is the economic system that defines it. As for the classical economy that defines aspects of micro and macro economics, for tokens one can identify characteristics of micro and macro tokenomics. Microtokenomics define the individual properties of the token and the forces that directly depend on the rules of generation and use of the tokens, Macrotokenomics describe the overall properties of the network and the forces that depend on the token holders and the participants in the network. For more information I recommend to read this article.
The Token Velocity is an indication of the volume and average frequency with which stakeholders exchange a token. This velocity influences the market cap: as the velocity increases, the market cap lowers. If the Token Model foresees a frequent exchange of tokens, there will inevitably be a loss of value in the initial capitalization as the service provided increases the user base. The most effective Token Models counter this phenomenon by providing token burn mechanisms or the use of dual token models. This article introduces the Token Velocity problem.
Another relevant aspect is the legal support for the Token Model. First make sure that the tokens issued by the project are actually what they claim to be (very often security tokens are declared as utilities), and then you must make sure that the rights associated with the tokens are properly formalized at a legal level for the jurisdiction of reference.
The final aspect to consider is governance, i.e. the decision-making capacity that is recognized to token holders. Starting from 2018, the governance aspects are increasingly important in defining a blockchain project, in fact the possibility of intervening in the disbursement of funds and in the decision-making process become increasingly felt by users (see DAICO).
By internship we mean the project development phase, usually the following phases are identified.
1. Conceptual phase: we only have the development of the value proposition.
2. Prototype phase: we already have something working, some projects develop prototypes before funding, but that’s not the rule.
3. First Funding phase: we obtained funding through an ICO/STO.
4. Development phase: the platform is financed and the marketing functionalities are being developed.
5. First operative release: we have the first commercial release.
6. Subsequent releases: we have other releases.
Needless to say, the further we are on the project stage the greater the probability of the project to succeed .
Market Cap and Fundraising
Another aspect to evaluate the effectiveness of a project, if it has already passed the funding phase, is the market cap and the respective fundraising, i.e. the overall value of the tokens in circulation and how much of this capital is in the hands of the company that promotes the project.
You can quickly retrieve data on the capitalization of a Blockchain project, being it a currency, a utility or a security, using sites like coinmarketcap.com.
It is also interesting to observe the temporal trend of the token value over time, in particular how the crypto winter started since January 2018 is facing, also in relation to the performances of other crypto assets.
The capitalization operation can accept cryptocurrencies, fiat or a mix. At the end of the capitalization the company can proceed by holding / purchasing a cryptocurrency reserve or keeping / converting the remaining part into fiat for the financing of the operations in the business plan.
Usually the funds needed to cover the first milestones of the project are converted into fiat. To understand the state of health of a project, it must therefore be assessed whether the collection was sufficient to cover the operating costs to achieve at least the first release.
While assessing the effectiveness of the market cap, it is essential to consider the state of maturity of the project, if the project starts from scratch, the market cap must be able to support the development (and related technological risks) of the first operational milestone and the construction of the community, if instead the project starts from an already working prototype, the funds raised can be concentrated in the consolidation and dissemination operations.
What a comprehensive article: