Intro
Due to sudden boom of defi projects there is huge fomo and rush which can lead to many fingers burnt just like the ICO mania of 2017. As the defi is getting popular many substandard and fraud projects will line up in market just like 2017 ICO mania.
As an investor you need to be very cautious while putting money in any of the projects. Here I am sharing what important things you must keep in mind before investing in any defi project.
Developer Team
It's very important to check about the qualifications and experience of developer team of any defi project and don't go just by hype and marketing which can be falsely created and sometimes specially crafted to do frauds. A great development team with lots of experience and excellent past record must be your first choice.
Security of defi project
Security is Paramount in any defi project as once launched the smart contracts are immutable and any vulnerability in smart contracts can lead to great chances of hacks and thefts.
So always check what the project is investing and doing on security area of projects. Most of the projects don't focus on security and just focus on growth and marketing and leads to abrupt end once a big security flaw gets discovered and project get overnight rejected.
Transparency and Audits
Always check how much transparent is the team and company about the project. Will it be fully decentralised with time. How much control team and founders have on projects. Are third party independent audits of smart contracts are done time to time.
Don't follow hype and short term price as it may lead to disappointments in long term. Always check what is the goal and mission of the project. Check the integrity of founders and there drive of the mission. Are they changing decisions frequently, are they not sharing details with community transparently , then you should not put your hard earned money in such projects.
Innovation and problem
Check what innovation this projects bring to the table , is it solving a new problem or solving a old problem a better way. If the project looks similar to other projects with no extra benefits then its better to pass that on. Many copy projects flood the market when one project succeed but these projects don't have the great talent(development team) , vision and mission. They are just trying to cash in on the running trend and mostly fail.
Economic and Incentive model
Check the economic and Incentive model of the defi projects. Is it sustainable in long term. Don't go by initial price of high returns as these can go to bubble territory anytime. Always go for steady growth and sustainable economic model. Alot of projects give huge incentives during start but collapse after Incentive go down and userbase don't increase. So always try to choose a project with a well thought Economic model which is sustainable for very long term.
Research
Always do thorough research , try to find as much as possible about the project. Don't go by marketing and hype and influencers , rather try to find technical blogs , Reddit discussions and research articles which can give good insight about the long term success of projects. Most of the influencers are paid to shill the projects or they have some other selfish motive in mind. Always go by your own instinct and research. Always keep checking Github activity and development updates.
Conclusion
Even after you follow every steps there are still chances of failure of projects as even good projects fail sometimes due to unforeseen circumstances , such as regulatory issues , wrong timing of project etc. Only less than 1% projects will succeed in long terms in crypto and defi sector so you need to work hard and also get little bit lucky so that you get hands on maximum winning projects.
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Let me know what are your thoughts on increasing hype of defi sector ?
I think the points raised are relevant for any kind of investments/projects, not just for DeFi.
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