In this article, we break down key factors and metrics to look out for when carrying out due diligence into a crypto project as well as how you can use Nansen to surface the signal and conduct due diligence.
Crypto has come a long way since 2009, from being largely regarded as worthless to potentially powering a whole new internet and way of living. Projects are getting more sophisticated with many use cases, verticals such as DeFi, NFTs and gaming have been blowing up recently. Industry behemoths like Meta (originally Facebook) and Block (originally Square, Inc) have also pivoted their business to leverage the booming digital market. Since November 2020, the crypto market capitalization has risen five fold, reaching US$3T in November 2021, when Bitcoin and Ether reached new all-time highs. This space is now referred to as “too large to ignore” by many traditional institutions.
To make life easier for non-crypto natives to get started in the crypto world, we've compiled a list of some of our favorite indicators for evaluating the market and crypto projects.
If you are familiar with Nansen, you should be familiar with our Smart Money labels by now. Smart Money is a label by Nansen which includes Smart LP, Smarter LP, Flash Boys, Whales, Funds, Smart NFT Trader, Smart NFT Hodler, Smart NFT Early Adopter, Smart NFT Minter. See our definitions of wallet labels here.
Smart money refers to wallets that are very active and prolific. Specifically, this would be any wallet that is considered a fund, smart LP, flash boy, or whale, with a proven history of making savvy investment decisions and being ahead of the curve. Thus, Smart Money holdings is one of the possible positive indicators of a certain project/protocol.
Nansen allows users to set up highly customized Smart Alerts so they are notified in real-time as these wallets make new trades and investments.
With Nansen’s Smart Money labels, you can track what the best DeFi and NFT brains in the space are up to. On top of these, you could set smart alerts on such wallets to receive real-time updates on their every movement!
Some examples of such Smart Money activities that could possibly translate into good Alpha are listed below.
Example 1: Defiance received $MUSE before the official funding announcement, $MUSE price doubled when it became public.
Example 2: BlockTower capital loads up on MCB and sells partially at the local top, a good opportunity for quick profits if you followed them closely
Example 3: Some smart alerts for fund movements and Smart Money inflows
Smart alerts can be a very powerful tool for tracking fund and Smart Money inflows based on customizable filters on various chains. This would allow you to keep up to date with funds, whales or other Smart Money equivalents.
This Nansen dashboard shows Smart Money stablecoin holdings as part of their total on-chain crypto holdings. This is often used as a sentiment check on the current market situation. Generally, a high % in stablecoin holdings might indicate a more risk-off sentiment whilst a lower % in stablecoin holdings might indicate a more risk-on sentiment.
This chart is often seen in tandem with other factors, for example, a lower stablecoin holdings amidst a correction which might indicate bullish sentiment as Smart Money are buying the dip with expectations of an upward trend to follow.
This dashboard shows the 30, 7 and 1 day(s) change in holdings for Smart Money, along with the number of addresses involved. This is often used to identify investable opportunities but also used to do a sentiment check on projects and the market as a whole. As we can see from the dashboard below, there is a large accumulation of $USDC across 30, 7 and 1 day(s). This shows a rotation towards stables and towards a more risk-off approach, possibly in stressful situations.
Similarly, this dashboard shows the top token that Smart Money wallets were accumulating over the past 30, 7 and 1 day(s) is none other than Shiba Inu $SHIB across 67 addresses. This is in time with $SHIB’s meteoric rise from $0.000009 to it's all time high of about $0.000088.
Hold on for dear life (Hodl), is a term often used to describe holding on to coins or tokens whilst riding out periods of volatility for a long term perspective. HODLing is a passive approach towards investing as opposed to the active approach of trading. It is ideal for those who do not have the time to keep track of the highly volatile markets, yet want to have some skin in the game.
One possible indicator people can look at is the token seniority distribution dashboard which is readily available on Nansen. The token seniority distribution dashboard shows the number of tokens and number of addresses in percentage holding on to tokens for various time periods.
Generally, the higher the amount of tokens held for longer periods of time signals positive perception and conviction towards the value of the token as people are seeing it for its long-term potential. If the percentage of addresses holding it for longer periods is also high, it signals that more people are in agreement with the long-term potential of the token. Of course, there are many factors as to why people are more likely to hold the tokens for longer periods of time, which could be tied to certain vesting schedules, staking or holding rewards, other utility etc.
Similarly, the unique addresses dashboard for tokens can be found on Nansen. This shows the number of addresses holding the tokens. With more addresses holding the tokens, it is generally a good sign that the broader market is confident in the project’s long term viability. Moreover, it can also signal less concentrated holdings, which can be confirmed using the top balances dashboard on the Nansen platform as shown below.
Market capitalization is basically an estimate of an asset’s total value according to its current market price. In our opinion, MCAP is one of the most simple and useful metrics for evaluating projects.
Market Capitalization (MCAP) = Current Price x Circulating Supply
For many investors, doing an in-depth analysis of a project’s intrinsic value can be a tough ordeal. Hence one simple way that investors can use, is to compare the MCAP of a project with its competitors to get a rough estimate of the project’s growth potential.
It is important to note that in our comparisons, we try to compare projects that share similar characteristics (e.g. project’s utility) so that we can strive to achieve an apple to apple comparison.
To demonstrate, let us compare the MCAP of Solana and Ethereum. As mentioned earlier in this guide, Solana is a L1 network and is often dubbed as an “Ethereum killer” hence it would be appropriate to compare the MCAP of Solana and Ethereum due to their similarities.
If we assume that Solana will eventually achieve Ethereum’s market cap, then we can calculate the future value of Solana.
SOL Forecasted Value = 460,157,827,005307,925,117 = $1,494.38
Potential Upside = 1,494.38177.13 = 743.66%
FDV can simply be defined as the Market Cap of the project once the maximum number of tokens have been issued by the development team. In other words, it is a method of computing the future market cap of a project.
However, FDV might not be the most reliable metric as it assumes that additional supply of the token will not affect its price in the market as well as not taking into account the future developments of the project and the space it is in.
Fully Diluted Value (FDV) = Current Price x Total Supply
Relative and comparative valuation metrics:
When valuing different DeFi projects, there are many metrics that would come to mind. Some of these would be TVL, transaction volume, borrowing/lending volumes. It is important to look at the key drivers of the protocols that would lead to its success.
For Defi Aggregators (Staking/Farming), one important metric to look at is the TVL of the project. It is, however, more accurate or conservative to use the trailing 3/6 month average of TVL as liquidity is highly mercenary in DeFi as users are in pursuit of higher or better APR/APY.
For Defi or Centralized Exchanges, one important metric to look at is the volume on the exchange. This is because more often than not, volume is directly associated with the revenue driver of such exchanges. To have a more accurate comparison, we can use the trailing 3/6 month average of volume, revenue or fees captured.
For lending protocols such as AAVE or COMP, other than TVL, borrowing volume is also a key metric to look at when doing comparisons.
An example of how we could do a comparison of MCAP and FDV based on such key metrics can be seen in the model below. It is a simple comparative model which we use to see the various multiples of the important ratios. This gives us a sense of the valuation of the project and allows us to make more informed decisions based on this.
For other market indicators, check out our previous article on the topic here!
Among the thousands of different tokens out there, only a fraction of these tokens have some form of proper utility. Here, we'll talk about how the tokens you're buying generate value and thereby increase their fundamental value.
Value accruing tokenomics are designed to reward the token holders one way or another. These can be in the form of earning yields, participation in the protocol’s governance, etc. Ultimately, these tokens aim to provide incentives to align the interests of the token holder, along with the network’s.
Note: This list of token value accrual methods is not exhaustive.
Airdrops involve blockchain projects sending out their own native tokens to a specific community, in a bid to encourage new users to interact with the new protocols. The airdrop concept is fairly similar to new online games giving out free credits to new users in hopes of bidding up player volumes. As of recent, most airdrops have been carried out by giving out new tokens to existing token holders of a specific project.
For example, over the past year, $ATOM token holders have received multiple airdrops from the likes of Osmosis and Juno network, so as to encourage existing Cosmos ecosystem users to interact with the Osmosis and Juno Network projects. These airdrops were fairly sizable and would have net huge returns for $ATOM stakers.
1000 $ATOM Staked = 1988 $OSMO Airdropped
→ Equivalent to US$18,448 reward for staking US$27860 worth of $ATOM in today’s prices.* Not considering the initial high yields for staking $OSMO, these airdrops have certainly been a super attractive pot of gold for everyone.
*Prices as of 26 Feb 2022
The underlying concept is fairly similar to the traditional dividend paying stock or interest paying bonds, whereby token holders lock up their currency in exchange for yield. This yield can be generated by the underlying protocol through various ways, or more commonly through the fee-sharing mechanism between the protocol and the liquidity providers. Tokens that offer more attractive yield farming / staking opportunities (e.g. more farming platforms / higher APYs / leveraged farming opportunities) would naturally be more valuable than those that do not.
However the inflationary token mechanism of many protocols has its fair share of issues. Usually new protocols offer high yields in hopes of improving liquidity. However, this system creates elevated rewards that incentivizes holders to dump their tokens. As a result, it is definitely important to assess if the protocol has deflationary mechanisms / strong utility to ensure token value retention.
On a side note, the topic of vampire attacks have also been on the rise, where new protocols incentivise existing liquidity providers on another platform to stake their LP tokens on the new platform by offering extra incentives.
To read more about vampire attacks, you can refer to this link.
Having a say in the protocol’s future can be considered to be valuable. This concept is quite similar to the voting rights of ordinary shareholders. Apart from this influence, many governance tokens offer the token holders various benefits, including those mentioned above.
Example of Governance Token Benefits
Governance token holders can vote to distribute X percentage of the total fees generated by the protocol to the token holders.
Token holders can farm additional tokens through staking / yield farming.
Core concept of a governance token. Essentially converts “ownership” of the protocol.
Reward early protocol adopters with tokens.
Examining the governance token distribution can be crucial as well. Widely distributed tokens, on the whole, have a better governance participation structure because votes aren't influenced by whales with massive token bags. Nansen's Token God Mode makes it simple for investors to evaluate token distribution as mentioned earlier in this guide.
One of the most common value accrual mechanisms is the buyback of the protocol’s native token using the revenue generated by the fees in the protocol. The tokens that are bought by the protocol can then be burned forever which reduces the total token supply, or distributed back to stakers. The act of distributing the tokens back to stakers will then form an added incentive for token holders by putting buy pressure on tokens and ensuring perpetual incentives to good actors.
From the above chart, we notice a strong price rally during each $BNB burn event. However it is also important to note that a price rally is also not guaranteed to occur every burning event as seen here. In actuality, burns technically do not create any real value, other than contribute to the scarcity of the token.
Many new tokens have huge emission runways, which create strong inflationary pressure on the token. As a result of this design, the “strong” token price action is unlikely to be sustainable as the only way to sustain the token price is to create continuous additional demand for it.
The existence of a declining supply emission rate creates a scenario in which token demand gradually outpaces supply in the market. This would boost the buying pressure on the token and, in essence, help it to appreciate in value owing to scarcity.
This concept has recently been applied to $SLP, the token rewards for Axie Infinity players. To help improve the long term sustainability of the game’s rewards as well as support $SLP prices, the developers decided to reduce $SLP emissions for game features such as “daily quests” to zero from 130m $SLP earlier. This drastically reduced the daily $SLP token supply by 56%. As a result of this change, the price of $SLP shot up more than 100% as shown in the chart
Following Curve’s huge success with its vote escrow (VE) model, which is an ingenious mechanism that encourages token holders to lock their tokens for a preset duration. An increasing number of protocols have similarly adopted this mechanism, with the latest being Terra’s popular Anchor Protocol.
In short, the vote escrow mechanism allows token holders to vote where token emissions are directed and earn enhanced staking yields, by locking their tokens. This time lock strategy encourages long term commitment from the holders in the underlying project, as well as reduces circulating supply thus reducing potential selling pressure for the token.
In fact, this VE model has become so popular, that a fight for liquidity has emerged in the DeFi scene. You can read more about this Curve Wars here.
The crypto market gives investors unique insights that aren't openly found in traditional markets due to abundance of transparent data in the space. Transactions that happen on-chain are readily available for everyone to see. Nansen supercharges on-chain data by adding on wallet labels that allow our users to move in lockstep with some of the smartest investors in the market. Other metrics such as market capitalization, fully diluted valuations, exchange reserves and tokenomics should be looked at during the due diligence process before making any investment decisions.