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DeFi DD Framework.

 

Basic decentralised finance projects due-diligence framework

The wave.

  • Social and economic factors (greed—easy money, new ways to make more money, seeking for extra income, global factors)

  • How lucrative is it?

  • Is it a new movement? Innovation or a trend or an improvement? How much of it will be related to making more money?

  • Is it a new market segment or a branch of an old segment?

  • Is the need commonly understood as a game-changer in the community?

  • How far and how big can this new “wave” generate monetary value from the user's point of view- 10x, 100x, 1000x?

  • How fast is the movement growing compared to the wave type, the monetary value generation potential to current market opportunities?

  • What is the current growth of the FOMO?

  • Community maturity potential vs wave growth?

 

The value capture.

 

  • How much proportion of the wave is going to be captured by the selected protocol?

  • The wave stage vs protocol launch. Regular market maturity cycles can be extremely long and sustainable. But in crypto, it can be extremely short. E.g. YFI caught the DeFi growth stage with the BTC price move.

  • Technology maturity. How far is the technology away from capturing the wave?

  • What is the key enabler or usage of the protocol? Is the technology able to provide the need?

  • Ideal product/market fit vs current stage of the project

  • How unique is the technology?

  • How fast is the core team building?

  • How much has the product positioning, branding, and USP caught the community's attention, and how do they label it? For E.g. ABC is THE game changer in this space. 

  • What is the community sentiment and dedication? (I.e. how many “hardcore” followers are in the TG, discord, Twitter, and Reddit channels?)

  • The protocol recognition compared to the core need/movement and the circulation elevator pitch in simple terms vs level speculation, excitement growth from the community perspective.

  • What are the current community attention and the growth potential?

  • How much is the token governance aligning with the wave? If it's a movement, how much is the tech protocol relevant from your usage point?


The network effect.

  • How fast can economic activities be on the protocol scale?

  • What efficient mechanism is in place to incentivize network participants, and how fast can this be adopted?

  • How much subscription percentage has been achieved compared to the ideal critical mass?

  • How far off is the project into capturing the network effect?

  • How much of the token network aligns its network participants to work together toward a common goal (the growth of the network and the appreciation of the token will determine the direct collaboration)?

  • What is the flourishing effect of the project from the need, end user and community perspective?

  • Tech, token Interoperability

  • Token adoption rate

  • Exchange listings and exchange listing criteria alignment

  • Overall market sentiment and macro wave correlation

  • Social expectation management vs growth potential.

The network effect
The vaue capture
The wave

The protocol.

  • First principle: is the need commonly understood by the community for the solution offered by the protocol. How easy can it be described from a user/community perspective? 

  • The core solution/features of the protocol vs encouragement of the economic activities on the protocol vs token economics

  • Is the current usage of the tech due to an inefficiency in the markets, or is it a true innovation? (i.e. flash loans arbitraging inefficiencies) 

  • Reward mechanism

  • The obvious truth at the token distribution to the team vs usage/protocol integration

  • What is the scalability of the protocol? Has the team addressed the barriers and bottlenecks to scaling the network? 

  • Are they building openly and communicating publicly?

  • What is the type of community holding the governance token? Technical and dedicated, purely speculative and basic retail? Is there solid knowledge transfer channels around the specifics of the protocol and tech and system?

  • What are the alignment and the product share with the end user’s needs and the core driving factor?

  • What is the whale heaviness of the project, i.e. is liquidity only controlled by a few users, looking at several users to complement TVL

  • What is the risk exposure? Where is the money at any one time? 

  • Is there insurance that can be purchased? What is the cost-to-risk?  

  • How reliant/interconnected is the project to other projects? Is there liquidity risk in one of the downstream protocols? (i.e. is at a layer on top like Yearn finance relying on the underlying protocols to perform?) 

  • How much effect do the gas fees have on the protocol usage? (i.e. can profits be enough to outweigh gas fees?) 

  • What is the composability of the project? (I.e. if built on Ethereum can interact with other projects, if on another chain, it is much harder)

  • What are the admin permissions? How many people have administrator privileges?

  • How many of those admins must approve before some action is taken? Are any administrative actions controlled by on-chain governance (i.e. a DAO)?

  • What is the governance structure? Centralised control or community governance? 

  • What exchanges does the system depend on? (CEX or DEX)

  • Is it easy to find the security contact information on the website and git repos? (Are they using GitHub’s SECURITY.md feature?)

  • What are the incident response planning steps in responding to a security incident? Which scenarios does the security compromise plan take into consideration? 

  • If a vulnerability is discovered that places funds at risk, what will the team preemptively exploit to protect the funds?

  • What is the APR? What are the formula/factors by that this is calculated? 

  • What are the average project user profiles? Are they more active or passive? (This will help with understanding where some of the project liquidations and lag recoveries are)

  • What is the total value locked up (underlying and synthetic)? What is the rate of increase in value locked up? 

  • What is the insurance/debt repayment mechanism? Is it automated or bot tracked? How many bots are currently acting as liquidators? 

  • What is the collateralisation ratio? At what price are most of the capital liquidation and collateral margins locked up?

 

The business model & tokenomics. 

  • What is the long term funding for the project? What is the long-term profit/business model of the project so that they can sustain? Is it VC backed? Is the team reliant on donations or Gitcoin grants? 

  • Is there a plan or built-in mechanism for raising, rewarding and allocating funds to future development? 

  • What is the purpose and usage of the token? What is the token supply model (inflationary, capped)?

  • Token liquidity, token distribution, token governance, global treasury

  • Token structure & distribution

  • Token release structure, i.e. ICO, pre-sale etc.

  • How much token usage and tokenomics models are directly influenced or involved in the core need?

The business model & tokenomics
The protocol
The team
The technology

The team.

  • How many years of tech experience the core team has?

  • Project narrative, team involvement and motivation from the community perspective. The obvious motivation behind the project and the investment.  

  • How long have they worked on the project in the past before launching?

  • Are there any other crypto projects, protocols, or people that were/have been involved before the launch (Collaborating with and helping the team)?

  • Do they work with well-recognised, well-respected tech, organisations and people?

  • How long have they been in space, and how much do they understand the crypto world? 

  • How many geeks and tech-savvy individuals are on the top?

  • How community-sticky are they, or can be?

  • What technology have they built? How busy are they?

  • Do they have legit Github commits?

  • How transparent is the team in keeping the community up to date and on track with where the project is at? Where is this information recorded?

 

The technology.

  • How much of the core tech is ready to use? 

  • Where are they in their roadmap? What stage are they at (v1, v2, beta)? What are the next stages in the roadmap? Is it public? 

  • Is the technology open-source or proprietary?

  • What is the community following and reach on GitHub? 

  • What is the code release strategy? I.e. completely open source, or is it opening up for someone to fork and try and front run and release before you? 

  • What is the technical risk? Is one person writing all of the code when he is tired? 

  • Has the technology and code been audited? When was the last audit? How much effort/hours went into the audit? 

  • Who performed the audit? Is the report public? Was any portion of the system excluded from the scope?

  • What is security? 

  • What oracles does the system depend on? (Chainlink could be a single point of failure for DeFi)

  • What 3rd party smart contracts were used to build the system (i.e. OpenZeppelin)?

  • What tokens does your system support, and what assumptions does the project make about their functionality?

  • Is there a project bounty program? What is the range of bounty payments, and has a bounty payment ever been paid? 

  • Before merging, do the developers review each other’s PRs (at least in Solidity files)?

  • Are any other security analysis tools in the process?

  • Is there a strong developer base? 

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