2017 has been the year of ICOs, with more than 3,6 Bio USD of token sales funded so far. While ICOs and tokens are getting a lot of attention from private and institutional investors, most investors are struggling with how to evaluate all these new tokens on the market, and how to distinguish the bad investment from the real deal.
The following token valuation canvas intends to give some guidelines for doing better due diligence. It is a set of questions that can help you research relevant information, for a more educated investment decision, pre- or post ICO – if an ICO is applicable in the first place.
Note: Classifications, categories, and descriptions used here are a proposal of how one could evaluate a token. Many of the terms are not defined yet, nor are they set in stone. For example, the categories that we proposed for the role of a token are suggestions, other categorizations and definitions exist. The important thing is that a token can have different value propositions and roles and that you understand what they are, independent of semantics.
- Intrinsic, Native or Built-in Tokens
Used as transaction fees to write to a blockchain: Bitcoin, Ether, etc. These tokens have an important security function to keep the decentralized network fault tolerant, attack and collusion resistant.
- Application Tokens
With Ethereum, tokens can now easily be issued on the application layer through smart contracts on the Ethereum blockchain. A majority of recent ICOs have been issued as Ethereum app tokens, with often unclear token design.
- Asset-backed Tokens
Digital equivalent to physical assets.
Example: DigiXDAO (DGX).
- Usage Token
A token that is required to use a service. Token ownership does not give you any specialized rights within the network, but it does give you access to the service.
Examples: BTC is needed to pay for transactions (payments) in the Bitcoin Network, ETH is needed to pay for transactions in the Ethereum network. SIA is needed to pay for file storage in the SIA network. Application Tokens that are usage tokens? These tokens have an important security function to keep the decentralized network fault tolerant, attack and collusion resistant.
- Work Token?
A token that gives users the right to contribute work to a decentralized network and earn in exchange for their work. That work can be serving as an oracle (in the case of Augur), being the backstop in a collateralized debt system (in the case of Maker), or securing the network (in the case of Ethereum when it switches to proof of stake).
- Useless token?
Is it in early stages of token development. Some tokens seem to have poor design and no clear function, and sometimes only designed to raise funds for the startup.”
- Pre-mined Supply
Total amount of tokens mined or created before launch.
- Current Supply
Total amount of coins created until today. Example: as of 05.10.2017 16,605,012 bitcoins are in existence.
- Total Supply
Is the total token amount limited? Bitcoin is limited to 21 Mio. Monero has no limit (perpetual tail emission).
- Inflation Rate
Number of new tokens minted/mined per year.
(((P1 – P0) / P0) X 100)
% of total supply the founding team or whales (big token holders) hold.
If they hold too much they can influence price or be seen as too centralized.
If Platform Token
P2P File Computing Power, File Storage, etc.
- Understand the infrastructure
What are the limitations?
What makes it more usable and scalable.
Bitcoin: Sidechains = building Blockchains
Ethereum, Tezos, EOS: Programming Language for smart contracts used.
- Tech know-how needed?
What is the complexity of coding skills needed?
How widely known are the programming languages built on top of it?
Are there many libraries?
If it is not a widely used language, is it easy to learn?
Is it popular on GitHub compared to alternatives?
Tested for smart contract security?
If Currency Token (P2P Money)
- What is the regulatory status of the currency?
- Will it be an underground currency or does it have the chance to be accepted by regulators and get mass adoption?
- How many startups are building on-chain off-chain solutions to integrate it?
- Does it get adopted by merchants?
- Forked from another project?
If yes, how much of the code is part of a previous project?
Are they copying somebody else’s work?
Do they contribute unique code?
- Is the code open source?
Is the entire code open source or only part of it? What license is used? Not all open source licenses are the same. If it is not open source then is there a good explanation why?”
- How big?
How big is the buzz around a certain token on different social media channels (Reddit, Twitter, Medium, Facebook, Linkedin} and what is the general mood/vibe (positive or negative).
Where dedicated social media channels, how many followers/fans/members do those channels have?
Is it growing, if yes by how much?
- How engaging?
How active are the users of those dedicated social media channels?
Is the project engaging with people on social media?
IE: Ask me Anything (AMA) sessions.
- Are team members or core devs active in the community (If applicable)?
Are they active on social media?
Do they take part in meetups?
Are they speaking or engaging at relevant conferences?
Do they host Ask me anything sessions?
Do they answer community questions?
- PR style?
Are they spamming users with ICO related information? — sales oriented
Do they bash other projects? — aggressive
Are they too active on social media? — sales oriented
What is the quality of the content they share?
- Stable running? Any issues?
- Is the blockchain/dApp running smoothly?
- Potential uptrend regarding network usage?
- How high is the transaction volume?
- Do users use the network?
- Is demand increasing?
- If not why?
- Trading volume on exchanges?
- Listed on many exchanges?
- Market uptrend?
- Is the token overpriced?
- What is the future potential?
- Token supply trajectory
- Do they release tokens too fast?
- Is there high inflation (newly minted tokens)?
Viability of Project
- Categorized as a security?
The US Securities and Exchange Commission (SEC) categorizes some tokens as securities. Such ICOs are not allowed under US law. Other countries might follow in the future.
- Legally approved?
Recently China banned all ICOs. The startups had to refund their investors.
Does the local government allow ICOs?
Is there future risk for the investors?
- Where is the company registered and how does it impact the business model?
Cayman Islands, Zug, Switzerland?
- Do they have legal guidance?
Does the team have legal support?
Are they being advised by known company?
- How many?
Does the project have many repositories?
Is there any code in the repositories?
- How often?
Are there code commits on regular basis?
- Are they simulating commits?
Are there serious commits or mainly typo fixes?
Check code history.
How is previous experience related to crypto?
- Track record
Are they acknowledged by other professionals & community?
What about previous projects?
- Long-term commitment?
Are they committed to the project?
Check work history.
What other professionals have to say? — Twitter, Medium, Reddit, LinkedIn
(focus only on the known professionals, ignore community discussions).
What percentage of the team are Devs?
Are there too many Advisors?
Are there too many marketing people?
Professional connections from previous work experiences?
Since when are they active in the community?
If Token is Pre-ICO
- Token distribution?
Who gets what?
What will be the token distribution after the ICO?
(The Gnosis team, for example, owns 95% of all tokens — investors 5%)
Is the ICO capped?
- Are there any soft or hard caps?
Is the cap too ambitious?
If there is no cap (EOS), then what is the argumentation?
Token pricing during ICO?
Price increases? (Ethereum)
Price decreases (Dutch auction, Gnosis)?
Is price fixed?
Price not determined? (EOS)
- Investor rights?
Check token sale agreement.
There are a few indications that can make a token sale more or less serious:
- Is token sale rushed?
- Do they spend too much on marketing?
- Are there too many marketing campaigns?
(Facebook, Bitcointalk banners, Coinmarketcap banners, Google ads, Sponsored content)
- Are institutional investors — VC’s hedge funds etc. — committed to the token?
(That can be a good or a bad sign, depending on the circumstances)
- Were affiliations announced before the ICO? Why?
(Example Tezos — Tim Darper)
- Is it too generic?
- Who wrote the whitepaper?
- How is it structured?
- Is there a good product description?
- Does it go into the details or not?
- Role of a token?
- Is the token design well explained in the white paper? Token economics?”
- Is there a need for a token, or is the token just designed for marketing and fundraising purposes, but otherwise useless?
- Alpha version available?
- What other devs say about it?
- Testnet: Has it been running for long enough?
- Code quality: Is it well written? Do devs show superior knowledge?
- External audits?
- Professional companies doing audits?
- What are the outcomes of the audit?
- What other established Devs say?
- Is there a lot of criticism?
- Too ambitious?
- If yes, why?
- Does it correlate to marketing strategy?
- On schedule?
- Are they delivering on time?
- Do they deliver as promised?
- Any deviations from the initial roadmap?
Are other projects working in the field?
What are the project’s advantages when compared to others?
In what stage is the competition? — pre-alpha? — late stage?
- Value proposition:
What value do we deliver to the customer?
Which one of our customer’s problems are we helping to solve? What bundles of products and services do they bring to each customer segment?
- Demand for the product?
Is there any market demand?
Are there non-blockchain alternatives?
- Post-ICO funding strategy?
Revenue streams for future development?
Personal Evaluation Add missing information. Express personal opinion. Give a general overview of the project. Compare it to similar ones.
What is your personal investment advice?
Also published on Medium.