First of all, you need to understand what a node is. For historical reasons that I will spare here, calling nodes is a misnomer. Nodes are simply a way to gather funds. By investing in a node, you’re investing in the protocol and giving the team money. The theory is that investment is paid off by the protocol using those funds to get revenue and use it to pay its investors.

The most important thing to understand about nodes is:

They are unsustainable for a fairly simple reason: they pay more than what they are able to give back.

Most of what is fueling the protocol rely on new node creation. Without new nodes, the project dies very quickly.

Before we get into it, repeat with me:

• This isn’t financial advice.

• DeFi is risky.

• DaaS/NaaS is very risky.

• I may lose all my money.

• I’m smart, and I don’t blindly follow random dudes on Twitter/Medium.

• This guide is oversimplified because space is limited.

All right, now that’s out of the way, let’s cover the main variables you should take into account.

If a protocol has high rewards, run. While it’s appealing that you may get your ROI faster, it also means that the protocol is dying faster. A general rule of thumb is anything over 1% is very risky. Although 1% is FAR from safe. The original idea of DaaS was that you paid back investors by investing in the treasury and then getting extra money from those returns.

The problem is that the rate of paying investors and the rate that you can get from investing in the treasury is super disproportional. It never pays off.

Remember that you need to account for the whole protocol when taking rewards into account. For example, many protocols have several types of taxes that need to be taken into account. So if you have a 2% reward rate but a sell tax of 50%, the true reward is 1%.

People don’t like to hear this, but the lower the rewards, the better. It gives longevity to the protocol, and it gives time to adapt as needed to make sure it stays afloat. No matter how hard a team is working, if you’re working on the clock and you have a 30-day runaway before your project self-destructs, your chance of success is low.

If a project is new, that adds risk. For one, you have no idea if they are going to be a rug or not. Many rugs happen within the first 1–3 weeks. So if a protocol is 1 month old, that adds credibility that it isn’t a scam. This does NOT mean that it can’t be a rug, it simply decreases the likelihood.

Launches can go very badly very quickly. Everyone is hyped up about getting into a new project, and prices can soar manyfold. However, it very often crashes back down.

Even if the project isn’t a rug and it survives in the long-term, if by default it has a 100-day ROI, but you got the price at $100 5mins into the launch before crashing to $20, then your ROI is now 500 days.

Avoid putting a lot of money into it in case this happens. If you see that the price is getting stable and the risk of a crash is decreasing, you can always buy it again. You will likely buy it at a higher price, but your overall risk is significantly reduced.

Just because influencers are sharing on Twitter does not mean it’s a legitimate project. It’s also not a sign that it’s a scam, but take it with a huge grain of salt.

Just because you see the protocol’s name everywhere, that means nothing about its chance of success. Such marketing tactics are easy to coordinate, and they bring many people in despite the project having nothing good to offer. Don’t blindly trust influencers.

It’s not that hard for anyone to fork an existing project and make a new node protocol. This is often done with very little care and without thinking of future plans.

Look for projects that are trying to innovate. If a project is just a copy of something else, be skeptical. DeFi requires innovation, and projects that are just copies of something else offer nothing.

There are a variety of indicators that assure some extra safety regarding a particular project. None of them guarantee security; they just increase the likelihood of being secure and trustworthy.

This means that a 3rd party company knows who the owners of the project are. This adds some extra security because in case of a scam, the identity of the person is known, and it can be sent to the authorities. This aspect is deeply misunderstood.

KYC does not mean it’s rug-proof. IRL criminals certainly don’t stop committing crimes just because their identity will be known. They will try to get away anyhow. Plenty of projects with KYC have turned out to be scams. Furthermore, even with the identities being known, it’s incredibly hard to make this actually go to court and have anything meaningful happen.

However, this also doesn’t mean KYC is useless. It’s simply 1 layer of protection. While the probability of repercussions is low with KYC, without it they are zero. So if you’re trying to scam people and steal money, why have a small chance of getting caught when you can easily still make money with zero chance?

In addition to KYC, it’s also possible for the team to be doxxed. This means that their identity is not only known to a 3rd party like KYC, but the public at large knows who they are. This adds even more liability to the individuals and, therefore, adds more trust for the investors. But remember, even doxxed teams can scam you!

The liquidity provided to the protocol cannot be moved within a certain amount of time. Liquidity is what makes trading possible, and it’s often a considerable amount.

So if the team pulls out the liquidity available, they are effectively running away with the money and killing the protocol. If you’re looking into a project to invest in and the liquidity is not locked, this is a huge red flag.

The code has been reviewed by a company and made sure that it’s safe. In DeFi, everything relies on code, so you rely on that code to be trustworthy. Unless you know how to read that code, the average investor can’t know if the code is safe or not.

Audit companies (like CertiK) review that node so that investors can have peace of mind. Like KYC, this is simply an extra safety measure but not infallible.

Exploits and bugs can be missed from the code, and honestly, some audit companies run more on marketing than anything else. Sometimes the devs themselves know more about smart contracts than the audit companies, but nevertheless, it’s always good to have an extra pair of eyes

This means that for any transaction to be made within a wallet, several people need to approve it. This reduces the chance that a single person can move the funds out of the protocol for their own gain. This is yet again not infallible.

If everyone is “in” on the scam, then everyone will, of course, happily sign the transaction. But again, it is an extra measure of security, and it’s especially trustworthy if there are people in the MultiSig that are completely outside the protocol and trusted in the community. I think part of the future of DeFi will be having companies that are part of multi-sig and making sure that every transaction is legitimate.

Look for projects that are transparent about how they are operating their protocol. KYC or doxxing are, of course, important elements. But look for overall transparency about everything related to the protocol.

How are decisions being made? Are you getting updates often? How hard is it to get in contact with the team? Are their investments known? Is the team being secretive? Does the protocol censor certain opinions?

DeFi is constantly evolving, and projects need to evolve with it. All these protocols are new and experimental, and they need to adapt fast in order to stay alive.

Projects that are set in their ways or that are too slow to move will die out. Look for teams that are working hard non-stop and that constantly innovate. This is one of the most important factors that determine if a project will still be here a year from now.

A large part of what kill node protocols is that their token devalues over time. This is because, in the beginning, some people are compounding or just not cashing out their rewards. Because other people are buying the token, the token price increases.

But as people start selling their rewards, sell pressure increases, and over time the token gets cheaper and cheaper. This is particularly the case with protocols with high rewards given that some people will compound.

The selling pressure they are creating with their rewards is much more disproportional to the buying pressure they created when buying the node. A solution to this problem is giving the native token some utility. There are several ways to do this, although none currently exist in any meaningful form. This is something that is still new to the space, and it’s being worked on.

The details of possible utilities are too complex to cover here, but the overall point is that you should seek projects that have SOME plan of utility. For example, THOR, COMB, STRONG, and VAPOR all have plans to give their token utility in different ways.

This does NOT mean that the utility plan will work. It might completely fail. And it’s easy for protocols to throw buzzwords like P2E, metaverse, etc, without having any concrete plan on how to actually implement this.

Talking is cheap; try to see if the team is serious and if their plan makes sense. But any plan is better than none. At least there is a chance of helping with the sustainability of the protocol in the long term. But without any plans, the chance is zero. If a project doesn’t mention any utility, it means they don’t care, and they won’t even try to rescue the protocol.

Other things to consider:

Generally speaking, getting early into a project is better. Because of the Ponzi structure involved, you’re getting to a time when most people still are not aware of the protocol. You’re also getting to a time where the token is more likely to increase (or not decrease) due to new investors and also with reduced sell pressure because many people aren’t cashing out yet.

Many people talk about the node number as an indication of being early or not. This is actually not a great way to view it. There is some nuance but generally speaking, the node count matters little.

What truly matters is how much the protocol is receiving compared to how much it is giving out (reward rate) and also how long the protocol has been running. As I mentioned in the beginning, if a project has been running for many weeks, that adds credibility. However, it also has the problem that the protocol is being drained and close to its life cycle. If I am offering you 1% per day, then I am not getting into much trouble until after 100 days, because until then I’m simply paying you back the money I received.

But after that then, I am in a deficit. And the more time passes, the more that deficit accumulates. So if you’re investing in a project that has been running for a long time, you’re entering into that deficit. You’re already part of what’s fueling the rewards for the early investors. If a project is new, then at least they aren’t in that deficit yet.

I wrote an entire thread about compounding strategies, which you can read here.

While the principles there are all solid, in hindsight, the practical recommendations might have been too aggressive for compounding, given how we have seen the space move. I’d be more cautious, and in most cases, don’t delay getting your ROI.

It’s also worth mentioning that some people don’t use my strategies here. They simply try to get their ROI back even if they don’t believe in the project. As long as you get in SUPER early, this may work. Even if you get into projects that you know, they will die.

However, it is risky, and it is simply a game that I don’t want to play, and I don’t recommend you play. It’s very easy to lose money, and I think it’s fundamentally immoral because you’re fuelling crap projects to keep appearing. But of course, it’s your decision in the end.

Overview

DeFi As Service is quite popular, but it’s tricky to navigate; make sure that you understand how they work and take into account the variables mentioned here in order to maximize your chances of picking a solid project that won’t immediately collapse or run away with the money.

This post was first published on March 2022, before I moved my writing to mirror.xyz