NFT investment due diligence framework

Non fungible token (NFT) has been a trendy topic since last year. Similar as other types of investment, a due diligence framework is essential to help yourself make a better investment decision in the NFT field.

Below is a suggested due diligence framework for generative NFT investment.

Section 1: Artwork Artwork design is the first impression to the potential buyers. The key parameters include:

  1. Originality: It is preferred that the artwork is original as imitating from other projects may imply the team lack of creativity and tend to earn quick money from the hype.

  2. Design complexity: The design style such as pixel arts, 2D, 3D or motions can imply how much efforts the team contribute into the design. Also, for secondary NFT, it is recommended to check whether only the top-ranking NFTs are designed well or the whole set of NFTs look good in general. The latter requires much more efforts from the team.

  3. Types of traits: More types of traits may imply the team is dedicated on the artwork design.

    There are some bonus points to be considered including:

    - Whether the artwork is designed by famous artists?

    - Whether the artwork is from the official collaboration with some famous IPs?

    - Whether the artwork has potential to collab with big brands or become a famous IP?

Section 2: Team Whether a project can be sustainably operating largely depends on the team’s capability. Their capability can be analyzed through:

  1. Previous experience: It is preferred that the team is known because we can trace back their experience such as entrepreneurship, development, design, marketing, as well as any rug pull records.

  2. Performance throughout the project operation: An anonymous project may still be a good project while we should spend more time analyzing the team’s performance from various aspects. For example,

    - Communication: Whether the team communicates their vision, roadmap and project updates clearly? In particular, how is their performance in AMA?

    - Technical: Whether the team designs the smart contract and website well? Any bugs identified? As many of NFT aims to build up metaverses, games or DAOs, technical is extremely important for the project’s long-term development.

    - Marketing: Whether the team’s marketing is creative and successfully make some noise in the market?

    - Responses to emergency (if any): If there were any accidents happened from the project or in the market such as Opensea exploit, we can observe whether the team communicate to the community efficiently and deal with the accidents within a short time.

    - (For secondary NFT) Execution: Whether the team successfully meets the milestones as promised in the roadmap?

Section 3: Project vision, roadmap and execution Project vision and roadmap is the backbone of the project. It can be analyzed through:

  1. Vision & Roadmap: In today’s market, most of NFTs claim that they would like to build up a community, a metaverse, a game, and a DAO. It is understandable that it may be difficult for a project to structure a detailed vision and roadmap at the beginning. But most of good project would try to lay out some key milestones they want to achieve such as DAO structure, airdrop, DeFi elements, physical collectables, as well as provide the estimated timelines. So we can consider:

    - How does the project differentiate themselves from other existing projects?

    - Whether the project has innovative elements in their vision and roadmap rather than just imitate other projects?

    - Whether the proposed milestones and timeline in the roadmap are feasible rather than exaggerated?

  2. Fund arrangement: Fund arrangement is a key for the project’s sustainability. What is the plan for fund distribution and future income generation? Does the team provide sufficient transparency on the fund flow?

  3. Project execution: Though this is more for secondary NFTs, we can still think about whether the project operates the public sales in order such as whitelist distribution, any delays on the minting, any AMA to introduce the project, etc. After the public sales, does the project provide regular updates on the roadmap execution? Are there frequent delays on the roadmap execution?

Section 4: Community Most of NFTs nowadays aim to establish their own community. Whether the project is supported by a group of loyal members that truly understand the project vision and execution will impact whether the project can be sustainably operated. Community can be analyzed through:

  1. Numbers of social media followers:

    - Whether there are sufficient followers in Twitter and Discord.

    - Whether the numbers of followers in Twitter and Discord have a large difference. This may imply the project may purchase followers

    - Whether the project has a sustainable follower growth or a sudden huge decrease in followers. It is noted that some projects previously purchased followers so the numbers are largely dropped by 50%+ in 1-2 days.

  2. Quality of members: Try to talk with other members in discord and analyze the quality of members.

    - Whether there are many bots among the members. We may check through whether there is a huge amount of discord members joined but the active ones are limited. Or whether some members talk strangely and are not able to answer the questions correctly.

    - It is preferred that members actively discuss various topics, provide help to each other or even brainstorm some improvement suggestions for the team. If the conversations in discord mainly focus on how to get whitelist, how to increase floor price, this may imply the members are more likely a flipper.

    - What is the split between whitelist and public sales and how is the whitelist distributed? If more whitelists are for active members in the project, they may tend to support the project in the long run.

  3. Communication channels: A good community is built by both the team and members.

    - Whether the team provides a channel for members to propose suggestions and whether the suggestions are seriously considered by the team.

    - Whether there are sufficient moderators to communicate with the members, monitor the discord, and then provide feedback to the team for improvement?

Section 5: Trading data (For secondary NFT only) If buying NFT from secondary market, it is recommended to analyze the past trading data including:

  1. Holder distribution: If the project is centrally hold by some members, they may have more control on the project governance and their trading activities may largely affect the price.

  2. Liquidity: The historical trading volume can imply whether the project has sufficient liquidity. Also, if there is sustainable increase in the unique address holding this NFT, this may mean more interests from the market on this project.

  3. Listing ratio and holding period: More diamond hands are involved in the projects may indicate more users believe the project will have a good development in the future. It can be also analyzed through the listing ratio. If a large proportion of NFTs are listed on marketplaces, this may indicate less long-term holders. Also, with Nansen, we can review how many days that users hold for the NFT in general.

Combing the above 5 sections, a high-level scorecard is designed to quantify the performance of the NFT project. The below is the reference rating:

  • 25+: Potentially excellent investment

  • 20-25: Potentially good investment

  • 15-20: Project with average market level. Need further consideration

  • 0-15: Potentially not good enough

Moreover, considering the nature of the NFT e.g. gaming focus, artwork focus, we may further adjust the weighting for each section.

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Disclaimer: Not FA. DYOR

Credit to: @Kryptree.eth ‘s suggestions