How to Find the Best IDOs (Part 2) - Technical Due Diligence

In Part 1 of How to Find the Best IDOs, we talked about looking at the people factor of a crypto project, identifying the hallmarks of good IDOs based on the intangible factors of the project team and project communities. In this follow-up article, we then examine the technical aspects that many good projects have in common.

For savvy crypto investors, this technical due diligence helps them identify unique new projects with unique value propositions. IDOs then is a chance to get in early to capitalize on attractive early pricing before these tokens appreciate in value as demand and adoption grow.

Naturally, blockchain and smart contract technology aren’t going to be easy to evaluate from a purely technical perspective, but you can still conduct simple research to narrow down IDOs to a smaller, more refined list of solid ones.

Here is what a basic technical due diligence framework would look like for the IDO hunter.

Before you should even consider participating in an IDO, the first thing to check is whether or not you’re allowed to do so lawfully in the country you live in. Some jurisdictions outlaw any kind of token sale directly, or even crypto. South Korea and China are two such jurisdictions. Many other parts of the world allow token sales or don’t regulate them but many developed economies are taking steps now to develop legislation that would legally allow citizens to participate legitimately so make sure you’re allowed to do so.

Many may require you to identify first if the token being sold is a security or utility token -- the former is usually far more restrictive.

The second thing to check is if the IDO itself has any restrictions on your participation -- this is usually done by looking to see if you can pass whitelisting requirements if any. Then, check out the terms and conditions of the IDO to see if your country is prohibited.

Check your country’s law. The point of reference is usually the financial commission in your country or other local regulators. 

Check the IDO’s terms of participation or whitelisting. It should be pretty evident if your country is prohibited.

Getting into a new project and starting out on the ground floor, so to speak, sounds like the formula to financial success. Back a new project early and benefit later as it takes off.

But as a crowdfunder, you are only one of many participants, so you may want to make sure there are enough people backing the project so that not only the IDO gets funded by reaching at least its soft cap (minimum sales required) but that also there is enough momentum to carry the project through to development.

Do a little bit of research into the sector the IDO is proposing to work in. Is it healthcare? The music and entertainment industry? Gaming? These are some industries that are very popular these days and have a lot of investor interest. But if the sector is too niche, definitely find out if there is enough investor interest -- you don’t want to be the only one investing in space travel for dogs, for example.

Then, try and find out what others are saying about the project. Check out some project reviews, for example, to get a general idea of first impressions from experienced IDO participants. Or look for articles in the news talking about the project. The more people are talking about it, the better the IDO’s visibility.

Is the sector attractive for investment? Follow the smart money. If big institutions and funds are backing projects in the field, then it’s a viable sector to look into. But if there’s no investor interest in building the next memecoin, then you probably shouldn’t back it.

What are others saying about it? If almost everyone is saying negative things about the project, perhaps stay away. Worse, if no one at all is talking about it, then they haven’t made any impact. Be wary of shill or paid reviews, though.

Perhaps the widest area you could look into, in the end, IDOs are all about the product, and in many cases, the tech behind it. There are several sections to look into here.

Many new projects will launch with a proposed solution for a perceived problem. It’s the simple formula: provide an answer to an existing problem and you have something that people will demand.

But saying an idea is one thing, providing actual evidence that it’s a viable one is quite another altogether. Sadly, many new projects haven’t made the effort to provide at least a proof of concept to show that the idea could work. The eventual fall of the ICO era proved that most projects that were just “vaporware” -- software or hardware that is only promoted but not actually available -- ended up being abandoned or never getting past fundraising stages. A good project should be able to show some kind of product or proof that it can work, without raising funds.

Another important thing to consider is where they are at in terms of development. Are they fresh out of the garage door with only a concept to work with? Or have they actually built something before and merely want to expand their horizons with new tech?

More importantly, did they have a development roadmap and were they able to reach their milestones in the past? Have they been following their roadmap or do they look like they keep getting distracted by shiny new things along the way? We’ve seen many projects suddenly nosedive and turn a sharp corner doing NFTs that had nothing to do with their original concept, for example.

As a rule of thumb, there is no better way of learning as much as possible about the project than reading its whitepaper. Here, the project should be able to define what their goals are, how they intend to achieve them. Additionally, it also should include the legal framework between the developers and the IDO participants (as covered in the previous section).  

The most technical aspects of the token, the project’s ecosystem and its entire infrastructure should also be laid out here in simple terms -- think about how Bitcoin introduced its complex revolutionary system in just 9 pages!

Watch out if the whitepaper can’t explain WHY it needs its own token and the IDO! The problem statement and their solution should be clearly described here.

Does the paper answer the who, what, why, when and how clearly and simply?

Is it full of technical jargon that you can’t understand? Then this is another red flag since it means an inability to convey and communicate well.

Now, one of the most lacking pieces of information in many IDOs is their financial plan. Don’t you think it’s strange that a company should look to raise funds but now have a plan for what they want to do with all that money, or how their token economics should look like?

A good sign is how they link their roadmap to the funding and token distribution since this means they’ve budgeted how much each phase of development will cost.

A commitment to providing financial statements or even past ones is a bonus, which will tell you revenue generation and costs. This is a level of transparency most IDOs won’t have, though.

Launching a token and then making sure that its structure in terms of supply, distribution, locking and vesting periods, and floating it in the free market… this is a very complex exercise that very few projects have got right.

Look out for tokens that are built only for the short term: with no plans for future distribution whatsoever, making it vulnerable to immediate dumping either by token buyers or founders. Look out for tokens with massive portions given out for free to bounty hunters and influencers too: these are the ones most likely to dump on the market since they don’t have actual funds invested.

Identify instead tokens that have sustainability features integrated, such as:

In general, the longer and the more tokens are locked in for liquidity, and the more of it is only available on the open market, the better. The other questions to ask yourself are:

Other important questions to answer include the following: 

In the end, it’s important to remember that IDOs don’t guarantee success. While they have definitely improved on earlier crowdfunding models like ICOs or IEOs, IDOs are still considered high risk, particularly for participants who aren’t prepared to take on more responsibilities for due diligence, as is required in a decentralized environment. On the other hand, the high-reward potential for IDOs can mean lucrative returns for savvy crypto enthusiasts.

Identifying IDOs with good potential and a higher likelihood of growing in terms of market valuation isn’t just a case of chance. The successful DeFi gem hunter puts a lot of groundwork into researching the IDO, identifying risk factors and assurance characteristics in projects to separate the good from the bad, and the really ugly.

At SpacePort incubator, we’ve done all the groundwork we mentioned in this article, to ensure only the best projects bringing value to space are selected. So if you want to get in front of the best new IDOs out there, then make sure you sign up for SpacePort alerts!

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(Disclaimer: The author is the CEO at PlasmaPay and Plasma Finance)