Since the NFT Summer of 2022, we’ve been witnessing a huge wave of new projects taking the stage in Web3, from game-applicable NFT projects and PFP collections to celebrity-endorsed selfie collections and an array of builders utilizing the technology of Web3 to innovate in various ways. It’s safe to say that as an investor, collector, artist or just general Web3 enthusiast, sniffing out the good from the bad has, at times, been extremely difficult and, at best, like spinning a wheel of fortune. 

Recently, we’ve been covering the diverse risks and pitfalls of crypto, like social scams in “Staying Safe in the Crypto Space”, and how you can potentially recoup some of your losses if you’ve been in bad luck in “Recovering Your Stolen Crypto Assets”, and lastly, how to spot the red flags of Web3 in “Due Diligence and Red Flags in Web3”. If you’ve read all of these or spent an ungodly amount of time in NFT Discord servers, crypto Telegram groups, and the likes, you’ve probably picked up a warning sign or two on the way. 

The space is rife with warnings and previous victims screaming at the top of their lungs about what NOT to invest in, leading a lot of users to stay on the fence about investing in anything, simply to avoid the heartbreak that may follow when being scammed or rug pulled with the inevitable financial loss that follows. However, there are a ton of brilliant builders and projects out there that are openly and honestly building great things worth considering being a part of. 

In this article, we’ll lay out how you can be a little more sure about who’s the good, the bad, and the ugly. Remember that this is not a “how to spot a 100x in two days” kind of article. Here, we’ll focus on how to do your due diligence and spot quality projects. NFA, NAL, and all of that. 

When it comes to investments, always remember that only you can know where your pain limit is concerning your time horizon vs. what you get out of it. Are you in it for being a part of a development journey, part of a larger social phenomenon you identify with, pure profits, or something else entirely? Either way, these key points may help you out on the way to get there. 

Take your time and do your research

We’ve previously discussed how to do your research when investing in cryptocurrencies, an article well worth reading to get you going on the token side of things. If you’re currently investigating a Web3 project that has a token connected to it, it may be a good idea to dive into that as a part of your research.  

They don’t say “DYOR” for nothing. As we discussed in the previously mentioned article, DYOR may sound like an annoying empty phrase of buzz, but it really is the best piece of advice anyone can give you. Taking your time to dive properly into a project’s documentation and goals on your own allows you to make up your mind and make informed decisions independently. Try to stay clear of social media fuzz and focus on the fundamentals to start. 

Check out the project’s websites, Gitbooks, whitepaper, and other documentation to get a feel for how the project communicates its goals and progress and what you can expect in the long term. If there is a roadmap, does it seem realistic in terms of funding and project resources? If there is a whitepaper, pay attention to the details, like unnecessary fluff, an unprofessional tone of voice with bad grammar, or direct contradictions in what is communicated. Clear and concise information, well-thought-out reasoning for unusual choices, and obvious connections between the project and products are good starting points. 

If you find that the presentation of a project and potential connected tokens or protocols align with the values presented, you may have a gem on your hands. If your gut feeling is good so far, it’s time to get technical.

Check the smart contracts & audits

Note: This topic generally applies to any project that launches its own smart contracts, be it cryptocurrencies, marketplaces, or NFT projects minting on their own contracts. If you’re looking into NFT projects that are solely doing their mints on well-known marketplaces with built-in minters, you can skip this point.

As we’re all building on the blockchain, smart contracts play a crucial role in most Web3 projects. Seeing that smart contracts are self-executing pieces of code, assuring that you don’t have a malicious smart contract on your hands is vital. 

First things first, verify that the contract address provided in the project documentation matches the one on the blockchain. Blockchain explorers like Etherscan, BscScan and Snowtrace are great tools for viewing the contract and verifying its authenticity.

If you’re tech-savvy and have a knack for code, taking a moment to learn how to spot exploits and malicious code yourself is always an option to be 100% in control of potential errors before jumping into a project. 

Any serious project in Web3 will make sure to calm investors’ nerves by having a code audit done by a reputable third-party auditor. If you don’t have a knack for code, ensure such an audit has been done and the results are available for you to read. Take a moment to read the report and look into what the phrases in the reports actually mean. 

Still, feeling confident about the project and want to investigate further? Then it’s time to visit the community! 

Getting to know the community 

A strong and supportive community is alpha omega for any Web3 project, and how you experience your time in a community may be a very good indicator of what kind of project you’re looking at. It may be wise to save this one until after you’ve done some thorough research to avoid being bitten by the hype and throwing your opportunity to make a nuanced decision out the window. 

When you do decide to jump into a new Discord server or Telegram group, take a moment to reflect on the vibe and sentiment in the community. Observing the tone of how people meet and greet each other, maybe particularly new members and curious newcomers asking questions, is often a good indicator of where you’re at. 

Are the members well-informed and willing to answer newcomers’ questions? Is there room for alternative thoughts or criticism, or do you exclusively experience hype and fluff? GMs and good spirits are, of course, great and we’re all attracted to exciting and seemingly positive things, but there should always be room for curiosity and learning to some degree.  

If you’re looking to invest in the long term, it might also be a good idea to find out if you align with the general vibe in the community. After all, you’ll have to hang out there every now and then to keep a finger on the pulse, so you might as well find a place you enjoy being in. 

Depending on what project you’re looking for, the general notion, lingo, and members will obviously be very different. If you, for example, want to tap into a social PFP project or a DAO, it may be important to you find a community that you can identify with when it comes to life, culture, and ideas. If you’re into DeFi and want to discuss investment methods, how to maximize yields, or exciting new DeFi protocols, make sure that there is space for such discussion in the community. 

Check out the team, communication, and values

If the team is doxxed, take a moment to check out their background and social media. Try to find out what the team has previously been involved in and what ties they have to other projects both in and outside of Web3. 

Similarly to, when you’re investigating the community, it may also be wise to consider if you align with the values proposed by the team. While this may be an unpopular opinion to many, how often the team chat, tweet, and communicate is a lot less interesting than the actual content of the communication. How are concerns addressed and expectations managed? 

Similarly to the investigation of documentation, keep an eye on what phrasings are being used and if the information is packed with a lot of buzzwords and fluff. Transparency is key here. The team should be willing to provide relevant information in a manner that is easy to understand, be it openly informing about where to find code audits and fundamental goals for the project, updating the community regarding progress or setbacks in the project, or clearing up misunderstandings that may create unnecessary FUD.  

On that note, it is important to remember that there are undoxxed teams who are building absolutely amazing projects, and that being undoxxed is not necessarily a bad thing. Again, communication methods, expectation management, proper documentation, and clear goals are often better pointers than people. There are a lot of charismatic characters in crypto who are great at swaying people, but like we’ve learned this past bear cycle, with celebrities being caught endorsing dubious projects and well-known founders in the space suddenly pulling the rug, looks can be deceiving. 

Lastly, on this particular point, if the project has been around for a while, it might be wise to focus less on words and more on results and achievements. A sure positive sign is if the team does the same. 

Concluding Thoughts

While it appears, we’re still paddling through the rougher patches of the cyclical bear market; it is evident that Web3 is not slowing down anytime soon. While the market conditions have helped us cleanse out a lot of bad actors and offered opportunities to see the survivors coming out stronger on the other side, it’s still important to stay vigilant when you want to tap into an exciting new project. 

Unless you’re in a particular mood for meme coins and moon shots and willing to make a gamble, make sure to take your time when researching your next project gem. Take a proper look through all available documentation, potential smart contracts, and audits, and don’t forget to get to know the community to learn what they are all about. Whether you’re investing for profits or to be a part of something bigger, it will help you locate the gems amongst the hype of Web3.