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March 22, 2022

How to evaluate NFT projects

By: Marika Tedroff

As with all kinds of investments, understanding how to evaluate opportunities is one of the most critical skills to learn. NFTs are no exception, in fact, it might be even more important in this emerging world characterized by high volatility and new territories. While there is no correct approach, and while ticking these boxes doesn't necessarily equal success, there are a few aspects that are worth looking into in more depth before deciding to put your ETH into a project. 

The most important factors to look out for  include: 

  • Community
  • Team 
  • Utility 

You want to know if and why people are willing to spend their hard earned money on the NFT.  How could someone find any value from it, and will the team pull it off? It sounds a bit like investing in crowdfunding campaigns or start-ups, right? It’s a bit like that, but also totally different. 


Note: This article will not touch upon anything technical or quantitative data points, and the  aspects discussed need to be considered in conjunction with factors such as trading volume, previous sales, floor price, rarity etc.

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Community


Why is it important?

If you are familiar with NFTs, you would probably already know that community is the new currency. It might be hard to explain exactly what an internet community is to your grandmother, but a strong community is the backbone of many of the most successful projects. Without an engaged crowd willing to vouch for your project, spend money on it, tell their friends and Twitter followers about it, it simply will be hard for projects to succeed - you can compare this to successful crowdfunding campaigns on for example CrowdCube or Republic. How an engaged community looks might differ depending on the type of project. However, the idea remains the same: community is vital because it brings momentum, liquidity, engagement, network-effects and in the best scenarios, ensures long-term success.

Why it's difficult to assess:

Community is more important than ever, but it's also very difficult to validate. What does a strong community look like?

Many projects have huge followings and lots of noise on Twitter. Many followers or members on Discord don't necessarily translate into a dedicated community that will stay invested in it long term. If you are new in the NFT space, you will learn sooner or later that a lot of shouting and positive messaging on Discord can mean….nothing. Understanding how robust a community is very difficult, and you need to think about what matters to you. If you are just looking to do a quick flip, you might gravitate towards projects with a lot of momentum, while if you are looking for more long-term projects, you might gravitate more towards the community and the level of engagement these members choose to reveal.

Helpful questions to think about:

  • What kind of community is the project trying to build, and are they successful doing so?
  • Why are people engaging with this project? Do they seem to be interested in the project's long-term vision, or is it more of a quick buck? (no right or wrong here, there are people and projects for many purposes!)
  • If people seem to be invested in the project long-term, what value does the project bring to these long-term holders? Why would they stay when the price fluctuates?
  • Are people active/engaged? For how long have they been speaking about the project? 
  • Are there members from other successful projects/communities talking about it? For instance, if a project attracts attention from holders of other successful projects, we might see this as a validating indicator (remember it could also mean nothing!)
  • Check trading activity on your NFT marketplace of choice - are people active? What is the volume? How is the price changing and what is happening in the community that can help explain these fluctuations?

Check out widely successful BAYC and research their cult-like community, and you might understand why it sticks around.

Team

Why is it important?

Without a strong team, it would be tough for a project to succeed. The team must be able to do many, many things. They have to understand marketing so the collection sells out, they must understand their audience and how their project can attract this community, the team needs technical skills to handle everything from setting up smart contracts to protecting the project against bots or attacks, and they often need to understand how to create long-term value for holders. While a  project is very different from a company, there are enough similarities that we can think about it in the same way.

Why it's difficult to assess:

The decentralized world and NFTs have enabled a new, anonymous world - sometimes referred to as the pseudonymous economy. Web3 is an alias-driven culture, and one of the benefits of this world is the opportunity to be whoever you want and use other names/avatars.

You can be someone different to the offline world-you. You might have seen people using avatars as profile pictures on Twitter and .eth addresses as usernames. Some very successful projects have never even disclosed their core team members' names. A strong team is important but projects can still be successful without a team that appears objectively good on paper wearing our web2 glasses.

Helpful questions to think about:

  • Who are the founders?
  • Do they have the skills needed for the project? For instance, a project focused on art might require both an artist and technical knowledge in the core team.
  • Has the team done anything similar before?
  • How are they engaging with their community? Are they answering questions? Are they helpful? Do you trust them? Why, why not?
  • If I don't know much about the team, do I know anything about the people invested in the project or the community? Are there any people I trust in the NFT world that are advocates for the team? It might help, it might not.

Check out the team behind BossBeauties and the wide range of skills and experiences they cover

Utility/Value Proposition

Why is it important?

You want to know why people would spend money on a project. In short, users joining the community want to know what the project is ultimately about. Long gone are the days when NFTs were just overpriced JPEGs. It's so much more than that, covering the arts, music, gaming, utilities, and so much more.

Regardless of how successful the team is in engaging their community in the early days, if the project is not considered valuable by its holders, it would be hard to see how it survives the longer term. You want to know what the project is about because this is a part of the broader puzzle you need to figure out by looking at aspects 1 and 2 combined - community and team. If the project is about community, you need to understand how the project fits into this wider vision, what people like about the community, and whether the team successfully connects the dots.

Why it's difficult to assess:

This aspect of a project can be easy or very hard to identify. For instance, if the project is focused on art, we have to think about what we like, whether we like it at all, and whether it even matters. Art is subjective. Your opinion matters if you’re only in it for the art, but if you are also in it for the money and the community, it might matter less since other people’s opinion about the value of the NFT matters more. A roadmap can contain many plans and ideas about how to bring long-term value to holders, but a roadmap on a landing page doesn’t mean very much until executed. 

Helpful questions to think about:

  • Think about the project and what it is about. How does it fit into the narrative the team is driving? 
  • Why would people spend money on this project?
  • How are they providing long-term value to the holders? 
  • If you are looking for longer-term projects, you need to understand why people would benefit from owning the NFT over time. Do they get access to the private sale for the upcoming mint? Do they get access to exclusive communities? What happens? Why do they stay?

In the end, accurately predicting which NFT projects to invest in is impossible. All these factors matter, but sometimes there are other factors that come into play and affect the success of the project. There are a myriad of aspects to consider before putting your savings into NFTs.

The best way is, as with many things, to just do it! Start engaging with the world yourself, follow some projects, invest a little bit, see what happens, and over time, you’ll find yourself developing a form of intuition to decide when the team matters and when it doesn’t. When the art matters and when it doesn’t, and what a good community looks like. Have fun!


Bio: Marika currently works in policy & product at TikTok. Outside of work, she likes to deep dive into discord channels, new NFT projects, and photograph weddings. Prior to joining TikTok, she worked in venture capital.

Instagram: @m.tedroff

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