3 ways investors can assess the strength of an NFT opportunity

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Originally published in TechCrunch.

Talk of NFTs may be filling board rooms and news feeds but their complex and new nature makes it hard for investors to determine what projects have real promise, and which don't. In fact, only a small portion of investors are reaping the most profits from NFTs (non fungible tokens) according to a study published in December.

I've been involved in more than 50 direct NFT and cryptocurrency deals, and am committed to scaling the DAO (decentralized autonomous organizations) ecosystem. But I know that the unfamiliarity of the NFT space is why many investors fear dipping their toe. 

NFTs are more than famous artworks, songs, and tweets - they serve as part of the broader decentralization movement that has already proven to bring good returns for investors. From copyright enforcement to buying real estate and identity verification, NFTs play a big role in the remote, digital world. In the first half of 2021, the NFT market cap grew 2,100%, reaching $2.5B in sales volume. Meanwhile, the creator economy boom has opened more doors for NFTs, as people don't have to go through aggregators or intermediaries to create a token.

Investors need to know the basics of NFTs and their potential, but they don’t really need deep technical knowledge. That’s because the real value of any NFT project lies with the people building it - the team, users, and wider community. They are the ones who will sustain genuinely promising NFT projects as they face inevitable moments of volatility. 

Here's how to conduct the ultimate litmus test on an NFT project, through its creators.

Check that both the founder and tech are open

The first NFT was created in 2014 and only sold last year. The NFT marketplace is still in its infancy, and investors can't expect NFT projects to undergo the same vetting process as other tech initiatives. There aren't sufficient data points available, nor the same tools to track NFT performance. Instead, investors should be looking for transparency in a project’s leadership and tech infrastructure. It's less about assessing the destination, and more about trusting that there's a window to observe the journey.

Decentralization has to be transparent to ensure that functions and control are fairly distributed across a group of people. It's why a large number of NFT projects are open source from day one, and why we're seeing a new generation of founders that are inherently more open about their company information. Whereas traditional tech has been reserved, NFT founders have to be comfortable sharing their secret sauce and highlighting its gaps.

If you're speaking with a founder who doesn't delve into the details of the business model, the tech, and competitors, that's a red flag. Founders not only have to build the product but also fit the token utility, and so should be happy to walk you through development plans, roadmaps, early user feedback, and emerging pain points. Moreover, they should explain how they communicate all this to their team and the greater NFT community, whether that be through blog posts, online forums or talks. 

Make yourself a community member before an investor

To really know the people involved in an NFT project, investors have to make themselves part of the group. Browsing NFT threads on Twitter, joining DAO, and listening to NFT podcasts is a good start. The most powerful move though, is to join teams' Discord and pay attention to how the team interacts with their community, start conversations, and respond to criticism. Investors shouldn't be a passive bystander though, roll up your sleeves and join in the discussions.

The whole point of having an active role in NFTs communities is to find the products and people you enjoy. For example, through the Axie community, I discovered the Yield Guild Games project, a play-to-earn gaming guild which brings players together to invest in NFTs. This platform enables more people to access the ecosystem, so improves adoption whilst curating a devoted community. Had I not played an active role in NFT communities, I wouldn't have come across this huge investment opportunity.

Confirm there's crypto and collectible expertise

Expertise in the vertical is key, but so too is constructing the technical backbone. The people working on an NFT project should have a background in cryptocurrency or other areas that utilize blockchain. These people can help the project scale through their knowledge of Layer 1 and 2 blockchain - third-party chains that enable modifications to be made to the original blockchain and its functions. Layer 1 and 2 are what will enable teams to innovate and update down the line. For instance, a company developing NFT art may want a financial layer on its decentralized application to enable people to lend and borrow money using the NFT ownership as collateral.

That said, the team also has to be well-versed in the collectible aspect of the token they're making. Their roadmap has to be aligned with their tokenomics, meaning they understand the factors that impact  the demand and supply of their offering. If the project is focused on art, the founder should have experience in art curation and have an extensive gallery network. If the project is rooted in gaming, the team should be made up of people who have a background in game development and cryptocurrency. It's a good idea to follow individuals from the team on social media too, to see what their interests are, and how proficient they are in the niche their NFT encompasses.

NFT investment is a marathon, not a sprint. The road ahead is still being paved and there's no set checklist to determine whether an NFT project has legs. Nonetheless, the value of a project lies with the people who shape it, and the people it serves. If a project team has the right background, community sentiment, and openness, investors can be assured they're heading in a good direction.