Blockchain Due Diligence
Blockchain-based platforms and applications are growing fast but the comprehension of the technology and the capacity to evaluate those proposals are still incipient. In BlockTac we have developed a methodology for this analysis that can be useful for both entrepreneurs and investors trying to establish the validity of these innovative applications and platforms. Its relevance is evident given the innovative nature of this industry, with technical and market distinctiveness that must be specifically considered.
The first step in this evaluation process is to study the generic use case. In a previous post we focused on how to perform this analysis (Blockchain generic use cases).
The second step is to study eleven different areas of analysis of these Blockchain projects, and to consider the critical metrics in each one of them. This adds a total of 75 metrics that provide a very accurate idea of the nature and viability of the project. Below, each one of the areas is briefly mentioned:
- Are the requirements for using blockchain fulfilled? The blockchain is a distributed peer-to-peer system among an unknown number of peers of unknown reliability and trustworthiness. Hence, the first point to consider is to determine whether the architecture meets the requirements of that technology.
- What kind of blockchain is used? Not all distributed systems are open to everyone and grant reading and writing access to all their nodes. These differences have an impact on the architecture and the distributed nature of the system, as well as on the purpose of the chain.
- What is the added value of using a distributed system among peers? Both centralized and distributed systems have their own advantages and disadvantages. Centralized systems are not intrinsically deficient, but choose a different architectural concept that serves well to a large number of applications and can be maintained in this way.
- What is the utility of the application? It refers to the idea of the application and how the system is supposed to create value for the users. It must be borne in mind that even a very sophisticated system architecture can never compensate for a weak or bad application idea.
- What is the business model? This is an important element of analysis since many products or technological innovations fail due to flaws in the economic and commercial aspects.
- How are the nodes compensated for the resources they provide and maintaining integrity? Blockchain integrity is maintained through the use of incentive systems based on income from fees and proof of work. The knowledge and understanding of such compensation to ensure integrity is a crucial aspect of the analysis.
- Does the reinforcing depend upon the existence of a community of developers? Certain projects that support the development of a new chain depend for their implementation on the support received from an open community. Its existence, number and activity are relevant elements to evaluate its viability.
- Economic role of tokens? In projects where the solution includes the launching of an ICO, it is necessary to determine whether their use has an intrinsic value or is not more than a source of financing or has a mainly speculative character.
- Degree of business development? At present, many projects are proposed only from an idea; others are backed by a proof of concept and others are ready to be marketed and have a more established market.
- Team qualification? It is necessary to know everything about the founders’ team, the developers and advisors. They have to establish their experience, industry recognition, mastery of technology, whether they have participated in other projects and what their impact has been.
- What are the marketing and sales activities? Those initiatives are crucial to establish a good customer base and users, and to communicate with potential investors. They are the best way to market the brand and the objectives of the project.
Finally, the analysis concludes with an evaluation of the project in nine dimensions that provide a quick and clear idea of the potential and interest of the proposal:
- Justification. It establishes to what extent the proposal solves a real and significant problem for the industry.
- Opportunity. Determine if the proposal appears at the right time and place to be able to grow successfully.
- Attractiveness. Evaluate the breadth of the customer market for the services provided.
- Scalability. Analyze the ability of the solution to reach more functions and customers in the same industry.
- Conviction. Describes the ease of understanding and acceptance of the application or platform among potential customers,
- Economy. It specifies the way in which the proposal is affordable and profitable for the clients to whom it is directed.
- Extrapolation. It indicates the capacity of the solution to be implemented in other industries.
- Consistency. Identify the adequacy and quality of the team’s professionals and the available code.
- Community. It defines the dependence on having a community of developers or users to be able to establish the solution.
This evaluation provides a deep understanding of Blockchain developed projects and complements the economic and financial analysis already known and commonly used by investors and financial managers.
This methodology is part of a work in progress that will be completed to the same extent that Blockchain technology is updated and strengthen.