How To Evaluate Tokenisation Projects

In the rapidly evolving world of financial technology, tokenisation has become a game-changing concept. It enables assets, whether physical or digital, to be represented as tradable tokens on blockchain platforms. This shift presents significant opportunities for investors and businesses but also introduces risks.

As an increasing number of tokenisation projects emerge, each promising innovation and profitability, it's essential for all stakeholders to conduct thorough evaluations. This guide aims to provide practical insights into this evaluation process, helping you navigate this dynamic landscape with confidence and clarity.

To delve deeper into the mechanics of tokenisation and advantages of tokenisation, explore our linked articles.

Evaluating a Tokenisation project

Prior to investing in tokenisation projects, conducting comprehensive due diligence is paramount, just as it is with any investment opportunity.

Tokenised projects represent assets, and these assets warrant the same due diligence as any traditional asset class. However, when assessing a tokenisation project, there are unique factors to consider, which we will explore in detail within this article.

This article is structured into two parts: Part 1 outlines the fundamental criteria for evaluating the underlying asset, while Part 2 delves into additional considerations specific to assessing tokenisation projects.

Use the criteria below as a guide and remember to conduct any relevant additional research independantly.

Part 1: Asset Evaluation

When delving into the world of tokenisation projects, it's imperative to begin by thoroughly evaluating the underlying asset, as the asset's quality and attributes significantly influence the project's potential success. 

Each asset is unique and therefore will require different due diligence criteria, but below we outline general categories. 

Asset Overview

In the initial stage of evaluating a tokenisation project, a comprehensive understanding of the underlying asset is paramount. This section should provide a detailed overview of the asset, offering insights into its nature, characteristics, current ownership, and context of why tokenisation is used. 

Defining the asset in question, whether it's a tangible asset like real estate, fine art, or commodities, or intangible assets like intellectual property, digital assets, or even a business entity, lays the foundation for assessing its suitability for tokenisation within the broader project. 

Market Positioning

Examine the market in which the asset operates. Consider factors such as the market size of the problem solved, Compound Annual Growth Rate (CAGR), key trends, geographical location(s), target audience, and any other important market dynamics. 

The asset is ideally situated in a growing market and solving an important problem as this leads to greater revenue and potential returns, whereas assets in shrinking markets may raise concerns. 

Understanding the asset's place within its market context is essential for evaluating its potential in the tokenisation project.

Financials

Delve into the historical financial performance of the asset, including past revenues, expenses, profitability, and growth patterns. Additionally, analyse future projections to gauge the asset's expected financial trajectory. 

Assess the sustainability of the asset's business model and its ability to generate income and value over time. A robust financial history and promising projections are indicators of a valuable asset in a tokenisation project.

Team

The success of any tokenisation project is often closely tied to the team behind it. Evaluate the expertise, experience, and track record of the team members, particularly their involvement in the asset's industry or relevant fields. Consider their ability to execute the project's vision effectively. A strong and capable team instils confidence in the asset's potential within the tokenisation project.

Competitor Analysis 

Identifying and analysing the project's top competitors is crucial to gauge its competitive advantage and potential for success. Look for key players in the same market or industry who are pursuing similar tokenisation initiatives. 

Evaluate what sets the project apart from its competitors and why it is positioned to yield better results. Assess factors such as technology, partnerships, market reach, and unique features that give the project a competitive edge. Understanding the competitive landscape helps in determining the project's ability to thrive in a market and stand out as a superior tokenisation investment.

Roadmap

A well-structured roadmap is not only a sign of careful planning but also an essential aspect to consider. It should outline how the project intends to allocate resources and funds over time. Look for transparency in the use of funds, with clear explanations of how each aspect of the project will be financed. 

Beyond financial aspects, the roadmap should also provide insights into the project's future plans. Assess whether the roadmap aligns with the project's objectives and whether it includes milestones, development phases, or technological advancements that inspire confidence in its long-term viability. Understanding how funds will be utilised and what the future holds for the project is vital for evaluating its potential and sustainability.

Summarising SWOT

A comprehensive SWOT (Strengths, Weaknesses, Opportunities, Threats) analysis is a valuable tool for assessing the underlying asset and tokenisation project. 

Strengths and weaknesses relate to internal factors, such as the asset's unique qualities and potential drawbacks, while opportunities and threats are external factors, like market dynamics and competition. A well-balanced SWOT analysis reveals the asset's competitive advantages and vulnerabilities, along with the project's ability to capitalise on opportunities and mitigate threats. 

Understanding these critical factors provides a holistic view of the asset and project's potential for success and helps in making informed investment decisions.

Part 2: Tokenisation Evaluation

Part 2 of this guide delves into the comprehensive evaluation of tokenisation projects, focusing on the key criteria and aspects that define their viability and potential. Tokenisation represents the convergence of traditional assets and blockchain technology, revolutionising the way we invest, trade, and interact with assets. 

Evaluating a tokenisation project involves a multidimensional analysis, encompassing the token's type, the underlying technology, security measures, legal aspects, deal dynamics, and more. By scrutinising these critical components, investors and stakeholders can navigate the intricate landscape of tokenisation with confidence and make informed decisions. 

Each asset is unique and therefore will require different due diligence criteria, but below we outline general categories to evaluate during this process. 

Token Type

Tokenisation projects encompass a diverse range of assets and concepts, and understanding their underlying token type is fundamental to assessing their potential. 

The type of token used can significantly impact its utility and function within the project's ecosystem. Projects may employ fungible tokens, like the ERC-20 standard, which are identical and interchangeable. On the other hand, non-fungible tokens (NFTs), like the ERC-721 standard, represent unique assets, such as digital collectibles or real estate. This classification dictates how tokens are used and traded, and its alignment with the project's goals is crucial for determining its value proposition.

Moreover, the number of tokens issued by a project, whether capped (limited) or uncapped (unlimited), plays a pivotal role in shaping token economics. Capped supplies can create scarcity, potentially driving up token value, while uncapped supplies allow for continuous minting, affecting inflation rates and market dynamics. Evaluating this aspect provides insights into the project's economic model and its sustainability over time.

Token issuance, governed by minting mechanisms, further influences token distribution and circulation. Projects may utilise one-time minting events, creating tokens during a specific launch period, or employ predefined criteria or events to trigger new token creation. Understanding these mechanisms is essential for assessing token issuance, inflation, and how they align with the project's growth strategies. Additionally, token distribution methods are vital, as they impact how tokens are allocated to different stakeholders, ensuring fairness and transparency within the project.

In summary, comprehending the token type, the total supply of tokens, minting mechanisms, and distribution methods is integral to evaluating tokenisation projects effectively. These factors collectively shape token utility, scarcity, and overall project dynamics, providing valuable insights for prospective investors and participants while ensuring alignment with the project's objectives.

Technology Stack

The choice of blockchain technology underpinning a tokenisation project is a pivotal aspect of the evaluation process. The blockchain serves as the foundation upon which the project's infrastructure and operations are built. Assessing the blockchain used provides valuable insights into several critical aspects of the project, including security, scalability, interoperability, and functionality.

Here are some types of blockchains:

• Public vs. Private Blockchains: Understanding whether the project is built on a public or private blockchain is fundamental. Public blockchains, like Ethereum or Binance Smart Chain, are decentralised and open to anyone, offering transparency and accessibility. In contrast, private blockchains restrict participation, often used by businesses for internal processes, focusing on privacy and control. Evaluating this aspect helps gauge the project's approach to decentralisation and openness.
• Custom Networks: Some projects opt to create their custom blockchain networks tailored to their specific needs. These custom networks are designed to ensure optimal performance, scalability, and functionality, aligning with the project's unique requirements. Assessing whether the project utilises a custom network allows for insights into its commitment to technical excellence and innovation.
• Layer 2 Solutions: Scalability is a pressing concern in the blockchain space, and projects often employ techniques like rollups, which are layer 2 solutions. This approach enhances transaction speed and cost-effectiveness. 

The choice of blockchain technology has far-reaching implications for the project's security, transaction throughput, cross-chain interoperability, and user experience. A well-considered selection aligns with the project's goals and enhances its potential for success, making it a pivotal aspect of the evaluation process.

Security

In the realm of tokenisation projects, security is paramount. The utilisation of blockchain technology inherently provides a level of security through its decentralised and immutable nature. However, additional security measures are essential to safeguard the assets and data associated with tokenisation.

One crucial aspect of security is on-chain and off-chain collateral verification. On-chain verification involves recording collateral data on the blockchain, ensuring transparency and immutability. This on-chain approach enables users to independently verify the existence and value of assets backing tokens. Off-chain verification, on the other hand, entails external checks often conducted by trusted third-party entities. These entities confirm the collateral's existence and value, further fortifying the project's credibility.

Moreover, tokenisation projects rely on smart contracts for execution. Smart contracts are self-executing agreements that automatically enforce contract actions when predefined conditions are met. These contracts minimise the need for intermediaries and offer a high degree of security and trust. However, it is imperative that these smart contracts undergo thorough auditing by reputable third-party firms to identify and rectify vulnerabilities. Auditing ensures that smart contracts are secure, free from potential exploits, and function as intended, further enhancing the project's overall security.

A comprehensive evaluation of these security aspects ensures the protection of assets and the trustworthiness of the tokenisation project, offering peace of mind to investors and participants.

Legal

Legal aspects play a pivotal role in the evaluation of tokenisation projects, as they establish the project's governance, investor protection rights, and regulatory compliance. Understanding the legal framework in which a tokenization project operates is essential for making informed investment decisions.

Governance and Investor Protection Rights: Tokenisation projects often involve the issuance of tokens that confer certain rights to their holders. These rights may include voting on project proposals, receiving dividends or rewards, and more. Evaluating the clarity and fairness of these rights is crucial. Investors should have a transparent understanding of their role in project governance and how their interests are protected. Assessing the project's documentation, such as its whitepaper and terms of service, is vital for determining the extent of investor rights and protections.

Jurisdiction Set-Up: The choice of jurisdiction in which a tokenisation project is established can significantly impact its regulatory obligations and legal compliance. Some jurisdictions have robust legal frameworks for blockchain and cryptocurrency projects, while others may have stricter regulations or limited legal protections. Understanding the project's chosen jurisdiction and its implications is essential. It's advisable to seek legal counsel or consult with experts familiar with the legal landscape of the project's jurisdiction to assess potential risks and compliance requirements.

Regulated as a Security: Depending on the nature of the token and its underlying assets, it may be classified as a security under relevant financial regulations. Security tokens are subject to specific regulatory requirements, including registration with financial authorities and adherence to investor protection measures. Evaluating whether the tokenisation project complies with applicable securities regulations is critical. Non-compliance can lead to legal challenges and regulatory actions that may impact the project's viability.

Given the complexity of legal considerations in tokenisation projects, it is strongly recommended to seek legal advice from professionals with expertise in blockchain and cryptocurrency law. 

Deal Dynamics

Understanding the deal dynamics of a tokenisation project is paramount for investors and participants. Assessing the financial dynamics provides valuable insights into the project's financial viability and aligns investors' expectations with the project's goals.

Project Valuation: Project valuation is a critical factor to consider when evaluating a tokenisation project. It involves evaluating the proposed project valuation and assessing its accuracy to the total worth of the project. A thorough valuation analysis considers factors such as the underlying asset's value, the number of tokens issued, and the demand for those tokens. Evaluating the project's valuation can help investors gauge whether the tokens are priced reasonably and whether there is potential for capital appreciation.

Amount Raising: Understanding the fundraising goals of the project and the amounts already committed by investors is essential. This information provides insights into the project's funding status and whether it has achieved or is close to reaching its fundraising targets. Projects that have successfully attracted significant commitments may indicate strong investor interest and confidence in the project's potential.

Upside Potential: Yield or return on investment (ROI) is a key consideration for investors seeking financial gains from their participation in a tokenisation project. Assessing the projected yield or valuation allows investors to estimate potential returns on their investment. This analysis may involve evaluating factors such as expected token price appreciation, dividend distributions, or other forms of returns offered by the project. Investors should carefully review the project's financial projections models to assess the potential rewards of participation.

Liquidity Access Post-Investment: Liquidity is a critical aspect of any investment. Understanding how and when investors can access liquidity for their tokens is crucial. This involves assessing the project's liquidity mechanisms, including whether the tokens will be tradable on secondary markets, decentralised exchanges, or other platforms. Investors should also consider any lock-up periods or restrictions that may affect their ability to liquidate their holdings.

Thoroughly evaluating the alignment of the deal structure with your investment strategy is pivotal when making investment decisions. Therefore, it is imperative to dedicate ample time to this crucial process.

Conclusion

Investing in tokenisation projects presents exciting opportunities but carries inherent risks. A thorough evaluation is crucial, enabling individuals and institutions to make well-informed decisions based on research, analysis, and data-driven insights, ultimately ensuring more secure and prosperous investments.

Tokenisation is a dynamic field, constantly evolving and positioned to transform various industries. As with any rapidly growing sector, navigating this changing landscape can be challenging. To succeed, whether you're a novice or an experienced professional, it's essential to maintain a commitment to ongoing learning. Engaging with reliable sources, participating in community discussions, attending workshops, and staying updated with the latest developments are all vital for success.

In summary, the world of tokenization holds immense potential but is not without its challenges. A disciplined evaluation approach, combined with a dedication to continuous learning, is the optimal strategy for capitalising on opportunities while effectively managing risks.

Based on the regulatory clarity the EU has given, More Liquid has chosen to tokenise their first asset available to the EU, based in Luxemburg. Our first asset is royally special. If you want to stay up to date with our tokenised launches, subscribe to our newsletter here.

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Useful Links

1. How to evaluate a Blockchain project
2. Evaluating blockchain projects
3. How to evaluate crypto projects
4. How tokensation helps fuel the success of Web3
5. Key success factors of Asset tokenisation

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