How to assess the reliability of financing for Web3 projects? What pitfalls are there?

Written by: Quinn, RootData

Recently, the RootData team has received a lot of feedback asking how you determine the authenticity of financing? What are your input standards? Some users have even criticized us for including a lot of false financing. This is indeed a very practical and awkward issue. As a trusted data platform, RootData must uphold the bottom line in terms of information credibility. However, in the current market situation, we have to face some contradictions in the comprehensiveness, timeliness, and credibility of the data.

According to the usual standards, we generally record investment and financing information based on reports from credible media such as Coindesk, The Block, Decrypt, and Fortune. We also refer to the financing information released by the project's official Twitter, which is a common practice among all financing information platforms. The main differences lie in the comprehensiveness, timeliness, and presentation of the financing records.

In recent cycles, the amount of financing has been one of the core indicators for most users to assess project quality. However, whenever quantitative data is involved, it inevitably becomes a target for project parties to play tricks. In the past few months, several projects have disclosed that they completed financing of tens of millions of dollars, for example, Wunder Social recently announced the completion of $50 million in financing, led by Rollman Management; Solix announced the completion of $29.5 million in financing, led by Eclip Foundation. Among them, Rollman Management has invested over $10 million in at least 10 projects in recent months.

Many KOLs are also taking advantage of the financing hype to recommend participation opportunities in these projects, which is precisely the goal of the project parties: to attract user attention with high financing and create momentum for themselves. However, upon closer examination, there are many questionable aspects to this financing, such as the investors being relatively unknown, and the project itself lacking highlights and having an average team background.

It can be determined that these financings are schemes co-created by the project party and certain specific institutions, fabricating false financing amounts. In this regard, the media has published multiple exposés, such as "The Most 'Wealthy' Crypto VC Institution GEM Digital Behind: A Covert and Strange Capital Game" and "Deep Dive into Rollman Management's Capital Game: Hanging the VC Signboard, Selling Marketing Dog Meat." For such financing situations, we will label them as suspicious financing, and a symbol will appear for the financing amount; hovering the mouse over it will display a prompt: This financing amount is suspicious and will not be included in data statistics, for display purposes only.

However, it may be that this entry is relatively hidden, and many users are still questioning whether we are including fake financing, which can be misleading. Some users are also asking if we will not independently verify the financing? It's not that we don't want to verify, but there is simply no channel for verification. The project financing process is a black box, and the project parties and investors have no obligation to disclose the specific transfer process and addresses. Even if we ask the participants for verification, as stakeholders, they will only affirm the statements of the project parties.

What should we do? We can only further optimize the input and product processes, adding multiple review steps for suspicious financing events, and significantly alerting users. Therefore, in our recent product adjustments, we have hidden the amounts of suspicious financing, and users will not see this financing in the primary investment and financing channel; they can only see that a particular institution has invested in the project on the project detail page, along with a suspicious label. Additionally, users can view the financing news in the news module on the page.

For the sake of transparency, we will also regularly disclose the handling of this situation.

Just yesterday (23rd), the digital asset trading platform BitradeX announced the completion of a £12 million Series A financing on the news release platform Finance Feeds, led by Bain Capital, and many Chinese media outlets reported on this as well. Considering that Bain Capital is a very well-known VC firm, the news was not published in credible media, and there was no attention from any credible individuals on Twitter, we did not record this financing information.

In addition to directly fabricating financing, some more cunning project teams will play tricks in the form of financing, such as including the "committed financing amount" or the amount of provided protocol liquidity (TVL) in the financing amount. What is committed financing? Let's look at the case of 0G. In November last year, 0G announced that it had secured $290 million in financing, but the article further mentioned that $250 million of this was for token purchases and working capital commitments. The project's CEO Michael Heinrich recently explained in an interview that this can be understood as a kind of quota, but not a pre-agreed price; rather, the discount on this quota is determined based on market pricing after the tokens are issued.

In other words, this promised investment has not actually occurred, and future amounts are also highly uncertain. However, the project party includes this type of financing amount in the officially disclosed data, which only indicates impure motives. In this case, RootData will not record it in the database and has only recorded the seed round financing amount of 40 million dollars.

KernelDAO revealed a kind of black box operation in financing while clarifying the Web3port incident this month. Previously, in May last year, KernelDAO announced the completion of a $9 million financing round, with Web3port listed among its investors. However, due to Web3port's recent reputational bankruptcy, KernelDAO announced that Web3port had not actually invested for various reasons, and its SAFT had been canceled. This indicates that KernelDAO announced the completion of financing ahead of actual investments from investors. Are there other investors or projects with similar situations? We do not know.

In some cases, project parties may disclose old investors alongside new investors to create confusion. The blockchain gaming platform Balance has been severely criticized for this. Balance has repeatedly mentioned in its PR that a16z is one of its investors, leading its $30 million financing round, but further investigation reveals that a16z did not invest directly in the Balance project itself, but rather in its parent company E-PAL, and that investment occurred in 2020 and 2021 respectively.

At that time, E-PAL was a gaming companionship platform focused on integrating social features like live streaming and voice chat, with no relation to Web3. Now that the team has transitioned to Web3, it likely means that the original Web2 business is unsustainable. The company may map the EPT token to E-PAL's equity investors a16z, but this does not represent any endorsement of the Balance project by a16z. Many users purchased Balance nodes primarily because of a16z's investment background, but now they are ruthlessly harvested by the project team, which highlights the critical importance of information quality and accuracy.

So in summary, how can we better assess the reliability of financing for Web3 projects?

First of all, we can confidently say that after refining so many cases, we have reorganized the data entry process and established new standards, marking any questionable data for independent verification. In other words, by using RootData, most suspicious financing can be filtered out, effectively improving information search efficiency. If you find financing data with entry errors, feel free to provide feedback to us (support@aicoin.com contact@rootdata.com), and if adopted, we can offer a reward of 20-100U for each instance.

Second, establish a basic understanding of the investment and financing market pattern, such as which are the leading VCs? Only with the participation of leading VCs does a financing amount exceeding 10 million dollars have credibility. Leading VCs also do not casually endorse ordinary small projects; financing endorsed by a large number of well-known VCs generally also has a high level of credibility. If interested, one can further study which projects invested in by VCs perform better in terms of token price? Which projects invested by VCs are more likely to be listed on major exchanges, and so on.

Thirdly, learn to use multi-dimensional data to comprehensively assess the credibility of a project, such as team background, publishing media, and Twitter follower situation. For instance, the credibility of financing reported by media like Bloomberg and Fortune is extremely high, whereas if it is only published on press release platforms like Chainwire or GlobeNewswire (where the price generally does not exceed 1000U), the credibility is relatively low. The current trend is that many projects only debut their financing on platform X and do not wish to pay thousands of dollars in PR fees on other media platforms, which requires assessing the quality of followers on X.

Now, many Twitter plugins can help users view the fundamental situation of a tweet, and the RootData website also provides such information. In fact, if a project claims to have received investment from a well-known VC on Twitter, and there is no interaction between both parties on Twitter, and the project's Twitter does not have the attention of credible industry figures, RootData will not record such information.

Of course, the most important thing is to learn to demystify the funding amount and VCs. When RootData was first established, the first screen of the homepage dedicated most of its space to funding round information, apart from the search interface. However, with changes in the industry environment, VCs no longer play a crucial role in the development prospects of projects; narrative and community do. Last year, Hyperliquid's VC-free, purely community model is proof of this, and there are numerous instances where top VCs' investments have led to plummeting token prices or even project shutdowns.

DYOR, delve into the community, and thoroughly understand the narrative; it is the ultimate key to unlocking the financing black box and achieving significant results.