What it does, who can issue more of it, who already holds it, how deep the book is, whether the rules can be changed, where you would keep it, and what would tell you that you were wrong.
14 min read · Level 3
Diligence in this class has an unusual property that almost nobody exploits: an extraordinary amount of what matters is public, permanent and free to inspect. The supply is on the ledger. The holder distribution is on the ledger. Every transfer any large holder has ever made is on the ledger. The order book is live on the venue. In private markets an investor pays for access to a data room and still receives what the seller chose to include; here the primary record is open to anybody who looks, and the overwhelming majority of buyers do not look. I find that gap more interesting than any argument about whether the assets should exist, because it means the standard of diligence available to an ordinary person is genuinely higher here than in most of what this curriculum covers, and the standard actually practised is lower than almost anywhere. My view is that this is a vocabulary problem rather than a technical one. The material is presented in a language that makes checking feel like specialist work, and the effect - whether or not it is the intent - is that buyers substitute the project's account of itself for the record. The correction is the first check, and it is deliberately placed first: write what the thing does in ordinary words. Everybody who can do that can also read a supply schedule, and everybody who cannot do it has learned the most useful thing available in ten minutes and can stop.
Seven checks on one asset, ordered by how much each changes the outcome rather than by how easy it is to answer.
One. What does the thing actually do, stated without its own vocabulary. Write one sentence saying what problem it solves and for whom, using no term the project invented. If the sentence cannot be written, that is not a gap in your understanding - it is the finding, and buying-the-story is the lesson about what happens next.
Two. Who can create more of it, and on what schedule. This is the closest thing this class has to a balance sheet. Take Asset D:
Total supply 100,000,000 Circulating today 42,000,000 which is 42.0% of total Held by the team and treasury 18,000,000 which is 42.857% of circulating Locked, releasing over four years 58,000,000 which is 14,500,000 a year
14,500,000 a year is 34.524% of today circulating supply
Now the consequence, and it is arithmetic rather than opinion. If the total value the market assigns to the network stays exactly the same, the price per unit falls as units are added:
After one year 42,000,000 / 56,500,000 = 74.336% of today's price, a fall of 25.664% After four years 42,000,000 / 100,000,000 = 42.0% of today's price, a fall of 58.0%
Nothing in that calculation requires anybody to sell or anything to go wrong. It requires only that the network value does not grow to absorb the new units. A holder who is right about the project and wrong about the schedule loses money.
Three. Who already holds it. Concentration among holders is a property of the asset, not of your portfolio, and it is the one that interacts with lesson three. If the ten largest addresses hold 38.0% of circulating supply, that is 15,960,000 units. One per cent of circulating supply is 420,000 units. The book in lesson three absorbed 300 units before the bid fell nearly 3%. So one per cent of supply is 1,400 times the depth that book actually carried.
Four. How deep the book is, for your size. The slippage walk from lesson three, on the venue you would really use, for the amount you would really trade. Do it for the exit, not the entry - buying is done at your own pace and selling frequently is not.
Five. Whether the rules can be changed, and by whom. Ask who can alter the supply schedule, the fees, the transfer rules, or the ability to move the asset at all. Is it a fixed protocol, a vote among holders, a small group of key holders, or a company. This is the governance question, and it determines whether the answers to checks two and three are facts or current intentions.
Six. Where you would keep it, decided before you buy. Lesson one's three arrangements, and whether the asset can even be held the way you intend - some cannot be self-custodied in practice, which changes the position into a claim on whoever can.
Seven. What would tell you that you were wrong. Written down, in advance, in terms of something observable: a schedule missed, a holder distribution that worsens, activity that falls, a governance change. Without it, every price fall becomes evidence of an opportunity and every rise becomes evidence of judgement.
Because the first three checks are the ones that decide most outcomes, and only one of them is ever discussed.
Check one is discussed constantly, in the project's own vocabulary, which is exactly the condition under which it cannot be answered. A sentence that requires four invented terms to state is not an explanation; it is a translation of the same claim into a longer form. The test of writing it in ordinary words is not a literary exercise - it is the only way to find out whether there is a proposition underneath.
Check two is where the money usually is and it is almost never computed. The numbers above are not adversarial: 42.0% circulating with the rest releasing over four years is an ordinary structure, publicly documented, and the arithmetic is a division anybody can do. What makes it consequential is that it acts continuously, in the background, on every holder, without any event. A project can do everything it said it would do and a holder can still be down 25.664% after one year on an unchanged network value, purely because the denominator grew.
That is worth contrasting with equity dilution, where the lesson dilution covers the same mechanism. A company issues shares and each existing holder owns a smaller fraction, and the defence is that the company received something for them - cash, or an acquisition, or employee effort. Here, units released from a lock are not being sold to raise anything; they are being delivered to people who already owned them. Nothing enters the network in exchange.
Check three then interacts with check four in a way that is specific to this class. In a liquid listed equity, a large holder wanting to exit has a market deep enough to absorb a meaningful position over days, plus block-trading mechanisms designed for exactly that. Here, one per cent of circulating supply was 1,400 times the depth the lesson-three book was carrying. The point is not that a large holder will sell. It is that the option to sell is held by somebody else, it is large relative to the market, and its exercise is not something you would see coming.
Checks five and six are the ones people leave until after the purchase, and both can invalidate everything above them. A supply schedule that a small group can vote to change is not a schedule, it is a current plan. An asset that cannot in practice be self-custodied is not the instrument lesson one described; it is a claim on whoever holds it, with all of that lesson insolvency arithmetic attached.
And check seven is the one that separates an investment from a position. Without a written disconfirming condition, the asset has no way to tell you anything. Every fall is an opportunity, every rise is vindication, and the holding continues indefinitely in both directions, which is the state writing-down-why-before-you-know exists to prevent.
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The same seven checks applied to two assets with almost identical marketing.
Asset D. Total supply 100,000,000, circulating 42,000,000, team and treasury holding 18,000,000, and 58,000,000 releasing evenly over four years. Top ten addresses hold 38.0% of circulating. The supply schedule is fixed in the protocol and cannot be altered without a change that holders vote on. It can be self-custodied. The documentation states what the network does in two sentences that use no invented terms.
Annual release 14,500,000 = 34.524% of today circulating Price at constant value after one year 74.336% of today, a fall of 25.664% Top ten holdings 15,960,000 units One per cent of supply 420,000 units, against a book that absorbed 300
Asset E. Identical marketing, identical sector, and a different set of answers. Total supply is not fixed and the issuing company can mint more at its discretion. Circulating share is not published. It cannot be held outside the company's own application, so every holder is a creditor of that company. The documentation runs to forty pages and the one-sentence test cannot be passed.
Asset E fails checks one, two, three, five and six, and it fails every one of them on evidence available before any money moved. No price forecast is required to reach that conclusion, no view about the sector, and no opinion about the team.
What is worth noticing is that neither asset has been called good or bad here, and that D answering its checks does not make it worth owning. D still has a schedule that costs a holder 25.664% at an unchanged network value in year one, a top-ten concentration of 38.0%, and no income of any kind. What the checks produce is a description accurate enough to size a position against, which is all any appraisal in this class can honestly deliver.
And the order matters. Somebody who starts at check four - the depth and the price - can spend a week on execution quality for an asset that check two would have eliminated in ten minutes. The expensive checks are cheap, and they come first.
Reading the whitepaper and calling it diligence. The document is written by the people selling the asset, and every claim in it that matters is verifiable somewhere else: the supply schedule on the ledger, the holder distribution on the ledger, the depth on the venue. Verification-vs-assumption is the general form of this and it binds hardest here, because unusually much of the evidence is public.
Skipping the supply schedule because the project looks sound. It is the check most likely to cost money and the one least likely to be done. An unchanged network value with 14,500,000 units added a year is a 25.664% fall in price per unit in year one, and it happens whether or not everything goes to plan.
Treating a percentage held by the team as a governance detail. 18,000,000 of 42,000,000 circulating is 42.857%, and it is simultaneously a concentration figure, a supply figure and a governance figure. Which of those it turns out to be depends on decisions you will not be consulted about.
Measuring liquidity on the way in. Buying happens at your own pace, in the size you choose, on a day you choose. Selling frequently happens under time pressure, in a size set by your position, on a day the market chose. Only the second one is a real test, and it is the one to compute.
Accepting a supply schedule that somebody can change. A fixed schedule and a current plan are different objects, and the difference is check five. If a small group can alter it, then checks two and three describe intentions rather than facts, and the appraisal has to say so.
Buying before deciding where it will be held. Some assets cannot in practice be self-custodied, which converts the holding into a claim on a company and imports all of lesson one's insolvency arithmetic. Discovering that afterwards means the instrument you own is not the one you appraised.
Owning something with no written disconfirming condition. Without one, a fall is an opportunity and a rise is vindication, and there is no observation the asset could make that would change the position.
Ordinary language, one sentence, naming who benefits and how. If you cannot write it after a genuine attempt with the documentation open, stop there. This costs ten minutes and eliminates more positions than every other check combined.
Total supply, circulating today, held by the team and treasury, locked, and the release rate. For Asset D that is 100,000,000 total, 42,000,000 circulating, 18,000,000 with the team, and 14,500,000 released a year - which is 34.524% of today circulating supply.
Circulating today divided by circulating then. For Asset D: 42,000,000 / 56,500,000 = 74.336% after a year, a fall of 25.664%; and 42.0% once everything has released, a fall of 58.0%. This is the number that acts on you whether or not anything happens, and it belongs in the decision rather than in a footnote.
Top ten as a share of circulating, converted to units, set beside the depth you measured in lesson three. For Asset D, 38.0% is 15,960,000 units and one per cent of circulating is 420,000 - which is 1,400 times the 300 units the illustrative book absorbed. That ratio is the whole of why concentration matters more here.
Use the venue you would actually sell on, at the size you would actually hold, and compute the average realised price and the shortfall. Selling is the side that happens under time pressure, and it is the only side worth measuring.
Supply, fees, transfer rules, or the ability to move the asset at all. A fixed protocol, a holder vote, a small set of key holders, or a company are four different answers with four different meanings for every figure above. Write down which one it is and where you confirmed it.
Something observable: a release schedule that changes, a holder distribution that concentrates further, usage that declines for a stated period, a governance change. Then a date to look at it. Without this, the position has no way of telling you anything and will be held through every outcome equally.
On any specific asset before buying, when re-appraising something already held after a schedule or governance change, and whenever an asset is being recommended on the strength of what it will do rather than on what can be checked today.
Do not use these checks to compare two assets against each other on a summary figure - they produce a description, not a comparison. And do not treat passing all seven as a reason to hold: the checks establish that you know what you own, which is a precondition for sizing it, not an argument for owning more.
Release schedules are typically published in full before an asset is widely available, stating exactly how many units unlock and when. They are also among the least consulted documents in the class, and the pattern that follows is consistent enough to be predictable: a period of enthusiasm during which the circulating supply is small and rising demand meets little of it, followed by a long stretch in which the arithmetic works against every holder continuously. Nothing is concealed at any stage and no promise is broken. What makes it costly is that the effect is gradual and has no event attached, so it never becomes the story, while the price is attributed instead to sentiment, competition or market conditions - all of which may also be true and none of which required 14,500,000 units a year to be absorbed just to stand still.
Read the release schedule before the whitepaper. It is shorter, it is arithmetic rather than argument, and it acts on you every day whether or not the project succeeds.
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