Check a token's purpose, supply and backing before you buy it.
Before you buy any crypto token, run it through five questions: who issued it, what it is for, what the total supply is, how much insiders hold and when they can sell, and where any yield comes from. Write each answer down with its source, and note any question the project cannot answer.
Darren keeps seeing a new token all over their social feed. Posts say it will power a gaming network, that holders can vote on its future, and that early buyers earn a yield of more than 20% a year (an example figure) for "providing liquidity". The token's website has a slick roadmap and a countdown. Darren cannot tell whether this is a real project, a long shot or a trap, and the five questions are how to find out.
Most tokens are created by a smart contract on Ethereum or a similar blockchain. You met these programs in Lesson 2.1, "Ethereum runs programs, and ether pays for them". Creating a token is cheap and quick, which is why so many exist.
Projects describe their tokens in different ways. A utility token is meant to be used inside a product, for example to pay fees on a platform. A governance token lets holders vote on changes to the project's code or treasury, which is what Darren's posts are promising. A meme token admits it is mainly a joke or a community badge.
Whatever the label, almost no token gives you a legal claim. A share in a Singapore-listed company is part-ownership of that company, with a right to the dividends it declares and a share of what remains if it is wound up. Most tokens carry no such right. If a token's team builds a profitable business, the profits belong to their company and go to token holders only if the token's legal terms say so. If the project fails, holders usually have nothing to claim against.
Read the project's documents with this in mind. If they use the words "investment" and "returns" but cannot point to a legal right, the price rests only on demand, the same as bitcoin in Lesson 1.3, "What gives bitcoin a price, and why it swings".
Check supply first, because it is where many token buyers get hurt. You want three numbers: the total supply, the amount circulating now, and how the rest is allocated. Projects usually publish these in a whitepaper or on a "tokenomics" page.
Take a token with a total supply of 1 billion, of which 150 million are circulating today. The team and early investors hold 400 million, locked for twelve months. The price you see is set by trading in the circulating tokens only, so it reflects those 150 million. When the lock ends, insiders can sell up to 400 million tokens into a market where only 150 million were trading before. Even if they sell only part of that, the price can fall hard. Anyone who bought before the lock ended may have paid a price that never reflected the supply that was coming.
For supply, ask three things. Who created the token, and are they named? What share did the team and early backers keep? When can they sell? If a project cannot clearly say who created the token, what share insiders kept and when they can sell, it has told you something. Put that in your notes as a warning sign.
DeFi, short for decentralised finance, means financial services run by smart contracts instead of firms. You can swap tokens through a contract that holds pools of them. You can lend tokens to a contract that lends them on to borrowers. Or you can deposit two tokens into a pool so traders can swap against them, in return for a share of the trading fees. That last one is called providing liquidity, and it is what Darren's posts are offering. In each case you earn a share of trading fees or interest.
DeFi runs all day, needs no paperwork, and has no company deciding who may use it. What you give up is recourse. A contract can be exploited, a price feed can be manipulated, or the team can walk away. When that happens there is no customer service desk, usually no regulator overseeing it, and often no legal entity to pursue. On a licensed platform you at least know who to complain to. With DeFi you are often on your own.
Every yield is paid by somebody. In a lending pool, you earn interest for supplying tokens to the protocol, which other users borrow against collateral they put up. Read the protocol's own documents to see how that interest is set and how it reaches you. In a trading pool, it comes from the fees traders pay. These real sources move with demand, so the rate rises and falls. A trading pool also exposes you to losses when the two tokens in it move apart in price.
Large advertised yields like Darren's, at more than 20% a year, are often paid in the project's own newly created tokens. That isn't income from any activity. The project is printing more tokens and handing them out. Printing adds supply and tends to push the price down, so the yield looks generous as a percentage while the value of what you are paid shrinks.
Treat any yield with no clear source of income as a warning sign. Ask who pays the yield, from what activity, and what happens to the rate if new deposits stop. If the honest answer is "new money coming in", walk away.
Fake platforms that invent yields and profits outright are a separate problem, covered in the course "Scam-proof your money". These questions are for real projects, which can still fail on their own terms.
Darren ends up with a short routine they can use on any token:
Who issued it? What is it for? What is the total supply? How much do insiders hold, and when can they sell? Where does any yield come from?
Write each answer down with its source. "I read it somewhere" is not a source. If a question cannot be answered from the project's own documents, record the gap instead of guessing.
Pick the token you have heard the most about recently, and run it through the same questions.
Choose one token you have heard about and answer five questions: who issued it, what it is for, its total supply, how much insiders hold, and where any yield comes from.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).