Decentralized Finance space moving at low speed in crypto space. This is going to be the reason for an avalanche of new projects. The essential analysis aims to define whether a protocol is overestimated or undervalued. Investors and traders can create more profitable decisions in their positions.
Wondering how you can estimate the “inherent” value of DeFi assets? Read on to know about some of the most emphatic metrics for doing so.
Decentralized Finance (DeFi) drives at such an accelerated speed that it can be quite difficult to keep up, let alone estimate new projects on time. What drives it even more difficult in the absence of a standard approach. There are numerous methods to calculate and compare DeFi protocols.
Not to worry, though. Here we cover some of the typically used indicators that can be good sources of information in Decentralized Finance. Since a significant amount of data is publicly available on-chain, it’s comfortable for any trader or investor to use these indicators.
In this article, we gonna see about the 7 indicators every DeFi Traders Should know.
7 Indicators every DeFi Traders Should know
Total Value Locked (TVL)
As the name would imply, Total Value Locked (TVL) is the aggregate amount of funds locked into a DeFi protocol. You could think of Total Value Locked (TVL) as all the liquidity in the liquidity pools of a given money marketplace. For example, in Uniswap’s point, TVL indicates the number of funds deposited by liquidity providers to the protocol.
TVL can be a useful data point that offers you an idea about the overall interest in DeFi. TVL can also be effective in comparing the “market share” of various DeFi protocols. This can be specifically useful for investors who are peeking for undervalued DeFi projects.
What’s also worth reporting is how TVL can be estimated using diverse denominations. For example, the TVL locked in Ethereum projects is commonly calculated in ETH or USD.
Price-to-sales ratio (P/S ratio)
In the case of a more conventional business, the Price-to-Sales Ratio (P/S Ratio) reaches the price of the company’s stock to its earnings. This ratio is then used to clinch whether the stock is undervalued or overrated.
Since many DeFi protocols already generate revenue, a similar metric can be utilized for them as well. How can you use it? You’ll be required to divide the market capitalization of the protocol by its income. The essential idea is that the lower the ratio is, the more undervalued the protocol may be.
Bear in mind that this is not a quintessential way to calculate valuation. But, it can be valuable in providing you with a broad idea of how relatively the market may be valuing a project.
Token supply on exchanges
Another method implicates tracking the token supply on crypto exchanges. When the sellers desire to sell their tokens, they generally do so on centralized exchanges (CEXs). That said, there are an increasing amount of choices available to users on decentralized exchanges which do not require trust in a mediator.
Nevertheless, centralized venues tend to brag much stronger liquidity. This is why it’s crucial to pay attention to token supply on Centralized Exchanges.
Here’s simple speculation about token supply. When there is an immense number of tokens on exchanges, sell pressure may be more elevated. Since holders and whales aren’t having their funds in their own wallets, it could be likely that they are looking to sell them.
With that said, this isn’t so explicit. Numerous traders will utilize their assets as collateral for trading on margin or futures. So, transmitting a large balance to exchange doesn’t inevitably mean that a large sell-off is impending. Yet, this might be something you want to keep an eye on.
Token balance differs on exchanges
Looking at only the token balances may not be enough. It can also be valuable to examine recent changes in those balances. Large token balance changes on exchanges can constantly signal an increase in volatility.
For example, assume the opposite scenario of what we’ve just concerned about token balances. If large holdings are being withdrawn from Centralized Exchanges, that may signify that whales are collecting the token. If they were seeking to sell soon, why would they withdraw to their own wallets? This is how monitoring token activities can be useful.
Unique address count
While it has its limits, a consistently enriching amount of addresses holding a particular coin or token should point to increased utilization. On the exterior, it would occur that more addresses are associated with more users and increasing adoption.
This is a gameable metric, though. It’s comfortable for someone to make thousands of addresses and allocate funds across them, thus providing the impression of widespread use. As with any metric in essential analysis, you should conflict the unique address count with other aspects.
So you’re watching up some emoji-based token that claims fantastic returns, but does it really do anything? It might get the Charles Ponzi seal of authorization if its sole purpose is to appreciate at price, but it won’t be sustainable for long.
Comprehending what the token is used for is crucial to figuring out its real value. Ideally, you would calculate this by glancing at the number of transactions that aren’t carried out for belief.
This can be complicated, but a good start would be to examine transfers that don’t take place on centralized or decentralized exchanges. The purpose here is to prevent people are using the token.
Not necessarily. Another crucial metric to keep track of is the Inflation Rate. A small supply now doesn’t ensure a small supply forever, especially if new tokens are constantly minted. A significant property of Bitcoin is an always decreasing inflation rate, which should theoretically contain the degradation of current units in the future.
That’s not to say that every system should desire to recite Bitcoin’s absence. Inflation in itself is not necessarily bad, but too much could diminish your slice of the pie. There’s no standardized percentage intended for “good” or “bad,” so it’s wise to take the number into account when considering other metrics.
Hope you get an idea about the 7 indicators that every DeFi trader should know. If you are a crypto trader, you will note that a lot of these metrics are typically used in the essential analysis for “conventional” Cryptocurrencies. As always, the markets are unreliable, unreasonable, and prone to excessive volatility. Above all, doing your own research is crucial to success.
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