What Should Every DeFi Investor Know?
It can be challenging to keep up with all the new ideas in the DeFi arena, which is expanding at a rapid speed. Fundamental analysis attempts to evaluate whether a business is valued correctly. Today we are looking at some of the most important metrics that will allow you to make more informed decisions about your investments.
The decentralized Finance (DeFi) sphere evolves at such a breakneck speed that evaluating new ideas promptly can be difficult. The lack of a consistent technique makes it much more complicated — there are numerous approaches to evaluating DeFi technologies. But don’t be concerned. We’ll go through some of the most widely utilized DeFi metrics. Because a large amount of data is public and can be tracked by anybody on-chain, you may easily use these indicators.
P/S ratio (price-to-sales ratio)
The Price-to-Sales Ratio relates the price of a company’s stock to its revenues. The stock’s cheap or overvalued status can be determined using this ratio. So how does it work? You’ll need to divide the protocol’s market capitalization by its revenue. The central premise is that a small ratio may indicate that the project is undervalued. This isn’t the only approach to figure out how much anything is worth. However, it can provide you with a rough indication of how fairly the market values a project.
The Price-to-Sales Ratio relates the price of a company’s stock to its revenues. The stock’s cheap or overvalued status can be determined using this ratio. So how does it work? You’ll need to divide the protocol’s market capitalization by its revenue. The central premise is that a small ratio may indicate that the project is undervalued. This isn’t the only approach to figure out how much anything is worth. However, it can provide you with a rough indication of how fairly the market values a project.
On-exchange token supply
Another option is to monitor the supply of tokens on the exchanges. The selling of tokens typically happens on centralized exchanges (CEXs). However, decentralized exchanges (DEXs) continue to provide more and more alternatives that don’t require users to trust an intermediary. CEXs, on the other hand, tend to have significantly better liquidity. This is the reason why monitoring token supply on CEXs is a good idea. Here’s a simple token supply assumption. Sell pressure may be more prominent when there is a large number of tokens on exchanges. Because holders and whales don’t keep their money in their wallets, they may be eager to sell it.
With that said, things aren’t so simple. Many traders will utilize their assets as collateral for margin or futures trading. As a result, submitting an outstanding balance to exchange does not always imply that a significant sell-off is on the horizon. Nonetheless, on-exchange token supply can give you a bigger picture.
Total Value Locked (TVL)
TVL is the total amount of funds locked within a DeFi protocol. It can be thought of as total liquidity in some money marketplace’s liquidity pools. For example, Uniswap’s TVL refers to the money put in the protocol by users to provide liquidity. TVL is a good metric for determining the general level of interest in a particular project. In addition, you can use it to compare the “market share” of various DeFi protocols. This is particularly beneficial for investors seeking undervalued DeFi projects.
Changes in the balance of tokens on exchanges
As we’ve covered before, checking token supply is beneficial. However, simply looking at the token balances may not be sufficient – you should try tracking them over time. Large swings can typically indicate a rise in volatility. Let’s look at a similar example concerning token balances. If vast amounts of tokens are being removed from CEXs, whales may be hoarding the token. You wouldn’t withdraw money to a personal wallet in case you consider selling them, right?
The rate of inflation
The rate of inflation is another critical metric to monitor. A limited quantity currently does not ensure a limited supply in the future, especially if more tokens are being created. Interestingly enough, Bitcoin has a constantly decreasing inflation rate, which should potentially prevent the depreciation of existing units in the future.
That isn’t to imply that every system should strive for the same level of scarcity as Bitcoin. Inflation isn’t inherently wrong in and of itself, but too much of it can make your portion of the pie smaller. While there is no standardized proportion regarded as “excellent” or “poor,” it’s essential to consider inflation while assessing other criteria.
The number of unique addresses
This is not an exact sign, but if the number of addresses owning a specific coin or token is growing, it usually indicates higher usage.
However, you should keep in mind that this is a measure that may be manipulated. It’s simple to generate thousands of addresses and transmit payments to them, so it can be all smoke and mirrors. That’s why you shouldn’t rely exclusively on unique address count, just like any other indicator, while performing fundamental analysis.
Usage that isn’t speculative
So how do you check whether some latest meme-based coin is going to give such high returns as promised? If the main objective is to increase value, it might earn the Charles Ponzi stamp of approval, but it won’t last long.
To determine the true worth of a token, you must first understand what it is used for. Counting the number of non-speculative transactions would be a perfect solution. This can be tricky, but an excellent place to start is looking at transfers that do not take place on controlled or decentralized exchanges. Check whether the token is used by people.
Conclusion
Markets are unpredictable, illogical, and prone to severe volatility, as they have always been. Above all, you must conduct your research to be successful, and these basic indicators can come in handy.
