Have you ever wondered how successful investors decide which DeFi projects to invest in? When no investor can forecast the future, they may spot signs of a potential protocol by going through some metrics associated with it. Let’s see everything from the principles to crucial crypto metrics in our guide to evaluating a DeFi project.
DeFi Metrics are the numbers that investors use to decide whether to buy, sell, or hold a DeFi asset. They are the quantitative assessment of a DeFi project commonly used for comparing and tracking performance.
Fundamental analysis of a DeFi project can be done with the help of these metrics. They can also be referred to as the quantitative measurement of the services offered by a DeFi project. These services include lending, borrowing, and other asset management tools.
Investors need to filter through a wide sea of data in order to find relevant information that will assist them in making investment decisions. This work might be hard and time-consuming if you don't know which metrics to evaluate and which tools to use. Here is a list of DeFi measurements and tools to get you started.
TVL (Total Value Locked) represents the overall crypto assets deposited in a DeFi protocol. It includes all rewards, interest, and new tokens from typical services such as lending, and staking.
It is quite different than the market cap of a project. The market cap of a coin is the entire supply multiplied by its current price. TVL, on the other hand, refers to the value of digital assets kept within a protocol's smart contracts.
In the context of decentralized exchanges (DEXs), TVL typically refers to the total value locked in liquidity pools. Traders can then use these liquidity pools to exchange one asset for another. The entire amount kept inside these liquidity pools is included in the protocol TVL.
A greater TVL value indicates that investors value the project and that more money is moving through its network. It assists investors in determining whether a protocol is healthy and worth investing in.
Protocol revenue is the fees collected directly by the protocol and its token owners. It is revenue paid to those who utilize the protocol. It is a major part of the total revenue.
Staking liquidity pools on DeFi platforms might be a feasible technique to generate investment income. The yields provided by DeFi protocols might vary greatly. The revenue or yield gained through Liquidity Pool staking is an essential metric.
Given the volatility of various DeFi protocols, yearly payouts are preferable to shorter-term rates. Naturally, as a protocol's popularity grows, yields are likely to fall. Smaller but boldly growing ventures frequently produce the highest yields.
As a result, annual protocol revenue can be an excellent tool for identifying undervalued DeFi assets.
Supply-side revenue is the amount of revenue the project pays to the supply-side participants (liquidity providers). It is not the same as protocol revenue. It is the overall fees paid to liquidity providers for AMMs or the amount of interest paid by borrowers for interest rate procedures.
It all comes down to how much people are prepared to pay to utilize the protocol. It practically corresponds to the number of money users are ready to pay for the protocol in exchange for its services.
In the realm of DeFi, the price-to-sales ratio (P/S ratio) is a critical metric. It is determined by dividing the fully diluted market valuation of the coin by its annualized total revenue. In DeFi, income is generated via transaction fees, which comprise both fees maintained by the protocol and fees received by token holders and liquidity pool providers.
In traditional stock investment, it is a very critical and useful indicator. Given the DeFi industry's youth and quick evolution, many traditional rules may no longer be appropriate. Instead, the ideal way to use the P/S ratio is to compare the number of DeFi tokens using this measure.
You can utilize revenues for time periods other than the standard 12-month period when using the comparative technique. For example, in the denominator of the ratio, you may use the last 6-month revenues for the coins you compare.
It is important because many of the new DeFi initiatives are less than a year old. Shorter durations, on the other hand, may not be as dependable as the standard 12-month term and are sometimes merely a trade-off measure owing to the necessity to analyze fresh tokens.
Token incentives are the value of the total number of tokens distributed to the users and supply-side participants as rewards. A native token is provided by the majority of DeFi systems.
This is frequently provided to protocol users in order to decentralize ownership and boost early liquidity. These incentives bring additional financial utility for a DeFi Project.
Active wallet addresses are the most commonly used DeFi growth metric. Active addresses are wallets that have participated in successful on-chain transactions, either as a sender or a recipient. A rising number of active wallet addresses corresponds to a wider network of individuals engaging over time.
The number of active wallet addresses on a blockchain is used to estimate the number of unique active users on a specific network. While this measure is easily manipulated by creating several wallets, it is frequently a good sign of protocol growth and narrative shifts.
The number of transactions or the value of those transactions can be used to calculate transaction volume. In most circumstances, such as DEX valuation, the entire value of transactions passing through the exchange is referred to.
On a low-fee alternative layer one blockchain, these metrics are readily and frequently adjusted. When a market maker performs transactions against their own orders, they are simulating real trade volume.
DeFi is still in its early stages, with thousands of developers attempting to disrupt existing financial institutions by leveraging the potential of blockchain technology. With fresh ideas and concepts that appear to have the potential to transform finance, investors must know how to analyze projects before deciding whether or not to invest in them.
By analyzing blockchain protocols using certain metrics, you may make more educated investing decisions. After all, figures depict the overall performance of a project. This a friendly reminder to always do your own research before investing in anything.