Abstract

The DeFi field is developing rapidly, and it is difficult for participants to be aware of the potential risks of new projects. Fundamental analysis can determine if a protocol is overvalued or undervalued, helping investors and traders make more informed decisions for their positions.

Want to know how to measure the "intrinsic" value of DeFi assets? Read this article to learn about the most powerful metrics.

Table of Contents

• Introduction
• Total Value Locked (TVL)
• Price-to-sales ratio (P/S rate)
• Token supply of the trading platform
• Changes in the token balance of the trading platform
• Unique Number of addresses
• Non-speculative use
• Inflation rate
• Summary

Introduction

Decentralized Finance (DeFi) is developing rapidly, and it is difficult for participants to keep up with the pace, and it is even impossible to evaluate new projects in a timely manner. There are many ways to measure and compare DeFi protocols, and the lack of standard methods makes it even more difficult to evaluate new projects.

Don’t worry, we will provide some common indicators to provide a reasonable and reliable basis for judgment in DeFi. The vast amount of data is published publicly on-chain, making these indicators easily available to any trader or investor. Inspired by Spencer Noon's ideas, we summarized some indicators in this article.

1. Total locked value (TVL).

As the name suggests, "Total Locked Value (TVL)" refers to the total value of locked funds in the DeFi protocol. We can think of TVL as the total amount of liquidity in the liquidity pool of a specific currency market. Taking Uniswap as an example, TVL refers to the total amount of funds deposited into the DeFi protocol by liquidity providers.

TVL is a practical data point for understanding the total interest rate of DeFi. It is also an effective indicator for comparing the "market share" of different DeFi protocols. It is especially useful when investors are looking for undervalued DeFi projects.

How to use different denominations to measure TVL is also worthy of attention. For example, TVL locked in Ethereum projects is generally measured in Ether or USD.

2. Price-to-sales ratio (P/S ratio)

For traditional companies, the price-to-sales ratio (P/S ratio) P/S ratio) equals the company's stock price divided by its revenue per share. Based on this ratio, it can be determined whether a stock is undervalued or overvalued.

Today, many DeFi protocols have generated revenue that can be evaluated through similar metrics. So, how to use it? You need to divide the protocol's market capitalization by its revenue. The basic idea is that the lower the price-to-sales ratio, the more undervalued the agreement is.

Please note that this is not an exact calculation of value, but it is helpful to understand how the market fairly and equitably assesses the value of a project.

3. Exchange token supply

This strategy tracks the token supply of cryptocurrency exchanges supply. When sellers need to sell tokens, they usually choose a centralized exchange (CEX). Nonetheless, decentralized exchanges (DEX) are increasingly providing users with more choices and bypassing intermediaries that rely on trust. However, centralized platforms are more liquid. This is also an important reason to pay attention to the token supply of centralized exchanges (CEX).

The following are simple assumptions about the token supply. If an exchange has a large backlog of tokens, pressure to sell may increase. Holders and whales don't let their funds sit quietly in their wallets, likely ready to sell at any time.

This statement is slightly abstract. Many traders pledge their holdings to participate in margin or contract trading. Therefore, transferring large balances to a trading platform does not mean that a massive sell-off is imminent, but you still need to keep an eye on developments.

4. Token balance changes on the trading platform

We know that the token supply is worthy of attention It is an effective indicator, but focusing only on the token balance is not comprehensive. Its latest changes are also an important basis. Significant changes in token balances on a trading platform often indicate increased volatility.

For example, assume the opposite of the token balance case mentioned above. If large sums of money are withdrawn from centralized exchanges (CEX), it could be a hint that whales are hoarding tokens. If they are eager to sell, how can they withdraw the funds to their own wallet? This is enough to prove the practicality of monitoring token changes.

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5. Number of unique addresses

The number of unique addresses is limited, but holding A steady increase in the number of unique addresses for a particular currency or token should indicate increasing usage. On the surface, the more addresses, the more users and the higher the application rate.

However, this indicator can be tampered with. Users can easily create thousands of addresses and send funds through these addresses, giving the illusion that the number of unique addresses is widely used. Like other metrics in fundamental analysis, the number of unique addresses should be compared to other factors.

6. Non-speculative use

You have followed some meme tokens that promise huge profits, but these Do the tokens have any practical use? If its purpose is only to appreciate, then it can basically be concluded that it is a Ponzi scheme and will definitely be unsustainable.

Understanding the purpose of this token is crucial to understanding its true value. Ideally, this would be measured by querying the number of non-speculative transactions. This may be difficult, but you can start by looking at transactions outside of decentralized or centralized exchanges, with the goal of checking whether users are using the token.

7. Inflation rate

Wow, the supply of a certain token is so small! This is a good sign, right?

Not necessarily. Another important indicator to keep an eye on is the inflation rate. Just because the supply is currently low does not mean it will remain that way in the future, especially since new tokens are constantly being minted. One of Bitcoin’s distinguishing features is its declining inflation rate, which theoretically prevents existing units from devaluing in the future.

This is not to say that all systems must imitate Bitcoin’s scarcity. Inflation itself does not necessarily have a negative impact, but excessive inflation can dilute the value of money. The impact cannot be measured in standard percentages, and it is best to also take the inflation rate into account when measuring other indicators.

Summary

If you are an experienced cryptocurrency trader, you will notice these indicators Many of them are very common in "traditional" cryptocurrency fundamental analysis. If you are unfamiliar with this content, we highly recommend you readWhat is Fundamental Analysis (FA)? ”, a comprehensive understanding of fundamental analysis.

The ups and downs of the market are always unpredictable and can easily fluctuate violently. The first thing to do is do your own research, which is the key to success.

Do you have any other questions about DeFi and fundamental analysis? Please visit our Q&A platform Ask Academy, where members of the Binance community will patiently answer your questions.