Summary

The DeFi space is developing rapidly, and it is difficult for participants to realize the potential risks of new projects. Fundamental analysis can determine whether the 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 a DeFi asset? Read this article to learn about the strongest metrics.


Table of contents

  • Introduction

  • Total Value Locked (TVL)

  • Price-to-Sales Ratio (P/S Ratio)

  • Token supply of the exchange

  • Changes in token balances on trading platforms

  • Number of unique addresses

  • Non-speculative use

  • Inflation rate

  • Summarize


Introduction

Decentralized finance (DeFi) is growing rapidly, and it’s hard for participants to keep up, let alone evaluate new projects in a timely manner. There are many ways to measure and compare DeFi protocols, and the lack of a standard method 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 of DeFi. A lot of data is publicly released on the chain, and any trader or investor can easily use these indicators. Inspired by Spencer Noon’s ideas, we have summarized and sorted out some indicators in this article.


1. Total locked value (TVL).

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

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.

It is also worth noting how TVL is measured using different denominations. For example, TVL locked in Ethereum projects is generally measured in ether or US dollars.


2. Price-to-Sales Ratio (P/S Ratio)

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

Today, many DeFi protocols are already generating revenue and can be evaluated using similar metrics. So how do you use it? You need to divide the protocol's market value by its revenue. The basic idea is that the lower the price-to-sales ratio, the more undervalued the protocol.

Note that this is not an exact calculation of value, but it helps to understand how the market would fairly and equitably assess the value of a project.


3. Token supply of the trading platform

This strategy tracks the token supply of cryptocurrency exchanges. When sellers need to sell tokens, they usually choose centralized exchanges (CEX). Nevertheless, decentralized exchanges (DEX) are also providing more and more options for users and bypassing the middlemen who rely on trust. However, centralized platforms have stronger liquidity. 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 a large number of tokens are accumulated on exchanges, selling pressure may increase. Holders and whales will not let funds sit quietly in their wallets and are likely to be ready to sell at any time.

This is a bit abstract. Many traders use margin or futures trading as collateral against their holdings. So a large transfer of balances to a trading platform doesn’t necessarily mean a massive sell-off is imminent, but you still need to keep an eye on developments.


4. Changes in token balances on the trading platform

We know that token supply is an effective indicator to watch, but focusing only on token balances is not comprehensive, and its latest changes are also important. Significant changes in token balances on trading platforms usually indicate increased volatility.

For example, let’s assume the opposite of the token balance example above. If a large amount of funds are withdrawn from a centralized exchange (CEX), it may indicate that whales are hoarding tokens. If they are eager to sell, why would they withdraw the funds to their own wallets? This is enough to prove the practicality of monitoring token movements.


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5. Number of unique addresses

There is a finite number of unique addresses, but a steady increase in the number of unique addresses holding a particular currency or token should indicate increased usage. On the surface, more addresses means more users and higher adoption.

However, this metric is manipulable. Users can easily create thousands of addresses and send funds from them, giving the illusion that unique addresses are widely used. Like other metrics in fundamental analysis, unique addresses should be compared to other factors.


6. Non-speculative use

You’ve been following some meme tokens that promise huge returns, but do these tokens have any real use? If their purpose is just to appreciate in value, then it’s basically a Ponzi scheme that will definitely not be sustainable.

Understanding the usage of the token is critical to understanding its true value. Ideally, this could be measured by looking at the number of non-speculative transactions. This may be difficult, but a good place to start is by looking at transactions outside of decentralized or centralized exchanges to check if users are using the token.


7. Inflation rate

Wow, a certain token has a very low supply! That’s a good thing, 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 need to emulate Bitcoin's scarcity. Inflation itself does not necessarily have a negative impact, but excessive inflation will dilute the value of funds. Its impact cannot be measured by a standard percentage, and it is best to take inflation into account when measuring other indicators.


Summarize

If you are an experienced cryptocurrency trader, you will notice that many of these indicators are very common in "traditional" cryptocurrency fundamental analysis. If you are not familiar with them, we strongly recommend reading "What is Fundamental Analysis (FA)?" to learn more about fundamental analysis.

The ups and downs of the market are always unpredictable and can easily fluctuate wildly. The first thing to do is to 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.