Signs DeFi Investor Needs to Know

2 August 2023

7m read

It might be challenging to make sense of the onslaught of new ideas because the DeFi field is developing at a dizzying pace. By determining if a protocol is overvalued or undervalued, the fundamental analysis aims to help traders and investors decide on their holdings.
Do you want to know how to quantify the "intrinsic" worth of DeFi assets? Continue reading to discover some of the most reliable metrics for doing so.


It can be challenging to keep up with Decentralized Finance (DeFi), much alone reviewing new projects on time because it evolves at such a rapid speed. There is no set methodology for measuring and comparing DeFi protocols, which makes the task much more difficult.
But do not worry. We'll discuss a few often employed indications that can serve as reliable information sources in DeFi. Any trader or investor can use these indicators because a sizable amount of data is readily accessible on-chain. Spencer Noon's thread served as our source of inspiration for gathering some of them for this piece.

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

The Price-to-Sales Ratio (P/S Ratio) measures how expensive a company's stock is relative to its sales in more conventional businesses. The stock's under- or overvaluation is then assessed using this ratio.
A comparable metric can be applied to DeFi protocols since many of them already make money. How would one use it? You must divide the protocol's market capitalization by its income. The fundamental tenet is that the protocol may be discounted to a greater extent with a smaller ratio.
Remember that this isn't the only approach to determining value. However, it might be useful in providing you with a broad indication of how fairly the market might be valuing a project.

Total Value Locked (TVL)

Total Value Locked (TVL), as its name suggests, is the total sum of money locked within a DeFi protocol. TVL can be compared to all of the liquidity found in a specific money market's liquidity pools. For instance, in the context of Uniswap, TVL refers to the sum of money that liquidity providers have deposited with the protocol.
TVL is a valuable source of information that can help you gauge public interest in DeFi. Comparing the "market share" of various DeFi protocols using TVL is also useful. Investors looking for undervalued DeFi projects may find this to be of particular use.
It's also important to note that several denominations can be used to measure TVL. The TVL locked in Ethereum projects, for instance, is commonly expressed in ETH or USD.

Changes to token balances on exchanges

We are aware that monitoring the token supply can be helpful. However, only examining the token balances might not be sufficient. Examining recent adjustments to such balances can also be informative. On exchanges, significant swings in token balances are frequently a harbinger of rising volatility.
Consider the alternative case to the one we just mentioned regarding token balances. Whales may be stockpiling the token if significant holdings are being taken from CEXs. Why would they withdraw to their own wallets if they intended to sell soon? This is how keeping track of token movements is helpful.

Token availability on exchanges

Monitoring the token supply on crypto exchanges is an additional tactic. Sellers typically list their tokens on centralized exchanges (CEXs) when they want to sell them. Despite this, users of decentralized exchanges (DEXs) have access to an increasing range of choices that do not necessitate faith in a middleman. Centralized platforms, however, frequently advertise far greater liquidity. It is crucial to pay attention to the token supply on CEXs because of this.
This is a straightforward token supply supposition. Sell pressure could be greater when there are many tokens available on exchanges. It's possible that holders and whales are eager to sell their money since they aren't keeping it in their own wallets.
That said, it turns out that this isn't so simple. When trading futures or on margin, many traders may utilize their holdings as collateral. So, transferring a sizable balance to an exchange doesn't always portend a sizable sell-off. However, you might want to keep an eye on this.

Number of unique addresses

A continually growing number of addresses owning a specific coin or token should indicate increased usage, notwithstanding its limits. It would initially seem that having more addresses is correlated with having more users and expanding adoption.
This measure can, however, be manipulated. Making thousands of addresses and distributing money among them is simple, giving the impression that they are widely used. You should compare the unique address count with other parameters, just like you would with any other fundamental analysis metric.

Non-speculative application

You're considering investing in an emoji-based coin that offers incredible profits, but does it truly accomplish anything? If its only goal is to increase in price, it might receive the Charles Ponzi mark of approval, but it won't last very long.
Determining the token's true worth depends on knowing what it is used for. The best way to gauge this is to count the number of transactions that aren't made with the intention of speculation. While it can be challenging, a place to start would be by examining transfers that don't occur on controlled or decentralized exchanges. Checking sure people are using the token is the goal here.

The rate of inflation

A token with a limited supply? Limited for... forever?

Not really. The inflation rate is another crucial measure to monitor. A limited supply today does not ensure a limited supply in the future, especially if new tokens are continually being produced. If an asset has a steadily declining inflation rate, in theory, that should prevent future depreciation of its current units.
Although inflation isn't inherently harmful in and of itself, too much can reduce your pie. Since there are no established criteria for what percentages are "good" or "bad," it is prudent to take the amount into consideration when evaluating other indicators.

Concluding remarks

A lot of these variables are frequently employed in fundamental research for "traditional" cryptocurrencies, as experienced cryptocurrency traders will notice. The markets are erratic, illogical, and prone to high volatility as usual. Above all, independent inquiry is essential for success.

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