Decentralized Finance (DeFi) ecosystem development can be hard to keep up with, let alone evaluate new ventures that are evolving at a rapid rate. Fundamental analysis attempts to decide if a protocol is overvalued or undervalued so that investors and traders can make better decisions on their positions. Here are some key indicators that every DeFi investor should pay attention to.
Total Value Locked
The number of tokens locked into a particular DeFi protocol is referred to as Total Value Locked, or TVL. It's literally all of the liquidity in a given marketplace's liquidity pool. TVL applies to all funds deposited to the protocol by liquidity providers in the case of Uniswap, a DeFi protocol used to trade cryptocurrencies.
TVL can be measured in a variety of denominations. TVL staked in Ethereum projects, for example, can be measured in ETH or USD.
TVL is a primary metric that provides insight into the overall interest in DeFi. As an investor, you can use TVL as a source of information to find DeFi projects that are undervalued. TVL will also assist you in comparing and evaluating the market share of various DeFi protocols.
Price to Sale Ratio
The price-to-sales ratio, also known as the P/S ratio, is a metric that helps investors determine whether a stock is undervalued or overvalued by comparing its price to its revenue. Investors can do this by dividing the protocol's market cap by its sales.
The higher the probability that the protocol is undervalued, the lower the price-to-sales ratio in the estimate. Despite the fact that it is not assertive and may not be the most accurate method of measuring valuation in the end, it still provides investors with critical information on how reasonably the project is priced in the market.
Token Supply on Exchanges
Investors in DeFi should keep an eye on the token supply on exchanges. The majority of the time, sellers sell their tokens on centralized exchanges (CEX). As a result, centralized exchanges have more liquidity than decentralized exchanges (DEX), which do not require the confidence of a third party.
When there are an excessive number of tokens available for purchase on centralized exchanges, the pressure to sell these tokens may be greater because investors may not be holding funds in their wallets. As a result, DeFi investors must keep an eye on token supply on exchanges with higher liquidity.
Since traders need to have a large balance on these exchanges for trading on margin or futures, this strategy is not assertive and does not reliably forecast an impending sell-off in large volume. However, every DeFi investor should continue to keep an eye on token supply.
Token Balance Changes on Exchanges
It's important to keep an eye on token supply on exchanges. As an investor, however, simply monitoring token supply and balances on exchanges might not be sufficient. It's also critical to keep an eye on recent changes in token balances on those exchanges.
Significant changes in the value of a token on an exchange may also reflect a rise in volatility. Whales could be collecting the token if large sums of money are being removed from centralized exchanges.
Unique Address Count
Investors can be able to assess the relevance of a specific asset by keeping track of the growing number of addresses that hold it. There is a clear connection between the two. The steady increase in the number of addresses holding a specific asset can also imply the asset's growing popularity and acceptance, resulting in further buyers and use of the token.
Remember that it's easy for someone to build several addresses and allocate funds to them all, giving the false impression that the asset is widely used. As a result, investors should be wary of using the number of unique addresses as a valid measure.
Non-speculative Usage
Some assets only offer high returns, while others deliver and meet expectations. As an investor, you should exercise caution before investing in assets that appreciate in value but are unlikely to last. As a result, it's important to figure out what an asset's true value is, what it can be used for, and why it's worth investing in.
Investors can conduct research and determine the asset's true value by looking at the amount of transactions involving that asset. This simple but powerful indicator informs investors whether or not the token is being used.
Inflation Rate
Last but not least, the rate of inflation is an important indicator that any DeFi investor should monitor. Assets with a limited supply can not always have good long-term returns. Some assets may have a limited supply at first, but this may not be the case for a long time.
If new tokens are periodically minted over time, the supply of tokens will gradually grow. Inflation isn't always a bad thing for investors, but too much inflation can lead to disappointing returns. As a result, when considering other metrics, it's also necessary to keep the inflation rate in mind.
Final Words
Regardless of whether you are a seasoned investor or a novice, you should have a clear understanding of some of the most widely used DeFi indicators discussed in this article. The market can be volatile at times, and it is vulnerable to high volatility. As a result, more thorough research is needed before investing in any project.
