7 Indicators Every DeFi Investor Should Know

With the DeFi Development Services industry moving at breakneck speed, it can be difficult to make sense of all the onslaught of new projects. Fundamental analysis tries to determine if a protocol is overvalued or undervalued, so that investors and traders can make better decisions regarding their positions.

Introduction

Decentralized finance DeFi Token Development moves at such a fast pace that it is quite difficult to keep up, let alone evaluate new projects on time. Complicating it further is the absence of a standard approach – there are many different ways to measure and compare DeFi protocols.

However, there is no need to worry. Below we will address some commonly used indicators, which can be good sources of information in DeFi. Since a considerable amount of data is publicly accessible on-chain, it is easy for any trader or investor to use such indicators.

1. Total Value Locked in Deposit (Total Value Locked or TVL)

As the name suggests, Total Value Locked (TVL) is the aggregate sum of funds locked on deposit in a DeFi protocol. You can imagine the TVL as all the liquidity contained in the "liquidity pools" of a given monetary marketplace. For example, in the case of Uniswap, the TVL is equal to the funds deposited into the protocol by liquidity providers.

The TVL can be a useful piece of information that gives you an idea of ​​the general interest in DeFi. TVL can also be effective for comparing the "market share" of different DeFi protocols. This can be especially helpful for investors looking for undervalued DeFi projects.

It should also be noted that the TVL can be measured using different denominations. For example, the TVL locked in escrow on Ethereum projects is typically measured in ETH or USD.

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

For a more traditional company, the price-to-sales ratio (P/S Ratio) compares the company's stock price to its revenue. The stock's cheap or overpriced status is then determined using this ratio.

Because many DeFi protocols are already profitable, a comparable measure may be used to them as well. How can you use it? You will need to divide the market capitalization of the protocol by its revenue. The basic idea is that the lower the ratio, the more undervalued the protocol may be. 

Please note that this is not a definitive way to calculate valuations. But it can be useful to give you a general idea of ​​how fairly the market may be valuing a project.

3. Monetary offer of the token on exchanges

Another strategy is to monitor the money supply of tokens on cryptocurrency exchanges. When sellers want to part with their tokens, they usually do so on centralized exchanges (CEXs). That said, users have a growing number of options available to them on decentralized exchanges (DEXs) that do not require trusting a broker. However, centralized platforms tend to have much more robust liquidity. That is why it is important to pay attention to the money supply of the tokens in CEXs.

Here is a simple hypothesis about the money supply of the tokens. When there are a large number of them on exchanges, the selling pressure can be higher. As the "holders" and whales (large holders) are not keeping their funds in their own wallets, it is likely that they will consider selling them.

That said, this is not that simple. Many traders will use their holdings as collateral to trade on margin or futures. Therefore, sending a large balance to an exchange does not necessarily mean that a large liquidation is imminent. Still, this might be something you want to see.

4. Changes in the balance of tokens on exchanges

We already know that keeping an eye on the supply of tokens can be useful. But looking at token balances alone may not be enough. It may also be helpful to look at recent changes in those balances. Large changes in the balance of tokens on exchanges can often indicate an increase in volatility.

For example, consider the opposite scenario of what we just discussed about token balances. If large CEX holdings are being withdrawn, that may indicate that the whales are accumulating the token. This is how tracking token movements can come in handy.

5. Number of unique addresses

While it has its limitations, an increasing number of addresses containing a particular coin or token should point to higher usage. On the surface, it would seem that more addresses correlate with more users and increased adoption.

However, this is a playable metric. It is easy for someone to create thousands of addresses and distribute funds among them, thus giving the impression of widespread use. As with any metric in fundamental analysis, you should weigh the unique address count against other factors.

 6. Non-speculative use

Understanding what the token is used for is critical to discovering its true value. Ideally, you would measure this by looking at the number of transactions that are not carried out for speculative purposes. That can be challenging, but a good place to start is by looking at transfers that don't happen on controlled or decentralised exchanges. The goal here is to verify that people are using the token.

7. Inflation rate

Another vital metric to keep in mind is the rate of inflation. A small supply now does not guarantee a small supply forever, especially if new tokens are continually being minted. A notable property of Bitcoin is an ever-decreasing rate of inflation, which should theoretically prevent the debasement of existing units in the future.

That is not to say that all systems should aspire to replicate the scarcity of Bitcoin. Inflation itself isn't necessarily bad, but too much of it could reduce your slice of the pie. There is no standardized percentage that is considered "good" or "bad," so it's wise to keep the number in mind when considering other metrics. Checkout more DeFi Development Company