What Indicators Are The Most Useful For DeFi Investors?
It’s quite hard to keep up with all the progress DeFi makes every day. For example, there are lots of different ways to measure and compare protocols. Let’s explore some frequently used indicators, which can be good sources of DeFi info. They are easy for to use because a lot of data is publicly available on-chain.
1. Total Value Locked (TVL)
Total Value Locked is the amount of assets that are currently being staked in a certain protocol. This is basically all the liquidity in the pools of a marketplace.
TVL shows you the overall interest in DeFi and is also useful for comparing the “market share” of protocols. Plus, TVL is measured with different denominations. For example, in ETH or USD.
2. Price-to-sales ratio (P/S ratio)
This indicator is often used in traditional businesses to find out if the stock is undervalued or overvalued. Similar approach can be used for DeFi protocols. To determine it, divide the protocol’s market capitalization by its revenue. Normally, the lower the ratio, the more undervalued the protocol is. The answer is not certain, but it can give you a general idea of how fairly the market values a project.
3. Token supply on exchanges
The next approach is tracking the token supply on exchanges. When there’s a lot of tokens on exchanges, the sell pressure can be higher. However, when holders aren’t storing their funds in their wallets, it’s likely that they are looking to sell them.
Still, some traders will use their funds as collateral for margin or futures. So, it doesn’t necessarily mean that a large sell-off is imminent. However, it’s something to keep an eye on.
4. Token balance changes on exchanges
It is important to look at recent changes in token balances. The significant ones can often signal an increase in volatility.
For example, if large amounts are withdrawn from CEXs, this may mean that whales are accumulating the token.
5. Unique address count
A growing amount of addresses holding a particular asset can point to increased usage. It usually looks like more addresses correlate with more users and growing adoption.
However, it’s not so difficult for someone to create lots of addresses and distribute funds across them. So you shouldn’t blindly trust this indicator. Just like with other aspects, you should juxtapose unique address count to other factors.
6. Non-speculative usage
To determine the true value of any asset, it’s important to understand what it can be used for. You can start by looking at transfers that don’t take place on decentralized or centralized exchanges. The goal is to understand if people are using the asset.
7. Inflation rate
Another big indicator is the inflation rate. When new tokens are constantly minted, it means that a small supply may eventually grow. Inflation isn’t always bad and there’s no standardized percentage considered “good” or “bad”. So it’s better to take this number into account when considering other metrics.
These metrics are often used in fundamental analysis for “traditional” cryptos. Experienced traders know that the markets can be unpredictable and irrational. However, doing your own research is very important if you want to succeed.