By Jake Coleman
The exponential growth of decentralized finance (DeFi) has completely changed how money works by making a lot of new goods and services available. Due to the number of projects on the market, it is essential to have the skills to analyze DeFi ventures well. Before buying a project’s tokens, buyers must do a lot of research on it. This help will explain more about that subject.
Metrics that are commonly used to judge a DeFi protocol
There are a lot of widely used measures that can give important information about the success and future of DeFi projects. The above factors include:
- The token’s 24-hour trade rate.
- Its tendency to increase in price.
- Its value.
- Its total market capitalization.
Total value locked (TVL)
Total Value Locked, or TVL for short, is the total amount of money locked into a DeFi system. TVL is the total amount of assets liquidity sources have put into a given protocol. The entire Value Locked (TVL) of Uniswap has gone over $4 billion as of February 2023. According to the most recent numbers, the total amount of money put into Uniswap has exceeded $4 billion. By looking at a DeFi protocol’s Total Value Locked (TVL), you can figure out how popular it is or compare it to other DeFi protocols to see if it “locks in” more value than its peers. A system is usually robust if it can build up a lot of Total Value Locked (TVL).
Market capitalization
Market capitalization, or “market cap,” is a measure used to figure out how much the circulating token supply of a decentralized finance (DeFi) system is worth as a whole. A token’s market value equals the sum of its current market price and the number of tokens in circulation. By looking at a protocol’s market price, you can get a good idea of how big and important it is. It is essential to consider the market value and other factors, such as how the system works, how well it is accepted, and how much competition there is.
24-hour volume
Market capitalization, or “market cap,” is a measure used to figure out how much the circulating token supply of a decentralized finance (DeFi) system is worth as a whole. A token’s market value equals the sum of its current market price and the number of tokens in circulation. By looking at a protocol’s market price, you can get a good idea of how big and important it is. It is essential to consider the market value and other factors, such as how the system works, how well it is accepted, and how much competition there is.
Inflation rate
The inflation rate is an important measure that must be taken into account. In a DeFi system, the growth rate refers to how fast new tokens are made. A lower inflation rate can be helpful because it means the number of tickets will be controlled, and their value may go up in the long run. It is essential to look at the whole tokenomics and distribution model to ensure that the system strikes a balance between giving people incentives to take part and keeping tokens scarce.
Price-to-sales ratio
The price-to-sales ratio is essential for determining how much a DeFi system is worth. To select a DeFi protocol’s price-to-sales ratio, divide its fully diluted market value by its annual income. The undervaluation of a protocol is directly related to how low its ratio is, and the overvaluation of a protocol is directly related to how high its ratio is. The method is similar to how the price-to-sales ratio is used in traditional financial markets to figure out whether a stock is undervalued or overvalued.
Unique address count
The number of people using a given DeFi system can be measured by the number of unique wallet addresses. This statistic is similar to “unique users” in Web2 apps. It is used to measure how engaged users are. The rise in the number of names could be a good sign that they are becoming more popular and used. It’s important to realize that this measure can be skewed, so buyers must use it with other factors.
Taking a look at the DeFi Project Team
Investors should find DeFi initiatives that fit their use cases and assess their teams. Examine the project’s website, whitepaper, leadership team, prior work experience, and any material related to the team members’ expertise.
Hire accomplished developers, advisers, and industry experts. Assess the team’s openness, reactivity, and community interaction on Twitter, Reddit, Telegram, and Discord. Active participation in open communication channels and regular updates on project advancement indicate a team’s commitment to the use case.
An investor’s early study may indicate that a project’s crew needs to be more responsive on social media or opaque. These signs should warn investors to avoid these enterprises.
Taking a look at DeFi technology
DeFi projects depend on their technology. Project blockchain platforms are essential.
Ethereum’s DeFi application architecture is prevalent. Other layers 1 blockchains are promising for scalable DeFi applications. DeFi token buyers should consider the blockchain’s merits and downsides.
DeFi’s intelligent contracts must also be assessed. Smart contracts on the blockchain are self-executing contracts with coded terms. DeFi initiatives must routinely audit their smart contracts to prevent risks and secure user cash. A project’s intellectual contract audit history might reveal its user protection initiatives.
DeFi tokens’ interoperability provides smooth communication between platforms and protocols. It facilitates token transfers, trading, and use between DApps and blockchain networks. Investors should confirm DeFi token interoperability before investing.
Looking at the economics of DeFi projects’ tokens
Tokenomics is a project’s token economy and incentives. Understand the token’s ecosystem role and distribution scheme before investing.
This entails evaluating token supply and distribution. Team, community, advisor, and other stakeholders may be involved. The first token distribution affects decentralization, project governance, and market manipulation.
Consider token issuance techniques. Mining, staking, or other token creation and distribution methods may be used. These techniques can assist investors in determining if the coin is inflationary or deflationary, its scarcity, and participant incentives.
Assessing the project’s revenue streams is essential. Understanding the project’s income and operations helps determine the token’s worth and sustainability. Transaction fees, platform use, and other sources may contribute.
Taking a close look at DeFi communities and adoption
Project success depends on community strength and user uptake. These factors reveal project feasibility, growth potential, and market acceptance.
To understand project community attitude, active engagement, and passion, engage with them. This contact shows community support, involvement, and trust.
Twitter, Reddit, Telegram, and Discord reveal the project’s community. Investors should watch these platforms for good moods, lively debates, and rising followers. Positive emotion shows community support.
