Cryptonomics: DeFi Indicators Explained

Here are indicators every DeFi investor should familiarize themselves with to keep up with decentralized finance’s rapid developments.

Wilfred Victor
February 26, 2021

Decentralized Finance (DeFI) makes up one of the crucial aspects of the cryptocurrency market, partly responsible for the current bull run. These protocols actively take up a significant dominance of the entire cryptocurrency market. There is currently $39.92 Billion USD of total value locked (TVL) in De-Fi, equating to a 16.37% market dominance, which can be viewed on DefiPulse

Significant action is taking shape once again on the Binance Smart Chain, known for its significantly cheaper transaction costs and almost zero cost of deployment on the network. This article will cover De-Fi indicators to help users stay relevant, vigilant of projects without real intentions, and evaluate DeFi metrics.

DeFi Indicators Every Investor Should Know

Defi moves at an incredibly high speed, making it almost impossible to track. The number of new applications continues to increase. This has only accelerated with a shift to the Binance network; the rate is virtually unprecedented. Here are indicators every DeFi investor should familiarize themselves with to keep up with decentralized finance’s rapid developments.

Total Value Locked (TVL)

TVL is the first step to understanding the true worth of a project, whether undervalued or overvalued. The Total Value Locked (TVL) of a project is a measure of platforms use either by staking mechanism or liquidity provision available in a project. For example, in Uniswap, a DeFi Dex protocol, the TVL shows the total value of all the liquidity provided by projects listed for different token exchanges. Ultimately this indicator allows investors to know how much money is being used (locked) inside the protocol.

TVL is a reasonable risk measure of how much the market is willing to bet on a given protocol. It determines the confidence level of users of the protocol and shows the direction of investors’ interest. It also indicates the market share of varying DeFi protocols against each other. The higher the TVL, the higher the investors’ confidence in the protocol. However, it should be worth noting that TVL could be volatile as it depends on the staked tokens’ price and the minimum duration of the staking program.

Annual Percentage Yield (APY)

APY refers to the staked returns as a percentage over a year. The value varies across different projects and is determined by the project’s yield incentives over some time (usually a year). As projects increase in popularity and gain traction, APYs gradually decline. Investors should be wary of ridiculous APY offerings as that’s a stress point for projects with no clue of what they intend to offer. Typically these tokens host ridiculously high yields at the cost of an extremely inflationary token -- which historically don’t perform too well. It is also essential to note that APY assumes compound interest, meaning a majority of gains won’t be realized until the end of the compounding period.

Inflation Rate

Investors making decisions based on project tokens total or circulating supply are very weary of high inflation tokens. These days, token TS or CS is not an exact determinant for project success. A small supply does not determine an impending boom in price as project tokens may come with the mint function enabled in the contract code, i.e., a project can mint new tokens over time. Inflation is not necessarily threatening, but too much of it may mean doom for the project. Always watch out for this using Etherscan or Bscscan to better understand the token supply and its emission schedule.

Unique Address Count

Tracking the project’s new token holders has proven a reliable strategy to gauge a project’s relevance. An increasing amount of new holders points to an increase in buyers and usage. On the surface, this may mean a rise in confidence level and rate of adoption of the project; however, one can manipulate this. It costs nothing for users or projects to open multiple addresses and spread tokens into this new address to game the system. Therefore investors shouldn’t take this type of strategy as a sole means of determining a project’s relevance.

Social Data

Google Trends and Twitter Analytics are useful resources to check for the Defi project’s increasing popularity and relevance. People actively talking about an asset class fuels new speculation and increases growth. With Bitcoin, for example, an impending boom is usually indicated by the amount of increased search and use of specific keywords like “How to buy Bitcoin.” In Defi, keywords like “How to stake X tokens” “what is X tokens” are a strong indication of a project’s increasing popularity and demand.

Twitter and Reddit are two hotspots for cryptocurrency discussion. Dogecoin rose quickly when the world’s richest man Elon Musk and big influencers started tweeting about the coin, fueling heavy speculation. It same as when GameStop GME buyers melted faces and caused a heavy movement in the stock market, which resulted in Robinhood stopping sales of GME stocks temporarily. Social Data is highly lucrative for DeFi applications and a sure sign of the growth of a project.

Token Supply on Exchange 

When tokens move into an exchange, it is one of two purposes, to act as collateral for trading on futures or margin market or to sell tokens on the market. It could pose a risk of a big sell wall incoming when the movement is pretty high or when the moved funds are considered very high. The large sale of tokens creates an excess supply against demand which can cause a fall in price. Monitoring wallets for these movements is a fail-proof strategy adopted by DeFi traders.

TVL to Market Capitalization Ratio

Market capitalization refers to the total value of all the projects token locked in the circulating supply, i.e., each asset’s price multiplied by the circulating supply. Comparing this to the TVL indicates if a project is undervalued or overvalued. This is easily calculated by dividing TVL by market capitalization. Suppose the resultant ratio is higher than 1. In that case, i.e., TVL is higher than market capitalization, the project is still undiscovered, indicating that its current value is yet to match its real value.

In Closing

It is best not to work with only one of the indicators listed in isolation, as it is better to have a mix of a combined strategy to give the best result. No single indicator is a 100% fail-proof strategy, as even projects with the best valuations can likely fail. Using these indicators when investing and trading will, over time, strengthen any chosen system adopted. It is important to note that learning should ideally come first before earning, the horse before the carriage.

Always take profit, no matter the indicator used. The cryptocurrency market is still very volatile and can knock off even the best projects with the best hands. Stay SAFU on your investment!

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Wilfred Victor

Ace finds himself as a blockchain enthusiast who is focused on growing with the entire crypto sector. He is an energetic and passionate writer who believes that all things are achievable.