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7 Indicators in DeFi That You Should Know

BitForex Editor
Nov 06, 2020

Decentralized finance, better known as DeFi, plays a vital role in the finance world today. It continues to move at an increased pace, making it difficult always to stay aware or assess the latest projects on time. What makes the process even more taxing is the absence of a standard approach as there are various ways to compare and measure Decentralized Finance (DeFi) protocols.

This, however, shouldn't be a source of worry as this article will focus on some commonly used indicators in DeFi that help provide quality information on DeFi assets. Any trader or investor can easily make use of these indicators as there is a notable amount of publicly available data on-chain. Some of the most commonly used DeFi indicators include:

Total Value Locked (TVL)

From the name, it can easily be noted that Total Value Locked (TVL) refers to the total sum of assets or funds placed into a DeFi protocol. Total Value locked (TVL) on some platforms like Uniswap; is considered the amount of capital deposited to the protocol by the liquidity providers.

TVL serves as a beneficial data point which provides traders or investors with knowledge on the overall interest in DeFi. It is also useful and efficient in comparing and assessing the market share of various DeFi protocols. TVL can come in handy, especially for investors or traders who are searching for DeFi projects that are undervalued. Another essential information of TVL is that it can be measured using various denominations like in the case of TVL deposited in Ethereum projects, which are measured in USD or ETH.

Price-To-Sales Ratio (P/S RATIO)

The price to sales ratio, otherwise known as the P/S ratio, is the next indicator that must be considered whether you are a trader or investor. It allows you to compare income with the market capitalization price. This ratio is used to know if a stock is overvalued or undervalued. It is almost the same as looking at income to the ratio of shares.

In the DeFi protocol, one can easily note income-earning, and similarly to stocks, it can be easily implemented. To do this, it is necessary that you divide the market capitalization by the protocol market and the revenue. The aim of this is to easily determine how undervalued a protocol can be from how low the ratio is. It is essential to understand that this method may not be an absolutely accurate way of calculating valuation, but it is, however, one indicator that can help provide you with a general idea of how a project is being valued in the market.

Total Supply On Exchanges

This indicator is a strategy that involves the process of tracking token supply on the exchange. Centralized exchanges (CEXs) are a common means for sellers who want to sell their tokens. That said, nowadays, there is an increasing number of available options for users on trustless, decentralized exchanges (DEX), which don't need the trust of an intermediary. Centralized venues, on the other hand, tend to have much stronger and higher liquidity, which is why it is essential that you take note of token supply on CEXs.

Let's consider this assumption based on token supply; in a situation where there is a vast number of tokens on exchanges, there tends to be an increase in the pressure to sell. Since holders are not keeping their funds in their wallets, it could mean that they want to sell them. On the other hand, numerous traders tend to use their holdings as collateral for margin or futures trading, which means depositing a huge balance to exchange does not necessarily mean that there is bound to be a large sell-off. However, this is one factor that you should still keep an eye on.

Token Balance Changes On Exchanges

From the previous indicator, it is already decided that keeping an eye out on token supply can be very beneficial; however, taking note of token balances or tracking the supply amount of a DeFi token is not necessarily enough. Observing the latest changes in those balances can also be very useful. Changes in large token balances can often indicate or signal an increase in trend or volatility.

Unique Address Count

This indicator tends to have some certain limitations; however, a steady rise in the amount of dress that holds a particular token or coin tends to indicate an increase in usage. In context, it would appear that an increase in addresses suggests growing adoption as well as more users.

This metric is often regarded as a gamble because an individual or a person can easily create a large number of addresses and also distribute funds across all of them, which will, in turn, give the impression that the token or coin spread across all those addresses is widely used. This is why it is necessary to consider other factors with unique address count.

Non-Speculative Usage

You might probably be paying attention to a certain token that promises bountiful returns, but the question you should ask yourself is, does it actually do anything? It is essential to understand the use of tokens as well as knowing the DeFi token's true value. This can easily be measured by checking the blockchain network or exchange in other to know the number of token transactions, which will then determine whether people actually make use of the token.

Inflation Rate

A token with a small supply does not necessarily mean it is a good sign, which is why the last indicator to look out for is the "inflation rate." The fact that the current supply is small does not guarantee that the supply will be small forever, especially if new tokens are constantly minted like in Bitcoin, which has a notable nature of experiencing a constantly diminishing inflation rate. This is not to suggest that all systems should imitate Bitcoin's scarcity. In fact, inflation on its own is not always bad, but frequent inflation, on the other hand, tends to reduce the value of assets.

These are some of the most commonly used DeFi indicators to know whether you are a seasoned or new cryptocurrency trader. However, it is also necessary to do more extensive research as the market is usually irrational, unpredictable, and sometimes prone to high volatility.

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