As the Decentralized Finance (DeFI) and cryptocurrency space go through the “great re-alignment,” here are five DeFi-focused indicators to keep an eye on.
Also please be aware, this is a list for DeFi projects, there are other indicators that i would suggest you look into regardless if a project is involved in DeFi or not. I just thought it would be interesting to list some indicators for DeFi as it is a new area of the crypto space.
1. Total Value Locked
Total Value Locked (TVL) is a measure of the value of tokens staked in a DeFi project. Take SushiSwap, for example. TVL refers to the combined value of all the tokens that investors put into the SushiSwap protocol to provide liquidity for token exchange.
TVL provides a good indication of the risk the market is willing to take on a certain DeFi project. This includes considerations such as expected adoption and the security of the protocol itself.
It follows that the higher the TVL, the more confidence people have in the protocol in terms of both use and security. Note that TVL can also be volatile as it depends on the price of staked assets and the minimum duration of the staking period.
You can get data for TVL on Defi Pulse.
2. TVL to Market Capitalization Ratio
While TVL is a good measure of assessing a project’s support, it is also useful to compare it to the market capitalization of the project’s native token.
Market capitalization refers to the total value of all of a project’s tokens in the circulating supply. The ratio indicates whether or not the token is undervalued and is calculated by dividing TVL by market capitalization.
If the ratio is significantly higher than 1, TVL is higher than market capitalization, and one could argue that the price does not yet reflect the token’s expected value and vice versa.
You can find data for market capitalization on CoinMarketCap.
3. Social Data
This is probably where the most fun can be had in DeFi. A token’s social data, particularly Tweet volume and Google searches provide an indication of a project’s popularity.
With bitcoin (btc) in particular, the first indication of an impending rally might be the rise in the number of “how to buy bitcoin” searches. In DeFi, this could easily be replaced with “how to stake X” or “what is X,” as many in the space already know how to buy the token.
Monitoring Twitter takes it to the next level. Twitter is undoubtedly cryptocurrency’s number one forum. A recent example is dogecoin (doge). Doge saw an immense spike in tweet volume which accompanied its meteoric 1000% surge in less than 24 hours.
Tweet volume data is more difficult to get directly, but there are some good apps that can help. Google search data is available here.
4. Annual Percentage Yield
Annual Percentage Yield (APY) refers to the staked returns as a percentage over the period of a year. The value differs significantly for each DeFi project and also depends on the staking period.
Over time, one expects this value to decrease as a project becomes more popular, thus there is less demand for liquidity provision.
A process called yield farming allows stakers to look for the opportunities with the highest yield to maximize returns. In some cases, stakers even automate this process.
5. Supply
Finally, supply is probably the oldest metric used to predict an asset’s value. If supply is bigger than demand, price falls and vice versa. In the case of cryptocurrency, most tokens have a limited supply. However, the circulating supply is often far less than the maximum supply.
This means that more of the token could “dump” on the market, causing a price fall. So, it’s important to monitor how much of a token is in circulation. Moreover, the inflation rate of that supply (how much is being added to supply over a certain period) is also important.
Supply data can be found on CoinMarketCap.
What do you look for when looking into a DeFi project? What is currently the DeFi project that you are most excited about?
