The list of new decentralized finance blockchain projects is expanding. In this sea of choice, which projects will be tomorrow’s stars and worth investing in? That is the focus of this article. Some of these indicators overlap with the metrics one would look at when evaluating traditional stocks. But, given the very different nature of crypto investing, many of these indicators are more relevant to the crypto world.
Total Value Locked
Since the rise of decentralized finance (DeFi) in 2020, financial market experts have grappled with a new type of investment and sought ways to assess its results. Aside from market capitalization, trading volume, and total and circulating supply, total value locked (TVL) is a popular crypto indicator used by DeFi speculators to assess the overall value of assets deposited across all DeFi protocols or in a single DeFi project in US dollars or any fiat currency.
The total value locked (TVL) is the total amount of funds committed as collateral to a DeFi project. It includes both funds locked up in liquidity pools and loan collateral. The protocol’s market cap should not be confused with TVL.
Market cap refers to the total supply of the coin multiplied by its current price. On the other hand, TVL refers to the value locked in smart contracts on the platform. For example, in the case of Maker DAO (MKR), one of the largest DeFi protocols, TVL refers to the amount of funds held as loan collateral in the “vaults” of the platform.
In 2022, TVL has reached nearly $2 billion globally, growing from $400 million in the previous two years. With the increasing popularity and value of DeFi in the cryptocurrency space, TVL has become an essential metric for investors who want to assess if the whole ecosystem or a single protocol is healthy and worth investing in.
TVL by itself is a great measure of a protocol’s popularity. However, by concentrating on this metric alone, you may miss out on smaller but still promising DeFi projects. The TVL ratio is a measure derived by dividing the market cap of a token by its TVL. This indicator helps you identify smaller DeFi platforms that are performing well and potentially promising from an investment point of view.
A smaller TVL ratio is often preferable. It indicates a protocol that might be undervalued and worth investing in.
In the world of DeFi, the price-to-sales ratio (P/S ratio) is a critical KPI. It is calculated by dividing the fully diluted market capitalization of the token by its 12-month revenue. In the case of DeFi, revenue is generated by transaction fees, which include both fees retained by the protocol and fees earned by token holders and liquidity pool providers.
A P/S ratio of 1 to 2 is considered good in conventional stock investing, while a ratio of less than 1 is considered excellent. Given the DeFi industry’s youth and rapid evolution, these traditional rules of thumb may no longer be applicable. Instead, the best way to use the P/S ratio is to compare a number of DeFi tokens using this metric.
Annual Yield from Staking
Staking liquidity pools on DeFi platforms can be a feasible way to generate investment income. The yields provided by DeFi protocols can vary greatly. The yield earned from LP staking is an important indicator to monitor.
Given the volatility of many DeFi protocols, annual yields are preferable to shorter-term yields. Naturally, as a protocol’s popularity grows, yields are likely to fall. Smaller but confidently growing projects frequently produce the highest yields. This can aid in the identification of undervalued tokens.
A variety of factors may be considered when researching an investment-worthy DeFi project. However, the indicators outlined above should serve as the core set on which you can focus. Among the topics covered indicators, the key ones are the P/S ratio, TVL, and TVL ratio.