Decentralised Finance(DeFi) has taken the crypto and economic space by storm in last couple of years. The innate capacity of DeFi ecosystem to dismantle conventional economic setup and establish new parameters of trust, order and exchange is something which is inevitable and the fraternity has been experimenting with for a while.
The remarkable expansion of decentralized finance (DeFi) has transformed the financial scene, presenting an array of groundbreaking products and services. Consequently, people now enjoy unparalleled entry to financial services and products, bypassing intermediaries such as banks or conventional financial institutions.
As an investor, for a selected pool of use cases, one should be able to narrow down a set of DeFi projects that fulfil and fit suitably abiding by their requirements. This also comes up with a detailed evaluation of the team involved behind it and their backgrounds. The underlying technology used for the sake of the DeFi project also has a very crucial role to play to determine how effective the project is. But above it all, how the user community of the product perceives the project and the extent of adoption are the most significant parameters of success.
Parameters of Crypto Evaluation
There are some popular metrics of evaluating the potential viability, effectiveness and possible success of a project.
- Total Value Locked (TVL): Aggregate amount of funds locked into a protocol is basically TVL. It can be thought of something like total amount of funds deposited by liquidity providers. For ex, Tron has a TVL of around $5.33B by the time this article was written, meaning that users have deposited $5.33B into Tron. Higher the TVL, more robust the project is.
- Market Capitalization: It is total worth or value of the protocol tokens in supply. Protocol’s acceptance into mainstream market can be a clear sign of high market cap.
- 24 Hour volume: It is total value of trade executed over a DeFi protocol in a time span of 24 hours. Higher 24h volume implies that the protocol is under active trading and stronger liquidity, further implying that market is interested.
- Inflation rate: Just like our conventional economic system, DeFi also has inflation rate parameter. In our conventional system, inflation rate is the rate at which fiat currency is minted. Similarly, in DeFi ecosystem, inflation rate is the rate at which new tokens are created within the protocol. Lower inflation rate implies controlled supply of tokens and a favourable situation of higher value over time.
- Price-to-sales ratio: Price to sales ratio is basically a quotient of the market cap of the DeFi protocol to its annual revenue. Lower price to sales ratio means the project is undervalued and vice versa. This evaluation works in a similar way as our conventional economic system where we check whether a stock is undervalued or overvalued.
- Unique Address Count: It is a metric to measure number of participants in a DeFi protocol. Higher the rise in the number of address count, higher the project’s popularity and rate of mainstream adoption.
In a rapidly expanding DeFi space, making informed investment decisions is crucial and critical more than ever. Other than these metrics mentioned above, a human touch of research and intellectual prediction of the order, potential and temporal stability in a particular DeFi project is much more significant. However, the above list of metrics isn’t exhaustive and there is always room for more research to avoid skeptical decisions and make much more informed decisions.
By considering factors such as the project team, technology, tokenomics, security, and community engagement, investors can gain a comprehensive understanding of the project’s potential.
Even so, it’s critical to never invest more than you can afford to lose.