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  3. Invest in DeFi the Right Way using these 5 Indicators
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  3. Invest in DeFi the Right Way using these 5 Indicators

Invest in DeFi the Right Way using these 5 Indicators

  • The rise of decentralized finance (DeFi) has promised a plethora of benefits for Web3 users, offering transparent and efficient financial transactions.
  • DeFi aims to revolutionize traditional finance by reconstructing core services using blockchain technology, enabling Peer-to-Peer transactions without centralized intermediaries.
  • Key performance indicators (KPIs) play a crucial role in evaluating DeFi projects, including metrics such as Total Value Locked (TVL), token supply on exchanges, token balance trends, inflation rate, and the growth of unique addresses.

The emergence of blockchains like Ethereum has ushered in a new era of decentralized finance (DeFi) that has captured the attention of investors and industry enthusiasts alike. The allure of DeFi lies in its promise of enabling cost-effective and expeditious financial transactions within a transparent framework.

Given the vast array of investment prospects within the DeFi landscape, it becomes imperative to establish a benchmark for evaluating project performance. This necessitates the utilization of key performance indicators (KPIs), which serve as indispensable tools in identifying projects with the potential for future profitability. By leveraging KPIs, investors can discern the viability and growth prospects of DeFi initiatives.

The significance of employing KPIs in the assessment of DeFi projects cannot be overstated. These metrics enable stakeholders to gauge factors such as liquidity, user adoption, revenue generation, and protocol security, among others. By scrutinizing these indicators, investors can make informed decisions and allocate their resources to projects that exhibit strong performance and align with their investment objectives.

What are DeFi investments?

In short, DeFi refers to a suite of financial services that operate on public decentralized blockchain networks, offering inclusive accessibility to users. It empowers individuals to create and execute smart contracts autonomously within the blockchain ecosystem. One of the defining characteristics of DeFi is its liberation from centralized authorities that traditionally oversee transactions.

The advent of DeFi has sparked a surge in the utilization of non-fungible tokens (NFTs), attracting both retail investors and institutions. The trajectory of the DeFi industry suggests a rapid expansion of the market. Industry data reveals that in 2019, the total market capitalization of DeFi products stood at a modest $700 million, but it has now grown exponentially to $36.5 billion in January 2023.

Source: Tradingview

In contrast to traditional financial systems, DeFi endeavors to reconstruct core financial services such as trading, lending, payment, and insurance using a decentralized approach facilitated by blockchain technology. By leveraging distributed consensus and smart contracts, DeFi enables Peer-to-Peer transactions without the need for intermediaries or centralized control. For instance, within the realm of lending and borrowing, DeFi streamlines and enhances the process by integrating smart contracts that define and oversee loan agreements, leading to a more efficient cryptographic verification mechanism.

The rise of DeFi signifies a paradigm shift in the financial landscape, challenging established norms and offering novel opportunities for participants. As DeFi continues to evolve, its potential to revolutionize traditional financial services becomes increasingly evident, offering greater transparency, accessibility, and efficiency through the secure framework of blockchain technology.

DeFi Use Cases

Decentralized Finance (DeFi) extends far beyond the realms of lending and transacting, offering a multitude of alternatives to traditional financial services. Some of these use cases include asset management, participation in Decentralized Autonomous Organizations (DAOs), performing token swaps and exchanges, and even portfolio diversification, all of which are features and functions available on the Bitget Wallet (Previously Bitget Wallet (Previously BitKeep)) Wallet.

With a plethora of available use cases in the realm of DeFi, it can be daunting for users who may be uncertain as to the best place to invest their funds. Some may follow the advice of experienced Web3 traders, while others prefer relying on third-party brokers to carry out their DeFi investments for them.

Regardless, it is still important to familiarize yourself with the key terms and concepts that tie in closely with DeFi, so that you may be able to make the best financial decision for yourself.

Key DeFi Indicators to Look Out For

Let’s now explore several important DeFi indicators to be aware of:

Total Value Locked (TVL)

Total Value Locked (TVL) serves as a fundamental indicator for assessing the value of digital assets that are locked or staked within DeFi platforms or distributed applications (DApps). Its significance lies in providing users with crucial information to evaluate the risks and potential rewards associated with investing in a specific DeFi ecosystem. The TVL metric acts as a measure of trustworthiness, with higher TVL figures indicating a greater level of confidence in the platform or DApp. By analyzing TVL, users can make informed decisions regarding their participation in the DeFi space.

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Token Balance Trends/Movement is a crucial aspect to consider when assessing DeFi tokens, and involves monitoring the flow of tokens between personal wallets and exchange accounts. Common examples of token movements between these accounts include trading, liquidity provision, or participating in various DeFi protocols.

By observing token balance trends and movements, investors can gain valuable insights into the activity surrounding a particular token. It allows them to understand how tokens are being utilized and whether there are any noteworthy patterns or anomalies worth noting.

In general, regular token movements are expected as part of normal trading and investment activities. However, it is essential to pay attention to any unusual or significant token movements that deviate from typical patterns. Unusual movements could indicate market manipulation, insider trading, or other potentially fraudulent activities that may raise concerns about the integrity and stability of the DeFi token.

When evaluating DeFi tokens, investors should look for indications of healthy token circulation and organic trading activity. A healthy balance of tokens moving between personal wallets and exchange accounts signifies a vibrant market and genuine investor participation. Conversely, irregular or suspicious movements should be thoroughly examined to ensure the token’s legitimacy and the project’s credibility.

Token Supply

Total supply refers to the combined quantity of coins or tokens that currently exist, encompassing those in circulation as well as those locked or inaccessible in some manner. It is calculated by subtracting the number of coins that have been burned or destroyed from the total coins that have been mined or issued.

The concept of total supply encompasses both the coins actively circulating in the market and those that are yet to be made available. For instance, it includes coins held under lockup or vesting periods, typically following private sales or Initial Coin Offering (ICO) events.

On the other hand, the max supply represents the ultimate limit of coins that will ever come into existence. In contrast to total supply, the max supply encompasses coins that are yet to be mined in the future, in addition to those already included in the total supply and those that have been burned.

From a cryptoeconomics perspective, many coins derive value from their inherent scarcity. For instance, Bitcoin and other mineable coins are generated through the validation of new blocks by miners, which is confirmed by the network. However, the generation of new coins is not an infinite process, as most mineable cryptocurrencies have a cap, known as the max supply, which sets a limit on the total number of coins that can ever be generated. The determination of the max supply is typically established during the creation of the genesis block.

Inflation Rate

Some cryptocurrencies are inflationary, meaning their coin supply increases over time. They have predetermined rates of inflation that determine how many new coins are added to the market periodically. However, there is usually a maximum supply set, beyond which no more coins can be created. The distribution of new coins is achieved through consensus mechanisms like proof-of-work or proof-of-stake. Miners or validators are rewarded with new coins for their contributions to the network. Inflationary cryptocurrencies encourage spending, liquidity, and rapid adoption. They offer flexibility in adjusting the token’s inflation rate to align with the ecosystem’s needs.

On the other hand, deflationary cryptocurrencies aim to decrease their supply over time. They have predetermined deflation rates that determine how much the total supply decreases annually. Similar to inflationary cryptocurrencies, deflationary tokens can have a fixed or variable maximum supply. To reduce the supply, they employ mechanisms like transaction fee burning or sending coins to inaccessible addresses. Some deflationary cryptocurrencies use halving events to reduce mining rewards and increase scarcity. Deflationary tokens incentivize holding, discourage spending, and can serve as a hedge against inflation and economic uncertainties.

Both approaches have unique characteristics and impact the value and use of cryptocurrencies. Inflationary cryptocurrencies incentivize spending, offer flexibility in monetary policy, and can be easily adopted as a medium of exchange. Deflationary cryptocurrencies promote holding, act as a store of value, and provide protection against inflation. Understanding the tokenomics and supply mechanisms of different cryptocurrencies is crucial for investors and users to make informed decisions and navigate the dynamic crypto landscape.

The Growth of Unique Addresses

The number of unique active wallets (UAW) holding a particular token can indicate its popularity and widespread adoption. This metric can be used to assess the relevance and demand for an asset. However, it’s important to consider that a single user may hold funds in multiple addresses, which can inflate the number of unique addresses.

It is therefore advisable to use this metric in conjunction with other key performance indicators to gain a comprehensive understanding of an asset’s potential.

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