DeFi, short for Decentralized Finance, has been one of the hottest topics in the cryptocurrency field in recent years since its explosive growth in 2020. As the digital currency market continues to evolve, the DeFi market is also expanding.

The unique financial mechanisms of DeFi have attracted an increasing number of investors to participate, providing crypto investors with more choices and opportunities. However, for newcomers, assessing the investment value and risks of DeFi projects can be quite challenging.

This article introduces six important indicators in the field of DeFi. These indicators will help you gain a better understanding of the actual performance and potential risks of DeFi projects, enabling you to make more informed investment decisions.

1. Fully Diluted Market Cap

In the field of DeFi, the term “fully diluted market cap” refers to the upper limit of the market value of a cryptocurrency asset or protocol. It represents the total market value in the scenario where all the project tokens have been fully issued. Therefore, the fully diluted market cap considers all the tokens that may be issued in the future and can be considered a more comprehensive estimate of the current token value of the project. It is generally used as a reference indicator for the actual value of project tokens.

The formula for calculating the fully diluted market cap is as follows:

Fully Diluted Market Cap = Current circulating token price x Total token supply

Here, “current circulating token price” refers to the price of the tokens currently circulating in the crypto project, and “total token supply” refers to the total number of tokens that can be issued in the crypto project.

For example, let’s assume a crypto protocol currently has 1,000,000 tokens in circulation, with a total supply of 2,000,000 tokens. If the current price of each token is $10, then the fully diluted market cap of the protocol would be:

Fully Diluted Market Cap = $10 x 2,000,000 = $20,000,000

Understanding this metric allows for a horizontal comparison with other projects to estimate the value of tokens in new protocol projects.

It is important to note that the fully diluted market cap is only an estimate of the market value of a cryptocurrency asset or protocol. In reality, due to market fluctuations and the uncertainty of future token issuance, there may be a certain margin of error in the fully diluted market cap.

DeFi Protocol Fully Diluted Market Value Chart. Data source: tokenterminal

2. Total Value Locked (TVL)

In the field of DeFi, TVL refers to the Total Value Locked, which is an indicator used to measure the total value of locked crypto assets in a specific DeFi protocol. It is commonly used to assess the value locked by users in a DeFi protocol, as well as the scale and influence of the protocol.

In fact, the TVL metric is of great importance to DeFi projects, as it can be used to gauge the project’s attractiveness to users and its market performance. Generally speaking, the higher the TVL, the larger the scale of the DeFi protocol, and the more crypto assets are locked in the protocol. On the other hand, it also represents the level of trust users have in it.

However, if two DeFi protocols have the same TVL, we need to compare whether they are incentive-based protocols. Incentive-based protocols often provide certain rewards to users who lock their tokens. Therefore, in the case of the same TVL, non-incentive-based protocols are better able to reflect the trust users have in their protocols.

DeFi Protocol TVL Chart, Data Source: tokenterminal

3. DAU (Daily Active Users)

DAU refers to “Daily Active Users,” which represents the number of independent users who use a specific DeFi protocol or platform on a daily basis. It is one of the indicators used to measure the level of user activity in a DeFi protocol or platform and is also an important metric for assessing the development potential of the protocol or platform. Generally, a higher DAU indicates a larger number of users utilizing the protocol, making it more popular in the market.

As shown in the following chart, among multiple Lending protocols, Aave’s DAU is significantly higher than other Lending protocols, indicating that the Aave protocol is more popular in the market. This can also serve as a reference for us in selecting a protocol.

DAU (Daily Active Users) Chart for Lending Protocol. Data Source: TokenTerminal

4. P/S Ratio (Price-to-Sales Ratio)

If you are a practitioner in the traditional financial industry, you are certainly familiar with the Price-to-Sales ratio (P/S). The P/S ratio reflects the value that people are willing to invest to generate one dollar. In traditional finance, the P/S ratio is often used as a fundamental evaluation criterion to measure market expectations for asset returns and future growth. In the DeFi field, the P/S ratio is an indicator that measures the ratio of protocol market value to revenue (i.e., usage), thereby assessing the reliability of the protocol.

However, it should be noted that the P/S ratio may have different meanings in different protocols. For example, in a decentralized exchange (DEX), the P/S ratio represents the amount the market is willing to pay in dollars for every dollar of transaction fees. In lending protocols, the P/S ratio indicates the amount the market is willing to pay in dollars for every dollar of borrowing interest. Therefore, when comparing DeFi protocols in different categories, the P/S ratio may not be the best comparative indicator. However, when comparing protocols within the same category, it remains a valuable metric.

In DeFi, the P/S ratio can be used to measure the liquidity and market participation of an asset. A higher P/S ratio usually indicates easier buying and selling of the asset due to better liquidity. Additionally, the P/S ratio can be used to identify popular assets or trading pairs in the market.

DeFi Protocol P/S Values. Data source: TokenTerminal

5. Loan-to-Value Ratio

The Loan-to-Value (LTV) ratio refers to the ratio between the value of collateral and the loan amount in a lending protocol. For instance, if you borrow $1,000 in a protocol with a 50% LTV ratio, you would need to provide at least $2,000 worth of collateral. A higher LTV ratio indicates stricter risk management by the protocol and also means that you would need to provide more collateral to obtain the same loan amount.

Understanding the importance of the LTV ratio helps you better evaluate the risk and return of a lending protocol. If a protocol has a low LTV ratio, it suggests potential risks because a decline in the value of the collateral may lead to loan defaults and collateral liquidation. Therefore, protocols with higher LTV ratios are generally considered safer and more reliable. (The LTV ratio is typically visible on relevant decentralized exchanges or lending platform interfaces.)

6. Trading Volume

In the DeFi field, trading volume refers to the total volume of all transactions conducted on decentralized exchanges (DEXs). A higher trading volume indicates a more active DEX and can also serve as an important indicator for evaluating the activity of the DeFi market. The higher the market activity, the higher the trading volume of the entire DeFi market.

DeFi Trading Volume Chart, Data Source: TokenTerminal

These are the six key metrics we have shared, which investors can refer to when making investment judgments on DeFi projects. However, it should be noted that investment in the DeFi market should not solely rely on these metrics. Investment decisions in DeFi require more comprehensive and detailed analysis. Investors also need to pay attention to factors such as the project’s technical capabilities, team background, and governance mechanisms, as well as market risks and potential risks. Only by fully understanding all aspects of a project can wise investment decisions be made.