How to analyze DeFi projects

introductory

According to Statista data, the average revenue per DeFi user is expected to reach $1,378.0 by 2024, and the number of users is expected to reach 22.09 million by 2028. Based on current value predictions, the DeFi market is expected to generate $261.7 million in revenue in 2024, thus building a stronger financial economy.

Decentralized finance is one of the great innovations fueled by blockchain technology. Leading the way in a unique way, it provides a range of solutions to make the financial world more optimized and accessible. The introduction of decentralized finance has not only changed financial processes, but also spawned a digital economy, enabled users to access many financial services, and thus enhanced financial inclusion and freedom.

This innovative and pioneering transformation has given birth to a two-way world of financial transactions and has provided multiple ways to access financial products, quietly stripping some of the key centralized controls from traditional gateways such as banks. DeFi projects have democratized finance, enabling anyone with an internet connection to borrow, trade, and cultivate profits.

With the rapid expansion of the DeFi sector, it has become increasingly important to navigate a large number of projects. However, it’s best to first answer the question: is it safe to interact with or develop on any DeFi protocol’s ecosystem? The answer is definitely no! So we need to understand how to analyze the pros and cons of DeFi projects.

In this article, we’ll discuss a few necessary metrics and metrics to help you evaluate the potential and effectiveness of DeFi projects.

Learn the fundamentals of decentralized finance

Source: SaveMyLeads.com

Investors and individuals entering the DeFi field must have basic project analysis knowledge and skills, because it is obvious that the number of users in the DeFi industry has experienced significant growth in well-known projects such as Ethereum, Solana, BSC, Avalanche, Injective, Metis, and Polkadot. This fact makes it even more important to have an analytical mindset.

In order to do things right from the start, a great deal of research is required, which includes understanding the fundamentals of the project and analyzing its community support and safety measures. One appeal of DeFi is its open and permissionless nature, where different individuals and teams can contribute to developing apps that cover a wide range of use cases. This includes giving users unprecedented control over personal data, ensuring absolute ownership of digital assets.

For those venturing into the DeFi space, prudence and prudence is essential. The technology’s limitless possibilities require newcomers to exercise due diligence and understand the risks and potential benefits of different projects.

Exploring due diligence in DeFi

Over time, some popular terms have evolved due to the volatile and speculative nature of the cryptocurrency sector. These terms include WAGMI/NGMI, diamond hand (daimond hand) /paper hand (paper hand), rugpull (Rugpull), REKT, FUD, FOMO, DYOR, etc. The basic idea behind these terms stems from unsafe activities, which can lead to personal property damage, and should be taken as a warning.

For example,

• According to reports, $120 million was lost in the Badger DAO hack on December 3, 2021.
• In November 2021, Crypto Briefing reported that consumers lost approximately $31 million on Ethereum and Polygon.
• CNBC, referring to Elliptic‘s report, said fraud and theft caused more than $10 billion in losses in 2021.
• Additionally, on November 3, 2021, “Business Insider India” reported losses of US$140 million in DeFi hacking attacks. Fortunately, around half of the stolen funds have been recovered.
• Furthermore, the insecurities about DeFi have extended to the UK. According to Coindesk‘s October 18, 2021, approximately £146 million was lost due to fraud, according to data from the City of London Police.

Treating due diligence as a compass can guide users to overcome the complexity of DeFi. It enables users to discover projects with real potential while protecting them from pervasive unforeseen challenges. Looking at the overall picture of decentralized investing, due diligence is more than a preventative step; it is also a strategic need for anyone looking to confidently and profitably navigate the frontier of decentralization.

Furthermore, the due diligence process is more than just minimising risk; it is the foundation for investors to link their decisions to specific goals and risk tolerance.

How to Analyze DeFi Projects: Start with Fundamental Analysis

Studying the team’s trustworthiness, reviewing the project roadmap, and reviewing the project’s smart contracts are great ways to do fundamental analysis in DeFi. Users (especially newbies) should pay attention to this basic method of analyzing DeFi projects.

The credibility of the research team

Often, the success of a project depends on the quality and strength of the team. DeFi projects led by experienced teams are more likely to thrive. Investors should carefully review founders, developers, advisors, and key management members to consider their past records and popularity in the industry before investing.

Smart contract audit

Smart contract-based DeFi projects are generally prone to bugs. To find and stop possible security breaches, it is important to ensure that the project is subject to an independent, credible security audit.

Source: morethandigital.info

Review project roadmap

Source: ICO Drops

By analyzing a DeFi project’s roadmap, you can gain insight into the project’s goals and plans to achieve them. A clear timeline of project development and milestones gives investors confidence in the project’s commitment to achieving its goals. In most cases, these roadmaps are usually displayed on their official website. Sometimes, some projects are also covered in white papers. Solana seems to have a good roadmap and is likely to become one of the top DeFi projects competing with Ethereum. Here’s a showcase of its ecosystem, and just how huge it is becoming.

Source: yashhsm.medium.com

Assessing community strength

This is one of the basic indicators, and it also requires close attention. Of course, it may not always be a guideline, but most of the time it matters. The strength and support of a project’s community reflects its adoption rate, viability, and future growth. A strong and active community is a sign of a sustainable project, while poor community strength can be a warning sign. Using social media platforms can help measure community sentiment.

Evaluating governance and decentralized models

DeFi projects usually have governance tokens for users to participate in. Assessing the level of decentralization and distribution of power among token holders is critical. Projects with strong community governance capabilities tend to have a more sustainable future. Recently, users prefer projects that provide rewards to the community, such as airdrops. In some cases, users may be less likely to think that the project owner is a scammer because they are willing to share the value of the project with the project owner.

Source: AppInventiv.com

In-depth analysis: metrics and metrics

Delving into the advanced analysis of DeFi projects requires days or weeks of careful research, unraveling intricate layers to measure the true potential of the project. This thorough process includes scrutinizing details, evaluating complex metrics, and interpreting the long-term viability of the project to provide discerning investors with a comprehensive understanding.

Total Value Locked (TVL)

Source: Cointelegraph

In terms of DeFi analysis, Total Locked Value (Total Locked Value) is one of the primary metrics we need to consider. It is a key indicator for analyzing users’ interest in DeFi protocols and reflects the total amount of funds deposited by liquidity providers. TVL refers to the total amount of assets a user has pledged, offered as collateral, or deposited into a smart contract in a DeFi agreement, usually in the form of cryptocurrency. The higher the TVL, the more assets participating in the agreement. Essentially, TVL is one of the key metrics for evaluating the overall size and success of DeFi protocols.

Most notably, as of February 2021, Uniswap’s total locked value (TVL) increased by more than $4 billion, which shows how much trust many users have in the platform and their commitment to it. Additionally, the project’s TVL location can be used to make informed decisions and predict likely outcomes and success rates. Investors, however, have developed a habit of making multiple TVL comparisons between protocols in order to make informed conclusions and decisions about the potential appeal of their chosen projects.

24H Trading Volume

The 24-hour trading volume is an important indicator when analyzing DeFi projects. It’s an intuitive indicator that measures the total trading activity of a particular protocol over a 24-hour period. This indicator is valuable to traders and investors alike because it reflects the level of interest people have in the project. A high 24-hour trading volume indicates active trading and increased liquidity, indicating a vibrant and healthy ecosystem. This can attract more participants to the market and create a dynamic environment for asset trading within the project.

Conversely, a decrease in 24-hour trading volume indicates a decrease in market activity and liquidity levels. This decline is likely due to a lack of interest or confidence from traders and investors. When participants are hesitant to participate in a deal, liquidity decreases, which may affect the overall viability of the project. Monitoring changes in trading volume over a 24-hour period can provide valuable information to understand market sentiment and help stakeholders make more informed decisions about the potential risks and rewards associated with specific DeFi projects.

Market Value

Unlike other DeFi analysis strategies, market capitalization ranking is one of the few analytical processes that require close monitoring. It is a measure used to determine the total value of tokens supplied in circulation by DeFi protocols. To get the actual value of a given project’s market value, simply multiply the token’s current price by the total number of tokens in circulation.

In order to conduct a consistent analysis while looking at market capitalization, competitive circuit, degree of adoption, and utility of the agreement, it is possible to help understand the overall potential and viability more comprehensively.

Network Value to Transactions (NVT) ratio

The network transaction ratio (NVT) is a simple indicator that compares the market value of a cryptocurrency to its daily trading volume to make a relative assessment of the network’s valuation based on the frequency of use. A larger NVT indicates that the network is overvalued, while a smaller NVT indicates undervalued. For example, Litecoin (LTC) has a higher NVT than Bitcoin (BTC), which may indicate that Litecoin is overvalued relative to Bitcoin.

Additionally, Dogecoin (DOGE)‘s NVT may be considered undervalued relative to Bitcoin. Although NVT has its limitations, such as not including off-chain transactions, spam attacks, and distinguishing between old and new addresses, it is a reasonable starting point for valuation research. However, a more thorough analysis is needed to fully understand the price of cryptocurrencies.

Circulation supply

Notably, unmined bitcoins, such as those belonging to Satoshi Nakamoto, are also included in Bitcoin’s circulating supply. In the cryptocurrency world, the term “ circulating supply “ refers to the number of tokens actively traded in the market at any given moment. This indicator is essential for calculating the market capitalization of cryptocurrencies (representing the overall economic value of digital assets). Market capitalization is calculated by multiplying the unit price of a cryptocurrency by the total number of existing tokens, including lost or confiscated tokens.

rate of inflation

The inflation rate is also an important indicator when analyzing DeFi protocols and represents the speed at which new tokens are generated. Lower inflation is likely to mean that token scarcity is more controlled over time, which could benefit token holders and possibly enhance long-term value.

Before evaluating the rate of inflation, it is essential to take a thorough look at tokenomics. Therefore, it is wise to strike a balance between motivating participants through higher inflation rates and maintaining scarce token supply through lower inflation rates. Understanding the unique philosophy behind each agreement is key to evaluating its intrinsic value and making further informed decisions.

Number of wallet addresses

The number of wallet addresses can be used as a possible measure of the number of participants in the DeFi protocol, similar to the number of users in traditional Web2 applications. It is used to measure user engagement, and the increase in the number of addresses is a positive sign of growing popularity and adoption. It is worth noting that this indicator may be manipulated, especially in situations such as airdrops, where investors may have multiple addresses.

Source: Be [In] Crypto

Analyzing the token economy of DeFi projects

The token economy of a project is usually presented in the form of a percentage, reflecting the distribution of tokens for a particular project

Tokenomics (Tokenomics, derived from the term Token Economics) is another key indicator for analyzing DeFi projects. It involves understanding the principles and mechanisms that govern the allocation of project tokens. This knowledge helps make informed decisions about acquiring and holding specific tokens. By delving into tokenomics, investors can learn more about how tokens are distributed, distributed, and incentivized within the ecosystem.

For project developers, a solid understanding of tokenomics is critical to designing a sustainable and successful token economy. This enabled them to establish mechanisms consistent with the project objectives and promote the long-term viability of the project. It is important to recognize that tokenomics societies vary according to the specific goals of the project. For example, tokens designed to encourage participation in decentralized applications may require a different structure, while tokens designed to function as stablecoins require a different structure.

A visual display of the token economy model, such as PancakeSwap’s Cake token, is a valuable tool for individuals evaluating a project. By considering factors such as token allocations, incentives, and overall economic design, investors can assess whether PancakeSwap is a promising and well-structured project to match their investment goals and preferences.

Source: COIN98

DeFi research tools

Although fundamental analysis of DeFi projects can help us achieve tremendous progress and wealth, some tools will be essential in the process. Currently, there are over 211 DeFi tools on the market to explore the DeFi sector for different needs. Here’s a list of the tools currently receiving a lot of attention.

DappRadar (DappRadar)

Source: DappRadar

DappRadar, founded in 2018, is one of the leading Web3 dApp distribution tools, which systematically tracks more than 12,000 decentralized applications (dApps) on more than 40 blockchains. Not to mention anything else, as of December 2022, DappRadar has over 500,000 monthly active users. DappRadar provides a broad platform for discovering and tracking dApps, NFTs, tokens, and DeFi initiatives.

The site’s user-friendly interface allows users to discover dApps based on their preferred blockchain or genre (such as gaming, DeFi, exchanges, social platforms, etc.). Each dApp details data such as: Unique Active Wallets (UAW), etc. This data provides insights into user engagement, transaction volume, token value, and total smart contract balance.

Dune Analytics

Source: Dune Analytics

Dune’s predecessor, Dune Analytics, is a community-driven data center that provides customers with the unique ability to query the blockchain using SQL. The portal provides free access to a variety of popular dashboards, allowing users to research individual cryptocurrency projects, find trending jobs, and browse dashboards built by their favorite authors.

Like any tool, its ultimate strength lies in the user’s proficiency level, which highlights the importance of focusing on practice. While Dune enables users to dive deep into specific data, even individuals unfamiliar with SQL can request custom dashboards from data experts for a fee. Exploring dashboards developed by the community’s top data scientists is a great place to start Dune’s adventures, and Dune’s star system ranks dashboards by popularity to make them even easier to use.

Coingecko

Source: Coingecko

More than just a simple cryptocurrency data aggregation tool, CoinGecko has a huge database of tens of thousands of digital assets. CoinGecko not only has excellent listings, but also has a friendly user interface that allows in-depth research on any crypto asset. Users can find information such as contract addresses with just one click, which is particularly convenient for users using MetaMask for custom token imports.

Additionally, CoinGecko broadens its usefulness by providing plenty of educational content on blockchain technology, and has an amazing feature that allows users to evaluate cryptocurrency prices. These include the NFT floor price, which allows users to track the NFT floor price on Ethereum and Avalanche (Avalanche), and plans to join other chains in the future.

CoinMarketCap (CMC)

Source: CoinMarketCap

CoinMarketCap has always been a must-have tool for cryptocurrency beginners and is often recommended for beginners starting their cryptocurrency trading journey due to its enormous utility and importance. The site provides a full set of features, including pricing information, cryptocurrency leaderboards, and market statistics. Known for its simple user interface and providing data for over 5000 tokens, CoinMarketCap is the go-to resource for anyone looking to dive deep into the volatile cryptocurrency market.

Whether you want quick access to cryptocurrency market information or do extensive research on certain cryptocurrencies, CoinMarketCap has what you need. Additionally, the platform also divides cryptocurrencies and crypto tokens into different categories, allowing users to learn more about their performance and discover new projects.

IntoTheBlock (ITB)

Source: IntoTheBlock

IntoTheBlock is a top cryptocurrency data analysis agency that specializes in providing in-depth insights and analysis on the volatile cryptocurrency market. The company uses advanced machine learning algorithms to methodically monitor data from various sources such as exchanges, social media, and on-chain transactions to provide a comprehensive view of the market.

IntoTheBlock provides a variety of tools and services to help individuals and organizations navigate the cryptocurrency ecosystem, including market analysis, sentiment analysis, and portfolio management. Notably, the company uses its experience to provide customized solutions for businesses that want to smoothly integrate cryptocurrency data into the process. One of IntoTheBlock’s outstanding strengths is the ability to conduct extensive research on certain cryptocurrencies and their underlying blockchain networks. This requires analysis of on-chain data, including transaction volume, miner behavior, and network activity, as well as off-chain data such as social media sentiment and current market trends.

Nansen

Source: Nansen

Nansen has quickly become a leading blockchain data analysis platform, giving itself an edge over the competition with decentralized platforms such as Dune Analytics by hiring its own team of professionals. Its rich experience has led to a range of advanced trading tools that are unique in the market.

Additionally, Nansen stood out by tracking over 70 million wallets and conducting in-depth analysis of money flows, revealing insights and trends with few data points that could be overlooked. Take NFT Paradise, for example, a Nansen dashboard that provides real-time floor price updates for OpenSea. It provides users with an important information advantage by tracking the wallets of NFT whales and using profit rankings to analyze the most profitable wallets in the NFT industry.

conclusions

Entering the world of decentralized finance has both potential rewards and inherent risks. While innovation in decentralized finance provides exciting opportunities for financial inclusion and democratization, navigating this dynamic field requires careful analysis.

This article explores several key aspects of analyzing DeFi projects, providing you with a solid foundation for making smart decisions and understanding the project’s potential and viability more clearly.

Remember, every investor’s risk tolerance and financial goals are unique. Always adapt your DeFi venture capital to your own circumstances and ensure that thorough research, clear strategies, expert guidance, and a sound risk management plan are in place. By acting prudently and using the analytical tools discussed in this article, you can confidently navigate the DeFi space and increase your chances of success in this rapidly growing financial ecosystem.