When you have been stumbling for some time within the decentralized finance sector, you start making sense of everything around you. The terms that are thrown bare-knuckle around the table are not foreign to you anymore; you start to accept those terms and phrases, and you make quite a bit of sense about what is going on and in what specific tone or narrative a deal is being commenced. Decentralized finance is specifically a recent space; it means that it has come into being only a few years back, and it doesn’t have quite the standing that other financial markets such as the stock and forex market enjoy.
This is going to take some getting used to because everyone is just so intimidated by these new phrases and terms that are spoken by the investors who have been playing the game long enough. If you happen to be a beginner, then you don’t need to worry at all. It isn’t your fault that you are only beginning with this new financial space because 10 years back, it didn’t even exist. So, you are not a beginner perse in the financial industry but in the decentralized finance space.
You might come around multiple terms that are thrown around such as an asset that can be either overvalued or undervalued, exchange-traded funds, non-fungible tokens, total value locked, price to sales, and many other such phrases would become available to you when you begin to hold your foot down and finally become an active part of the decentralized space. Now you might be wondering what is it that you can do?
Should you hire a tutor or join a boot camp for the sake of learning these terms or is there a crash course that you can undertake and be done and ready for when the market opens come Monday? This isn’t how it works; it is going to require some getting used to. This article will help you understand not only these phrases but the bilateral meaning that these have hidden in themselves while becoming more in line with the narrative of a deal and everything connected with it.
A Brief Introduction to DeFi
If you have dealt with the crypto market in the past, then you don’t require any introduction to decentralized finance. It is something that is the evolution of the crypto market and blockchain technology merging together and forming a rather brilliant solution for modern businesses and the finance of the tomorrow. In the very first, there was crypto; it was ruled and governed by blockchain technology which is nothing but a series of users connected in a decentralized fashion who are put in charge of not only validating the transactions but also calling the shots on drafting the policies for that specific crypto and the whole network in question.
It is the basic manifestation of decentralization and blockchain technology. Decentralized finance, on the other hand, is a bit advanced level; it has multiple entanglements interconnected with each other. You get to have multiple other digital products such as ETFs, non-fungible tokens or NFTs, and many other digital aspects tied with each other, and collectively these make the DeFi. The whole industry has been moving at supersonic speed, and at times it can become quite difficult to match this unprecedented pace. There exists a rush within the investors to grasp an opportunity in the form of a new project being launched in the decentralized finance space, and they don’t want it to slip from their hands.
That is why they don’t evaluate the prospect of this project or perform any kind of research, for that matter. Another thing that makes the whole aspect a bit more complicated is that there is no standard approach to this. There is no single protocol or rule out there that can be used to not only measure but also compare the decentralized finance protocols.
To make this whole thing a bit more convenient for you, there are going to be different phrases listed below that are used abundantly in the decentralized finance space, along with a few trends that you can use for the sake of evaluating the progress of a dedicated project if you are a trader or an investor looking forward to making a sound investment within the decentralized finance space. Following are some of the phrases and the indicators present within the DeFi space that you would have to get yourself acquainted with;
Total Value Locked
When you are investing in a dedicated project that is being listed in the DeFi space, then it means that you are going to stake a sum of your money as a form of investment into it. It is going to be there for the foreseeable future, and you can’t retrieve it until the agreement that you drummed up with the project on time of opening your position gets honored first. Total value locked or the TVL refers to the total amount of funds that are primarily locked into a DeFi space or a DeFi project protocol. It could be the sum of all the investment that the investors have poured into the DeFi project in question, or it could refer to the individual investment from a dedicated investor or trader.
In terms of the liquidity pools, you can say that the TVL corresponds to all the liquidity a specific DeFi project has. Take any protocol out there; TVL is going to interact with all of them a bit differently because of the difference in the available liquidity provided by the liquidity providers for each and every protocol. In no manner is the TVL protocol the same for a dedicated protocol within the DeFi space.
You can use TVL as a form of indicator to get a clear-cut idea about the overall interest a particular protocol has amassed from the audience; people could just be falling over that specific asset if the TVL value for that specific asset is through the charts. Not only this, but the TVL value can also be used for the sake of comparing the market shares for different DeFi protocols out there.
It will give you a clear-cut notion about the popularity of a dedicated protocol out there in the DeFi space. If you are an investor who is looking for an undervalued project, then running this specific metric can help you to get in touch with one. You can measure the TVL for a specific project or protocol using different denominations; when talking about Ripple (XRP) you can measure the TVL of this specific crypto both in the XRP and in USD or in your own native fiat currency that you prefer.
Price to Sales Ratio
This is a pretty standard indicator that is going to give you a proper in-depth review of the current price of a company’s stock in relation to its revenue. Whenever we have to decide if a business or company is profitable, the only way to do so is by cross analyzing the current price of the shares for that specific entity in relation to the current revenue that the company is generating. This ratio will then help the trader or investor to understand if the stock or asset in question is undervalued or have some potential note of opportunity still tied with it. Most of the decentralized finance protocols are already generating some kind of revenue, it might be small, or it might be big.
This specific metric can be used to distinguish between those specific decentralized finance protocols and the risks of the overall revenue that these generate. The only simple way to do so is to divide the market capitalization of the concerning protocol by the overall revenue that it is generating in a yearly system. If the ratio is lower, then the protocol is undervalued and vice versa.
You must keep in mind that it is not the most authentic way of calculating this valuation, and there might not be a definitive way at all; it is just speculations and trends that are being spruced up by the traders and investors at the time to identify or locate a particular stock or asset of interest as well as their value. Nonetheless, it will provide you with a definitive idea of just how fair the market is at the moment and how precisely it is valuing a dedicated project on decentralized finance.
Token Supply on Crypto Exchanges
The current token supply for a dedicated project is also going to help you in identifying whether the project is undervalued or overvalued. The general idea behind this is pretty straightforward if there are too many tokens present on exchanges, then it means that the asset has to be undervalued because people are not paying any attention to it. There is no practical trade going on, and therefore this remains out there on the exchanges waiting for an investor to grab them.
Sellers use centralized exchanges, or they prefer to do so when they are in a hurry to shed off their tokens, or they want to exit their investing position. This way, they will be able to pay whatever taxes they owe upfront, and they will get a proper idea of just how much profit they need on this whole deal, also in a centralized manner.
But decentralized exchanges are not that far behind; there are pretty good options when it comes to decentralized exchanges because there isn’t any need for an intermediary whatsoever because the whole process is going to be automated. When users shed off or chip in their tokens, the exchange is going to verify the transaction, and they will receive the upfront value for those tokens right then and there.
The centralized exchanges, on the other hand, have much better regard for liquidity, and that is why you must be paying precise attention to the current supply of tokens or a true asset over the centralized venues. When there are fewer tokens present on the exchanges, and the selling pressure is going to be extremely high. The very reason is that the holders and whales would have cast all of their tokens from their wallets onto the exchange so that these can be made available; they are doing this so they can sell them to anyone who has the stomach to buy such a large quantity of tokens.
This approach of at trader or investor in terms of the current token supply on the exchanges is not paramount. It is not a straightforward scenario; these traders could be using their holdings as a form of collateral so that they can trade on margin or do the futures trading.
Therefore if a whale or investor is sending a large amount of balance towards an exchange, then it doesn’t mean that they are going to sell this thing off; there is still a chance that they will be using this practical amount of tokens for the sake of making a margin or a future’s trade. With that being said, you must not let this thing get away from you; it is still important to keep an eye on these trends and to make your move when you see something changing or tipping towards what you desire.
Unique Address Count
Another metric that you should be aware of is the address count. It is going to tell you just how many unique addresses have been hit for a specific project or token in question. If the overall address count has been increasing steadily, then it only means that the users for that particular project or token have also increased. This is something that is going to help you verify the overall use case for that project or token; if the address count is increasing, then people are more interested in it, and they are trying their best to get their hands on it.
It definitely has some kind of give, the demand is also churning up within the market, and therefore an investment that is made into that specific token or project wouldn’t go amiss. The overall action of this metric is not precise; therefore, you shouldn’t take this metric for granted. It is very easy for someone to develop thousands of addresses on a public blockchain for the sake of distributing funds across all of them, and that will give you an impression that there are so many unique address count out there, and people are just throwing themselves at that specific token or project.
But in reality, the demand is not real, and all of it is fabricated, something to do with market manipulation. There are other factors that you need to take into account if you want to go after the address count metric for a specific project or token because this indicator alone is not going to help you discern just how many users are out there actually checking out that specific token or project.
Non-Speculative Usage of Token
The next thing that you want to check out is the non-speculative usage for a specific project or token. You don’t want to throw yourself at any new token or decentralized finance project that you have laid your eyes on just yet; it is something that might prove to be the very end of your career within the crypto market. In simpler words, it means that this project that you are eyeing up might be a complete fraud, it might be fake, and investors behind that specific project or token might not exist in reality. You need to use your common sense for the sake of discerning these fake projects from the real ones.
Is crypto or token promising you out-of-the-world returns over a period of a few days? Have you been promised that you can invest in that particular commodity or token with as much amount as you have presently? All of these indicate that the product in question is completely fraud; you are going to get ripped off. Have you ever heard about the Ponzi scheme?
It is a linear chain of events in a financial system where someone develops a project or starts a fund; now that someone is going to introduce as much capital as they can, and they will inject that capital into the fund, this capital comes from real investors. Now when it comes to paying off the profit, they are simply going to use a linear chain where the money of the most recent investor is paid to the previous investors, and the cycle goes on.
More and more investors join the project, and the old ones get paid, but the latest ones are kept on hold. Somewhere along the lines, people are going to get the hint that it is nothing but a Ponzi scheme, and when a particular target of investments has been hit by the manager of the fund, they are just going to bounce with all of your hard-earned money.
You must understand the true purpose of the token that you want to invest in; you don’t want to go in there blind because if you do, then it is as easy as decorating your money over a platter and just giving all of it to them. You aren’t going to be a wise person or called a wise investment for that. Speculate your investments into the commodities or crypto tokens that you want to invest in or otherwise get ready for the financial kicking of a lifetime.