It’s not uncommon for a project to generate hype and collapse just a few weeks later. For this reason, private DeFi investors need to have a framework in place to analyze the project and apply that framework before making a decision.

The decentralized nature of DeFi allows anyone to participate. Amazing how much technical knowledge or capital is not required to start a project or token. The results can be disastrous for investors who invest their money without careful consideration.

Fortunately, transparent and readily available data is the downside of decentralization. Data doesn’t lie, so the smart investor should think about it first.

When looking at a project, you should start with the following 3 metrics and 5 charts:

1. Total Locked Value (TVL)

Figure 1: TVL growth.

Figure 2: Distribution of TVL.

2. Market capitalization

Figure 3: MC / FDV ratio.

Figure 4: MC / TVL ratio.

3. Token Price and Allocation

Chart 5: Price movement of the token.

Total DeFi Logs Monthly | Source: Footprint Analytics

Total value locked (TVL)

Make sure the project has a stable TVL growth rate

TVL refers to the total value of user deposited assets and keys in a log. More assets tied to the project mean users have more confidence in the provision of liquidity and collateral for the protocol’s economic operations. Both signals the market’s confidence in the project.

TVL Comparison & Market Cap of Top 10 Protocols | Source: Footprint Analytics

As can be seen, the top 10 logs are all massive over $ 5 billion in value and have steady monthly TVL growth. This proves that the project continues to operate and maintain its strength.

On the other hand, the opposite is true for weaker, less well-known projects. The TVL increases over the course of the day with an unsustainable trend that often leads to a significant decrease the next day after the rally.

TVL projects are not stable | Source: Footprint Analytics

Select projects with “average” TVL

As shown in the scatter plot below, projects are sprouting “like mushrooms” with very uneven TVL distribution. There are now more than 500 DeFi projects, 33% of which have TVLs under $ 5 million.

TVL distribution of protocols (with the exception of the 10 most important TVL protocols) | Source: Footprint Analytics

This is one of the easiest ways to divide projects into 3 categories:

• Already “rated” or overrated.
• Brand new, untested and risky.
• Potential projects.

How should the risk be weighed against the reward?

To be on the safe side and avoid the risk of projects that are too small to “run away with money”, individual investors should try to invest in a project with a medium TVL or more (approx. Dollars).

Projects with TVLs between USD 1 million and USD 10 million are suitable for the seed round of institutional investors. Individual investors should avoid these projects as their future strategic positioning and direction is unclear.

On the flip side, while projects with a TVL in the $ 10 million to $ 20 million range have the right growth strategies and investors have access to data on this segment, they are at risk for stability: slow growth and the risk of weak growth Growth or deterioration if the growth is insufficient.

In contrast, projects with TVL in the $ 20 million to $ 50 million range find a clear match in terms of product mechanics and growth rates, with gradually improving community and technical support, and are a great choice if you want higher returns than leading protocols.

If your risk tolerance is low and the expected return is not too high, you can select projects from the top protocols to which you can enter based on your preferred DeFi project portfolio (e.g.

Market Capitalization (MC)

Market capitalization is the metric that most accurately reflects the total market value of a project.

This metric is calculated in a similar way to traditional stock market shares, namely by multiplying the price of the token by the amount in circulation and available for trading.

Since the number of tokens is influenced by circulation as well as supply and demand, the price can change quickly. In contrast, the market capitalization tends to go up or down in the region of 20% and there is no serious crash after the increase.

This stability makes market capitalization a good fundamental indicator to evaluate projects and identify potential investments that are worth considering.

Avoid low MC / FDV ratios when looking for long-term equity investments

Fully Diluted Market Cap (FDV) refers to the maximum token offer multiplied by the price. In other words, it is equal to the market capitalization when all tokens have been issued.

If the token’s MC / FDV ratio is low, it means that a large number of tokens have not yet been issued. This happens when: 1) the new protocol goes live, 2) the total inventory of tokens is extremely large.

MC / FDV ratios of the top protocols | Source: Footprint Analytics

Investors should carefully review FDV and focus on the duration of the project and the timeline for the token delivery to be released.

Low MC / FDV ratio | Source: Footprint Analytics

Some examples of low interest projects:

• Fruit: MC / FDV ratio is 0.002%.
• StakedZEN: The MC / FDV ratio is 0.077%.
• Hanu Yokia: The MC / FDV ratio is 0.17%.

The MC / FDV ratio allows investors to estimate whether the token price is rising too quickly. Because a low ratio shows that the supply is higher than the actual demand as the project owners spend more tokens. Since demand is increasing rapidly, prices are likely to fall when the market corrects.

Take a look at the table below to see what the top rated projects look like from an MC / FDV perspective.

Projects with MC / FDV quotas over 60% are better suited for long-term investments with almost guaranteed price security.

Prices of the top logs | Source: Footprint Analytics

On the other hand, a project with a high MC / FDV ratio is not without its drawbacks. They usually have a higher joining price. While this isn’t always the case, data analytics can help you make better investments based on your goals.

For example, Curve (CRV) has an MC / FDV of 11.86%. Another Lido loan project has a lower MC / FDV of 5.54% and a higher token price. So when we compare the two we can see that those looking for a long term DeFi loan project to invest in should consider Curve over Lido.

Monitor projects with a low MC / TVL ratio

Top 10 Protocols MC / TVL Ratio | Source: Footprint Analytics

The current MC / TVL ratio of the top 10 projects with TVL is hardly greater than 1. This means that the projects are undervalued and worth the investment.

Because the higher the TVL, the higher the MC from an economic point of view, because a high TVL shows that investors have a high level of confidence in the economic benefits of the project.

In other words, when investors lock their tokens, it means they are taking the benefits of the project more seriously than speculation. Preferential use over speculation is usually a good sign.

Therefore, investors should consider the MC / TVL ratio. A ratio greater than 1 means the valuation may be too high and there is little investment potential, while a ratio less than 1 indicates the project is undervalued and profits are rising sharply.

Remember to always compare projects in the same category for valid results and especially compare the ratio of lesser known projects to top logs.

Stable token price and reasonable token allocation mechanism

Choose projects with stable tokens

Many DeFi participants invest in reverse. You start with a look at the token price and then research the project to justify the investment (usually powered by FOMO).

Instead, you should investigate the right projects based on the metrics and indicators discussed above.

Top 5 Protocols Token Price Change | Source: Footprint Analytics

Once you’ve made a shortlist of projects you’re interested in and checked for solid fundamentals, the next thing to do is take a look at token prices.

In the field of cryptocurrencies, “stable” is a relative term.

You should be careful with jumps and boundaries within 20%. Usually, large fluctuations in price indicate an unhealthy market reaction to some news that may be short-lived.

If the token price is relatively stable, the liquidity is also relatively stable. Therefore, the possibility of losses due to the large number of individual investors selling tokens is reduced.

As with other indicators, this rule is best applied when comparing many different options as above in a visualization chart.

For example, data shows that InstaDApp and MakerDAO can withstand the negative effects of sell-out activities better than Curve.

Summary of 5 steps to assess the investment viability of a DeFi project

If you’re looking for the next project to invest in, start with the basics. Use the data to compare DeFi projects that you think have potential.

Things to take away:

• TVL growth is stable.
• TVL rating in the mid-range or higher, about $ 20 million or higher.
• The MC / FDV ratio is higher than 5%.
• The MC / TVL ratio is less than 1.
• Stable token price with monthly fluctuations below +/- 20%

In addition, the economics and team structure of the protocol are also important reasons to consider when making investments. If the percentage of tokens held by the team or organization is too high, then there is a high probability that the project was born with the sole aim of getting rich quick.

This can easily lead to a situation where core operators are rapidly releasing tokens in order to “collect the net”, resulting in severe dilution of token prices and increased potential for sell-offs.

As a new investment market, DeFi creates more investment opportunities than traditional financing, with many projects worth considering.

However, opportunities and risks go hand in hand. It is important to remember that the DeFi market is inherently unpredictable and even the indicators above are not a guarantee of long-term viability.

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