3 Metrics Traders Can Use To Analyze DeFi Tokens Effectively

Much to the chagrin of cryptocurrency proponents who are calling for an immediate and massive adoption of blockchain technology, there are many “digital mines” that exist in the cryptocurrency ecosystem, such as rug pulls and protocol hacks that can trick new users into to experience that they are lost sea.

Investing is more than just technical analysis and intuition. Over the past year, a handful of blockchain analytics platforms released dashboards of metrics that provide a better understanding of the fundamentals that support – or not – support a cryptocurrency project.

Here are three key factors to consider when evaluating whether an altcoin or a decentralized finance (DeFi) project is a solid investment.

Check out the project community and developer activity

3 Metrics Traders Can Use To Analyze DeFi Tokens Effectively
3 Metrics Traders Can Use To Analyze DeFi Tokens Effectively

One of the basic ways to know a project is to look at the statistics, which show the level of activity of the user base and the platform’s developer community.

Many of the leading protocols in the industry provide analytics to track active user growth over time. On-chain dashboards like Dune Analytics provide a more detailed view of this metric, like the following graphic showing new users of the Olympus log on a daily basis.

New daily Olympus users. Source: Dune Analytics

Other relevant data points to consider when assessing community activity include the average number of active portfolios on a daily, weekly, and monthly basis. Investors should also look at the number of transactions and volumes traded in the log, as well as social media metrics such as Twitter mentions, which can help gauge investor sentiment about a specific project.

Alert systems like Cointelegraph Markets Pro provide up-to-date notifications of a project’s Twitter mention volume and unusual changes in trading volume, which can be an early sign that cryptocurrencies are turning bullish or bearish.

CT Markets Pro Twitter dashboard and trading volume. Source: Cointelegraph Markets Pro

In terms of project development and developer activity, GitHub was the go-to for upcoming updates, integrations, and where the project is on the roadmap.

If a log is bragging about “soon to be released” features but showing little development or commits in progress, it could be a signal to turn away until activities are more in line with what is claimed.

On the other hand, discovering a little-known project with constant development activity and an engaged user base could be a positive sign.

Look for constant increases in the total locked value

A second metric that must be taken into account when evaluating the overall robustness of a project is the sum of all assets stored in the log, also known as Total Value Locked (TVL).

For example, data from Defi Llama shows that the total value locked in the DeFiChain protocol (DFI) has risen recently after a major protocol update and the TVL hit new all-time highs for several days in December. This suggests that the momentum and interest in the project is increasing.

Total value locked in DeFiChain. Source: Defi Lama

DeFi aggregators such as Defi Llama and DappRadar allow users to break into the data and provide statistics for various blockchain networks such as the TVL in the Ethereum or Binance Smart Chain network, as well as for individual projects such as Curve and. consult dealer Joe.

Protocols with a higher TVL tend to be safer and more trustworthy by the community, while projects lower on the list are generally at higher risk and tend to be at higher risk.

Identify who are the majority holders of tokens

Other factors to consider are the benefits token holders get from being holders and being active in the community. Investors should also check how the token was launched and who are the dominant holders of the token today.

For example, SushiSwap allows users to set the native SUSHI token on the platform in order to receive a portion of the exchange commissions generated, while Uniswap, DeFi’s leading decentralized exchange (DEX), does not currently offer this feature.

While other factors such as trading volume and daily users have made Uniswap a legitimate investment for many owners, some traders prefer to keep SUSHI due to its revenue sharing model and multi-chain trading features.

On the other hand, caution should be exercised in offering excessive returns due to poor liquidity logs and anonymous management with little community activity as it can be the perfect setting for catastrophic losses. At DeFi, these losses are known as “rug pulls” and usually occur after a large amount of money has been deposited into smart contracts controlled by a single anonymous party.

Examining the protocol’s token distribution, as well as observing the percentage of tokens allocated to developers and founders versus tokens held by the community, can provide a useful indication of whether a platform is a victim of a rug pull or mercenary capital could become a whim.

If the majority of the available supply is in the hands of the creators and sponsors, there is always the possibility that these tokens will be sold retrospectively at the market price if the first investors give up their position.

The views and opinions expressed are those of the author only and do not necessarily reflect the views of Cointelegraph.com. Every investment and trade involves risk, you must do your own research when making a decision.

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