The DEFI protocol is valued using 12 metrics

The way of the original title: the DeFi | with 12 kinds of index comprehensive evaluation of different DeFi agreement

Original source: Babbitt

Note: The original article was written by Bankless Analyst Lucas Campbell. In this article, the author summarizes the assessmentDeFiThe 12 indicators of the agreement, including 7 general indicators and 5 evaluation indicators specific to different domains.

As we've said before, DEFI is fast tapping into thousands of years of traditionfinancialWe are relearning, reorganizing, and applying old methods to this new paradigm.

We've learned a lot over the years, we now have a much better understanding of how agreements work, how they generate value, and, most importantly, we now have tools to analyze them with new (and old) valuation metrics.

Therefore, we will spend some time today reviewing some of the general and domain-specific metrics that currently exist in the industry, as well as several key ratios to consider when looking at new protocols.

General indicators

1. Market capitalization and full dilution valuation (FDV)

We need to understand the difference between the market value of the agreement and its full dilution valuation (FDV). If all tokens are in circulation, then the total market value of the agreement is very valuable to those who wish to hold the asset position for a long time.

If there is a big difference between the market value of the agreement and the FDV, that means there are a lot of tokens that have yet to enter circulation. As a result,investmentPeople should be aware that there is likely to be considerable selling pressure as these new tokens enter the market.

This is particularly important for newly launched agreements, where the supply in circulation is often only a small part of the total supply. For example,CurveAt launch, the initial trading price of the tokens was between $15 and $20, and the FDV value of the protocol was over $50 billion, which was higher than the market value of Ethereum at the time!

Recognizing this difference can help you save a considerable amount of money, and it was clear that Curve tokens were unreasonably valued at the time. As a result, the market is correcting itself and valuations are gradually becoming more reasonable. What's the key point? Understanding the underlying asset supply plan and how this translates into current valuations is extremely helpful for long term positions (especially new launched agreements)!

2. Total Value Locked Value (TVL)

One of the most widely known metrics in the DEFI space is the Total Value Lock-in (TVL), which represents the total amount of assets held in each agreement, which some might think of as the asset management value (AUM) of the agreement. In general, the more values locked in the protocol, the better.

This means that people are actually willing to lock up their capital in an agreement, trusting it to some degree in return for whatever utility it provides (such as earning income, providing liquidity or acting as collateral).

However, it is important to recognize that with the introduction of liquid mining, this indicator can be divided into 'incentive' and 'non-incentive' TVL, with some subtle differences between the two. A deal with $1 billion of unincentivized TVL may reflect real demand for the service better than a deal with $1 billion of high yield incentivized liquidity.

UniswapandSushiswapIs a good example of the contrast.

Currently, both protocols have similar TVL values, with Uniswap locking at $3.7 billion and Sushiswap locking at $3.4 billion. The key difference is that the assets locked in Uniswap are not motivated by tokens, so it is organic, whereas the assets locked in Sushiswap, on the other hand, are largely motivated by a large number of Sushi tokens.

This does not mean that any deal is better, but it is worth highlighting. So when you look at TVL as a valuation metric, it's important to recognize how much of it is motivated, or not motivated at all.

The total value of The mainstream DEFI protocol lock, from The Block

3, income,

The revenue of the agreement is equal to the total fees paid to the supplier participants of the agreement. In the case of AMM, this may be the total fee paid to the liquidity provider (LP), and in the case of an interest rate agreement, it may be the amount of interest paid by the borrower. In summary, the revenue metric actually boils down to the amount of money users are willing to pay to use the agreement, which is why when we say revenue is such a key metric, we can literally translate it into how much people are willing to pay for the service under the agreement.

Mainstream DEFI protocol revenue situation, source Token Terminal

4. Revenue from the Agreement

Revenue is the amount the user is willing to pay into the agreement, which is obtained by the provider party participants who provide the underlying service, and revenue is the actual amount of revenue obtained by the reference currency. This actually represents the bottom value of the agreement, the profit margin.

That said, just as early-stage startups and growth companies don't pay dividends to shareholders, not every agreement allocates cash flow to tokens.

Uniswap and Sushiswap are good examples to which we like to compare, and while Uniswap leads the DEFI revenue metrics, Uniswap's cash flow has not yet accrued to UNI token holders. In contrast, Sushiswap chose to allocate about 16 per cent of the revenue generated by the transaction (0.05 per cent of the 0.30 per cent transaction fee) directly to the XSushi pledgers.

The distribution of fees between the LP and token holders, according to Dune Analytics

5. Sales Ratio (P/S)

The price-to-sales ratio (P/S) is a metric that compares the market value of an agreement to its revenue. Many of you will be familiar with this metric for avid Bankless readers. It compares market value to revenue (even usage) and is a reliable measure. In traditional finance, the price-to-sales ratio (P/S) is a basic measure of the return the market generates relative to the asset and the expectation of future growth.

At its core, the convertible market is willing to pay $X for every $1 of revenue. Interestingly, the P/S can mean different things in the context of different agreements. Here are some examples:

DEX: The market is willing to pay $X in transaction fees for every $1 earned;Borrowing: The market is willing to pay X dollars for every dollar of interest that the borrower pays;Revenue mining: The market is willing to pay $X for every $1 of revenue LP generates;Therefore, the price-to-sales ratio (P/S) of different classes of DEFI protocols cannot be directly compared, as there may be some subtle differences between them, and of course, it is a valuable indicator when comparing similar protocols!

Price to Sales (P/S) for the mainstream DEFI protocol Source: Token Terminal

6. Price/earnings ratio (P/E)

Since many DEFI protocols are in their early stages of development, there is usually no direct cash flow for token holders, similar to the traditional world. With this in mind, as the industry matures and more and more agreements are made to distribute dividends to token holders, the P/E metric will become increasingly important.

That said, some existing protocols, such as Maker, Sushiswap,KyberAnd so on, providing token holders with direct cash flow. The following is the P/E data of the application protocol calculated by Token Terminal.

7. Revenue to value lock-in ratio

The cost-to-value lock-in (F/V) ratio serves as an interesting indicator of the efficiency with which agreements generate fees from the capital they hold. For reference, we calculated this metric by dividing the annual cost by the locked value.

Similar to the ratio above, this metric literally means "the protocol can produce X dollars for every dollar locked in."

The closer the "x" value is to 1, the more effective the agreement is at earning fees from the underlying capital, and may indicate that the agreement is a better investment option than similar agreements. For example, here is the Cost to Value Locked (F/V) ratio for the first five DEFI protocols by combining the Token Terminal and DEFI Pulse data.

Uniswap is the leader in this metric, and the agreement generates $0.35 for every dollar locked in, which is obviously very efficient.

Evaluation indicators for specific areas

Domain-specific metrics are the basic metrics used to determine whether a protocol is working for its intended purpose.

What is the trading volume of DEX? How much money was lent out under the loan agreement? Is anyone minting synthetic assets?

These are the key questions you should ask when researching the feasibility and usage of each protocol. Here's what you should know:

DEX

1. Trading volume

Clearly, one of the most fundamental measures of the success of a liquidity agreement is the volume of transactions it generates. The bigger the transaction, the more cash flows will flow to participants in the agreement, including liquidity providers and token holders.

Dex monthly trading volume, source: The Block

2. Volume/Price Ratio (P/V)

Volume/price ratio (P/V) is a valuation index specific to the field of DEX. It has similar properties with P/S ratio.

The reason behind this ratio, instead of valuing these liquidity agreements in terms of the amount of fees they generate, which may be slightly different when you look at agreements with different interest rates, the P/V ratio will run through everything and determine how the market is based onexchangePromote the volume of transactions to assess the value of the agreement.

Volume to price ratio (P/V) data of mainstream DEX, from Andrew Kang

borrowing

3. Daily net borrowings

forCompound,Aave,CreamOther interest rate agreements, total outstanding debt and utilization ratio indicate the demand to borrow from the agreement.

This is a key reason for the interest rate deal: it sets the flywheel in motion. The higher the borrowing demand, the better the deposit-user rate, which drives people to have a greater incentive to add more liquidity, thus increasing the lending demand capacity of the agreement.

Simply put, more demand for borrowing means higher interest rates for suppliers, which is crucial to attracting capital into the agreement.

Aave, Compound andMakerDAONet Borrowing Indicator, Source Dune Analytics

derivatives

4. Total outstanding debt/derivatives

SynthetixOutstanding debt or synthetic assets from derivative agreements with Maker and others are one of the key drivers behind revenue and agreement gains.

The more debt outstanding, the agreementcurrencyThe more capital is available, the more cash flow can be distributed to token holders. In short, outstanding debt is actually a key indicator of the demand for the synthetic assets of the protocol (i.e., DAI of Maker, Synths of Synthetix, etc.).

DAI's total outstanding debt, source: CoinMetrics

5, the amount of insurance (ActiveCover)

Active Cover is the most basic indicator of insurance agreements such as Nexus Mutual and Cover.

Simply put, it shows the market demand for protocol "insurance policies." The higher the effective cover, the more policies are sold, which means the higher the premium (or income) charged by the agreement. This relationship with Nexus Mutual is very direct because the token NXM is priced according to the combined curve driven by the total capital in the pool. The more insurance there is, the more premiums the pool of capital earns, and the more likely the joint curve is to rise.

Nexus Mutual's total insured amount in force, source: Nexus Tracker

conclusion

There are now many ways to dissect each DEFI protocol, and fortunately the industry has grown into a diverse ecosystem of protocols that you can compare with each other and see how they stack up.

Having said that, there are a lot of factors that can't be put into numbers, but they are just as important, including the capabilities of the team, the new products being developed, and, most importantly, the narrative.

Like traditional finance, fundamental valuation metrics are largely out of date, value investing is out of date, and the entire market is now narrative driven, with assets no longer priced based on earnings multiples or P/E ratios, but based on a company's narrative (some might call it MPE).

This certainly applies to the crypto world, ifNFTNow it's hot, then the NFT token project will explode, it's that simple, it doesn't need much analysis.

But fundamental valuation metrics do serve as a good gut check, especially when you delve into similar agreements. If a project comes to market at $50 billion FDV and exceeds the market value of its base layer, then this may not be a good time to invest and the market's expectations may be too high.

So at the end of the day, it's important to recognize that the crypto market is still young, inefficient, and prone to wild, irrational moves that don't necessarily fit with fundamentals.

In any case, basic valuation metrics like those outlined above can provide solid data to support your investment theory.

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