Investing in digital assets is becoming more popular. With the rise in popularity of cryptocurrencies and their use as a payment method, many investors have started looking into other ways to invest in digital assets. DeFi is one of the hottest investment markets today. If you are looking for an alternative investment option, then DeFi may be the perfect choice for your portfolio.
DeFi is a combination of the words decentralization and finance. It refers to any investment that involves using blockchain technology, smart contracts and tokenized assets to create new types of financial instruments or markets. The most common examples include decentralized exchanges (DEXs), which are platforms for buying or selling crypto assets without needing an intermediary such as a centralized exchange; stablecoins that peg their value against another asset; crypto-securities like digital bonds; recurring revenue models where users pay per use instead of being charged an upfront fee; and even peer-to-peer lending, where borrowers can borrow directly from other people who want to lend their money.
The decentralized financial ecosystem is characterized by high volatility and a large number of highly valued projects. Due to this, the barrier to entry into the space can be hard to penetrate, even for seasoned investors. Calibrating analysis is key to identifying which projects are worth investing in and which ones aren’t.
The key DeFi indicators (KPIs) are some of the metrics that are used by traders to ascertain the success of an investment. These indicators help you make informed decisions about whether or not to continue investing in a given asset, so it’s important to know which ones matter most for different types of investments. Here are some key indicators you should be familiar with:
Total Value Locked (TVL) is the total value of all assets locked in DeFi projects. TVL can be calculated by summing up all assets locked in DeFi projects, which includes both collateral and non-collateral tokens.
The total value locked is the sum of all the staked assets in a given protocol. This value does not represent the number of outstanding loans, but rather the supply secured by a specific DeFi application. Total value locked is a metric used to gauge the health of the DeFi protocol. You can track the total value locked on many services.
You should also be aware of the token supply on exchanges, as this is a good indicator of how many people are actually using the token. If you see an increase in token supply over time, it means more people are using the network, therefore increasing demand for your DeFi products or services.
The reason why we recommend looking at this number is that it’s easy to spot when there might be some issues with just looking at market cap alone — like if there was a large surge in price followed by a period where prices went down, there may have been some reason behind it.
Token holders are a critical indicator of the health of the DeFi ecosystem. When token balances increase and decrease, it indicates the movement of tokens. It is frequently a sign that volatility may be on the rise when token balances on exchanges experience significant changes. Whales may be hoarding the token if significant sums of money are withdrawn from centralized exchanges.
When analyzing a token’s balance movements, it’s important to keep in mind that the total supply doesn’t always indicate a large number of withdrawals from wallets. You also have to look at the balance movements of the token on the exchange.
For example, let’s say a token has a total supply of 100 and there are 50 tokens in circulation. If the token is trading on an exchange and the price is $1, then the market capitalization is $50. Now, let’s say that 10 tokens are withdrawn from wallets and sent to the exchange. The total supply stays at 100, but now there are 60 tokens in circulation. The market capitalization increases to $60.However, if the price of the token decreases to $0.50 on the exchange, then the market capitalization would decrease to $30.
In this case, even though more tokens were withdrawn from wallets, the overall value of the token decreased. This is why it’s important to look at both the total supply and balance movements when analyzing a token. By doing so, you can get a better understanding of how much demand there is for the token and whether or not it’s being traded at a fair price.
The inflation rate is a measure of how much money you lose from your investment over time. Inflation is the general increase in price levels or decrease in purchasing power across different goods, services, and currencies due to persistent economic growth (money supply).
The reason this metric is important for investors is that they need to know how much their investments will lose value over time before making an investment decision. The inflation rate is another statistic any DeFi investor should watch. Limited-supply assets may not provide good long-term returns. Some assets may be limited initially, but not for long. If new tokens are consistently created over time, the supply may increase. Inflation may not be terrible for investors, but too much might hurt returns. When examining other indicators, it’s necessary to account for inflation.
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Unique address count is another important DeFi indicator. The number of unique addresses that have participated in a DeFi project is a good indicator of the number of users who are actively trading on the platform.
If you have ever used an exchange or wallet, you will know how cumbersome it can be to check your account balance or make trades without having to manually type in all those numbers and letters – it’s easy to forget something! But with DeFi projects, this is no longer an issue because there’s already a built-in system for connecting wallets, checking balances, and making trades, which makes life much easier for both users.
When you have a solid grasp of these metrics, you will have a good idea of how well DeFi projects are doing and how they are developing over time. Keep this indicator guide handy and always make sure to evaluate thoroughly before trading any asset.
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