There is no doubt that decentralized finance (DeFi) is on the rise. This relatively new sector of the economy has seen impressive growth in recent months and shows no signs of slowing down. For Dan Schatt and Domenic Carosa, experts of DeFi startup Earnity, it is essential for buyers to learn the basics about the industry, especially since DeFi is moving at such an accelerated pace.
Below are the indicators that can be used to measure and compare DeFi protocols or products.
Total Value Locked
As the name implies, total value locked (TVL) is the aggregate amount of funds locked into a specific DeFi protocol. Simply put, it refers to all the liquidity in the liquidity pool of a specific marketplace. It is a key metric because it reflects the risk users take by participating in a DeFi protocol.
The price-to-sales ratio or P/S ratio is a financial metric that indicates the market value of a company’s stock relative to its revenue. In other words, it tells how much buyers are willing to pay for each dollar of a company’s sales. For DeFi protocols, this ratio can be used to compare the current price with the expected future revenue stream.
Token Supply on Exchanges
This metric measures the amount of a specific token that is held on cryptocurrency exchanges. According to Earnity’s Dan Schatt and Domenic Carosa, it is vital to check this indicator out because it gives insights into the selling pressure of a token. If the number of tokens held on exchanges decreases, it usually means that holders are HODLing and not selling, which is generally a good sign for the price of the token.
Annual Percentage Yield
Annual percentage yield (APY) is the rate of return accrued on an item over a period, expressed as a percentage. In the context of DeFi protocols, APY measures the interest earned on deposited funds. It is important to note that APY can be different from the actual result because it does not take into account the compounding effect.