The massive adoption of DeFi technologies led to the tremendous surge of tokens related to the industry. Some token returned thousands of % of profit in a matter of weeks. But the main issue with decentralized finance is the inability to properly analyze some tokens due to the absence of centralized trading platforms.
But with the rapid development of the on-chain and market analytics tools we now have numerous ways of analyzing DeFi projects and tokens related to them. Some dashboards offer up to 100 various metrics that you can use for analyzing a project and its potential to become profitable.
The development activity
One of the best ways of determining if the project is suitable for long-term investment is the activity of its developers and the community. The stable development activity is the foundation of any DeFi project. The majority of projects in the DeFi space are decentralized exchanges and platforms that should always receive new use cases to keep the current userbase and attract new investors and traders.
If the project’s activity is in a downtrend or completely absent it shouldn’t be considered as a long-term investment since it’s most likely to start losing users and investors that hold their funds in the project’s contracts.
Analytical dashboards like Dune Analytics are providing numerous indicators and metrics that can be used as activity trackers.
TVL Volume
The total value of funds locked in the contract is one of the most important values that DeFi investors or traders should track. A similar metric for a regular asset is market capitalization. As more traders use a DeFi project, it generates more fees and funds for the development process.
The easiest way to track the data from DeFi projects is using aggregators like DeFi LIama and DappRadar that provide accurate data about the TVL on various networks and specific contracts. Networks like Ethereum, Binance Smart Chain, or Cardano include numerous protocols with their own TVL.
Projects with the highest TVL are considered more secure and trusted by communities as they undergo constant blockchain security audits and keep their smart contract updated. By keeping the smart contract updated, platforms protect their users’ funds from being hacked or stolen.
Holders composition
Identifying the composition of holders could have a crucial role when choosing the protocol to invest in. Some projects hold generous airdrop events to attract more users to the protocol which is the double-edged sword strategy that might in fact attract more users but increase the selling pressure on the token (robotic trading software).
If holders’ composition of a token related to a DeFi project you are willing to invest consist out of small addresses holding an insignificant number of tokens you should reconsider your investment as it’s more likely that the token will face massive selling pressure as “free” tokens hit the market.
A healthy composition should consist of both large and small holders that stick to their tokens for at least a couple of months which would indicate that investors believe in the future of the project and are not willing to immediately take profits and move funds to another DeFi protocol.
