How To Value DeFi Tokens?

Welcome to another article from Run The Chain News. Today we’ll be discussing how to value DeFi tokens? Decentralised Finance is inherently compelling not only as a form of capital – it’s malleability, personalisation and truly open nature is what makes it so innovative.

DeFi tokens are indicative and representative of the nature of DeFi itself. However, establishing a specific protocol token’s value can be fairly complex. Be careful not to buy into any ‘umbrella’ metrics or at least, look beyond the market caps.

What is DeFi?

DeFi is pretty self explanatory in its title “Decentralized Finance”. This is largely due to the fact that web3 tech is by nature decentralized via Decentralized Ledger Technology (DLT). It’s intuitive to assume that a DeFi protocols value is symbiotic with its token, in that the market cap of a token is indicative of a protocols value – but it only takes into account tokens that are circulating in the ecosystem, and not what the platform holders themselves have.

As assets build, refine, repurpose, and diverte all the time to accommodate new projects before they’re in any kind of circulation that makes them visible to the market cap. Because of this, it’s inherently flawed as a valuation quantifier. To truly understand a DeFi token’s value, there’s many different aspects to consider.

Total Value Locked

Total Value Locked (TVL) is often touted as a more robust means of gauging token value. Although it’s also not without its flaws. This is essentially a means of measuring the balance of tokens (specific to whatever protocol you’re using) in smart contracts and expressing that figure in US dollars. This is arguably the most common way of discerning and ranking DeFi projects.

The problem with this, however, is that some protocols create subsidiaries with seed funding from their protocol listed by means of TV. Since Total Value Locked is, well, locked, it means the perceived value of that protocol drops dramatically if there’s a redistribution of funds – despite the fact that it’s simply down to a re-investment of assets – Uniswap and Sushiswap being DEX examples of this.

Value of DeFi

The self-regulatory nature of crypto means that you’re never really a google search away from knowing a protocol token’s value. It’s a collaborative community with DeFi serving as the framework to allow economic activity – incentivised by user participation with interest, fees and token-specific rewards – within that framework.

Value creation in DeFi is down to how well you engage crypto users, it doesn’t pivot or sway to socio-economic pressures, it’s about how you reward users for using your protocol’s economy and whether you’ve created an intuitive environment that engenders economic activity.

Like with any industry, DeFi is largely driven by the companies that participate in it. Above all else we stress that looking into the team and who is behind the DeFi protocol helps to determine the long term viability of the project. 

Key Points to Look at:

  • Does this protocol have intrinsic value?
  • Is this team capable of delivering the full scope of what they promise in their white paper?
  • Do the Tokenomics support a sustainable business model or are there merely short term staking rewards?
  • Is this Token providing a solution to a real problem or an imagined one?

Conclusion

It’s important to do your own due diligence whenever investing. Furthermore, to always have a clear understanding for your apetite for risk. With much of this tech being brand new, there are still huge opportunities for exploits when it comes to DeFi tokens and protocols. It’s also important to note that we never solicit financial advice at Run The Chain.

Thanks for reading How To Value DeFi Tokens? by Run The Chain’s Crypto Classroom. If you like our content don’t forget to like and subscribe.

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what can blockchain do

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In many people’s minds, cryptocurrency and blockchain are synonymous with one another. Although closely related, they are not one and the same, and it is

Read More »