Understanding DeFi Metrics (Guide) : altcoin


With everything progressing rapidly in the DeFi space here’s a quick guide to get beginners up to speed with the new terms they are going to encounter!

New metrics

When using DeFi platforms it is important to understand new terms that you can help you properly navigate the space. These metrics will help you to understand and evaluate how good a DeFi platform is so you can work out which platform is best for you. Ultimately, the more of these new terms you understand, the better equipped you’ll be to make informed decisions.

Total value locked (TVL)

The total value locked measures the total amount of funds that are locked into a DeFi platform. On a platform that does borrowing and lending, the TVL would represent the amount of funds that users have deposited onto the platform, which other users can then borrow. TVL is also being used as a metric to measure growth. If the TVL of a platform increases it generally means more money is flowing into the platform, which shows it is growing.

Like market caps, the TVL can also be used to represent the total value locked for the entire DeFi space. On defipulse.com you can view the TVL for the total DeFi space as well as individual platforms.

It is important to note that TVL values can fluctuate because of price fluctuations in cryptocurrencies. If a borrowing and lending platform uses ETH as collateral, then the TVL is dependent on the price of ETH. If it goes up the TVL in US dollars will increase, and vice versa. So consider TVL a close estimation and not an exact measure of the value locked into the platform.

Market cap to TVL ratio

The market cap to TVL ratio measures the ratio of the market cap to the amount of funds locked on the platform. Since the TVL can be a guide for how well the platform is doing it can be compared to the market cap to judge whether it is valued correctly. To calculate the market cap to TVL ratio simply divide the market cap by the TVL. Although, a website like coinmarketcap.com will already have those metrics displayed so you won’t need to do any calculations.

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Above, you will see the metrics for a project called AAVE. Here, their market cap to TVL ratio is 0.7994. Anything with a value of 1 or more means that their market cap is higher than the TVL. Any value less than 1 means their TVL is higher than their market cap. Since AAVE has a ratio of less than 1, their TVL is higher than their market cap.

Trading pair

A trading pair, or pair, is a group of two coins that can be traded for each other. To exchange one coin for another, there has to be a pair available for the trading to happen. If you wanted some USDC, a stablecoin, you would need to have a coin that you can trade it for. The USDC-ETH trading pair is the most popular pair for USDC. So, if you wanted to get USDC you can trade it for some ETH. Uniswap is the most popular decentralized exchange for trading tokens that run on the Ethereum blockchain. On info.uniswap.org you can find a list of the top trading pairs and other metrics such as liquidity and volume.

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When using decentralized exchanges to trade and swap coins, it is important to understand what liquidity is and how it can affect your trade.

When you want to trade ETH for USDC what happens is you give ETH to the platform, and it will give you USDC, like swapping one for the other. The platform has the tokens because its users provide them, which are put in a pool for you to swap with.

The liquidity is the amount of coins available in that pool to use, which is expressed in dollars. Above, you can see that the liquidity for the ETH-USDC pair is $295 Million. This means there is $295 Million worth of ETH and USDC which is available to use for swapping between the two. The larger the liquidity is, the more coins are available to swap with. If someone wanted, they could swap $50 million worth of USDC for ETH because there is enough for them to use. However, the cost of your liquidity provider fee is based on how much you take from the pool. If someone were to take $50 million from a pool that has $295 million they would have to pay a 17% fee because that’s how much they took out of the pool.

Since most people aren’t trading with that much money something like that won’t be a problem unless the trading pair has really low liquidity. Below is the USDC-LYM pair which has a liquidity of $455,000. This means that if you wanted to swap $100,000 of LYM for USDC then you would pay a 22% fee because you are using 22% of the liquidity.

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Essentially, higher liquidity makes it easier to swap larger amounts and gives you a lower liquidity provider fee will be. When trading pairs have low liquidity, it may be harder to swap large amounts, and can give you a higher liquidity fee. Ultimately, it depends on how much you intend to swap.

It is always best to remain cautious with small coins that have low liquidity.

Inflation rate

The inflation rate is the amount of new coins that are being created. Currently, Bitcoin’s inflation rate is 1.76% because the supply of Bitcoin is only increasing 1.76% per year. While a project may have a small supply of coins, it is important to see how many new coins are being created. While a large inflation rate isn’t necessarily a bad thing, it can negatively affect the price if demand for the coin is less than the amount they are creating. ETH is a token that has no supply cap, however, can increase in price because demand for it is higher than the amount that is being created, among other things.

You can find more lessons like this at https://www.novorauniversity.com/

Hope you all found this helpful!

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