Decentralized finance (DeFi) is a booming sector of the crypto industry, and many people are running into it. It is noteworthy though, that it is also a relatively new aspect of crypto, so not many are familiar with it. This makes DeFi a highly risky ground to tread on.
It is perhaps the little knowledge of the ecosystem that makes it more prone to criminal activities. More investors fall victim to scams in DeFi than in the regular crypto industry, especially beginners.
However once you learn about the ecosystem, you should be able to navigate safely and greatly reduce your chances of incurring losses due to criminals or mistakes on your part. Just like the centralized crypto space, the DeFi ecosystem has terms that you should be familiar with as a DeFi investor.
The following are five of such terms, also known as indicators that you should know. You can use these indicators to judge the suitability of DeFi projects before investing in them.
Total Value Locked (TVL)
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Total Value Locked (TVL) is the total amount of funds locked in a DeFi protocol. Because of their peculiarity, DeFi protocols don’t function the same way centralized crypto exchanges do. Instead, they use liquidity pools to fill swap orders. TVL is therefore the amount of funds available in the liquidity pools of a protocol.
TVL can be used as an indicator of the level of interest in a DeFi project. You can also use it to compare DeFi protocols to see which has a larger market share, which in itself is an indication of the level of interest in the protocol, or how much it has grown already.
Token Supply on Exchanges
Maybe you wish to invest in a DeFi protocol and you wish to see if it is a great choice. Well, the token supply on centralized exchanges can help you determine that. If there is a large supply of the protocol’s token on centralized exchanges, there’s a chance the token is about to undergo sell pressure.
On the contrary, a low supply of the token on centralized exchanges could mean that whales and other investors are holding onto the token and are not ready to sell anytime soon. A large supply of a token on exchanges isn’t always a sign of whales dumping it though, so you should combine this with other indicators.
Token Balance Changes on Exchanges
It is one thing to check the supply of a token on exchanges, and it’s another thing altogether to check the changes in the token balances on the exchanges. There may be a large supply of a token on exchanges for example.
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If large portions of those tokens get withdrawn from the exchanges, it usually indicates that whales are withdrawing to their private wallets to hold, which is a good indicator. However if more and more of the token continues to be deposited on the exchanges, it could be that sell pressure is on the way.
Unique Address Count
Another critical indicator for a DeFi project is the number of unique addresses. If the number of unique addresses goes up, it usually means there is an increasing interest in the token. However, a decreasing number of unique addresses is an indication of reduced interest in the project.
This isn’t absolute though, as the project founders can create wallets and deposit the token in them to feign interest. Therefore its better to combine this indicator with other indicators to come to a conclusion.
Many DeFi tokens are created solely for speculation. For instance, there are many variations of meme tokens like Shiba Inu flooding decentralized exchanges. They are mostly created to ride the wave of the hype around meme tokens or Elon Musk and then fizzle out.
To find a reliable DeFi project, ensure it has more use than just for speculation. A purely speculative project may rise quickly and die off before you know it.
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