The success of a crypto project is dependent on its users: projects need people to succeed. Just imagine having the only phone in the world – it’d be pointless without anybody to call. But as more people buy phones, each one becomes more useful, and the value of the phone network increases. Crypto projects thrive on these “network effects.” In fact, that’s one way to value them – so here’s how to do just that.
This is an intuitive way to assess a project’s network: simply compare its active wallet addresses with other projects. And while more addresses doesn’t always mean more users – as some could have more than one address – it does show increased adoption.
If the crypto’s price trends down while its addresses trend up, that could be an opportunity. Take the Ethereum chart below, where wallet addresses continued to climb throughout the 2018 bear market.
More transactions also suggests a growing network value. That said, be wary of spikes in transaction numbers: it could be a sign of unsustainably high trading volumes. You’re looking for a gradual, steady growth in transactions over time.
As the name suggests, “total value locked” (TVL) is the total value of assets locked inside the smart contracts of a DeFi protocol – that’s funds users have deposited for things like trading liquidity or lending collateral. The higher the TVL, the higher the adoption of a DeFi project.
We can also work the current market size of a project into the TVL data. The “market cap to TVL ratio” divides a DeFi project’s market capitalization by its TVL. All else equal, a lower ratio suggests a project is a better bargain. Based solely on this metric, Fantom and Terra are currently the most undervalued Layer 1 DeFi protocols.
When it comes to your digital investments, safety comes first. Of course, it’s always a bonus when safety comes wrapped in a pretty little package.
A rising user base isn’t the only thing that grows a network’s value: developer activity is important too. And since crypto projects are open source, you can see the level of developer activity in the number of new code “commits” to a project on GitHub.
When comparing different datasets, you should also consider a project’s use cases, as well as where it sits in the broader crypto ecosystem. Compound, for example, is a decentralized application (dapp) that lets lenders earn interest on their crypto. But the Compound dapp is built on the Ethereum blockchain, so it wouldn’t make sense to compare the metrics of Compound with those of Ethereum.
This guide was produced by Finimize in partnership with Ledger.
Check out Ledger’s mini-website at finimize.com.
Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.