đ DeFi Basics â How to Evaluate a DeFi Protocol
DeFi (Decentralized Finance) is growing rapidly, but not every protocol is worth your investment or trust. Before jumping in, itâs important to evaluate a protocol fundamentally. Here are the key indicators you should look at:
đč 1. TVL (Total Value Locked)
TVL shows the total assets locked in a protocol.
Higher TVL = more trust & adoption.
But donât just chase big numbers, also check growth trends.
đč 2. Market Cap & FDV (Fully Diluted Valuation)
Market Cap = current value of circulating tokens.
FDV = what it would be if all tokens were released.
Compare these with TVL to see if the token is overvalued or undervalued.
đč 3. Users & Activity
Active wallets, transactions, and unique users matter more than hype.
A protocol with genuine user growth has stronger fundamentals.
đč 4. Revenue & Token Utility
Does the protocol generate fees?
How is revenue shared with token holders?
Tokens with strong utility (governance, staking, fee-sharing) tend to sustain long-term.
đč 5. Price-to-Sales (P/S) Ratio
Similar to stock markets, P/S = Market Cap Ă· Annualized Revenue.
Lower P/S can mean undervaluation (but always compare with peers).
đč 6. Security & Audits
Smart contract hacks are common in DeFi.
Always check if the protocol has audits & bug bounty programs.
đč 7. Community & Governance
Strong community = resilience.
Governance model (DAO, voting, proposals) shows how decentralized it really is.
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â Bottom line:
Donât just buy a DeFi token because itâs trending. Study TVL growth, user adoption, revenue models, and security audits. Fundamentals always win in the long run.