Deep Dive Into Decentralised Finance: Valuing DeFi Blockchains

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Decentralised Finance (DeFi) is a system that allows financial products to appear on a public blockchain network which is not regulated by a central bank or intermediary. DeFi systems, majority of which are built on the Ethereum blockchain, aim to provide an autonomous and decentralised option for financial services that are otherwise regulated by banks and national or international administration. If you are serious about crypto investing, you must have a deep understanding of decentralised finance (DeFi). Simply put, DeFi is an umbrella term for financial applications powered by public blockchains.

The mindmap (pictured above) shows the various aspects of DeFi. Over the next few editions, I will take you through a DeFi Deep Dive and discuss the following issues:

  1. Valuing DeFi Blockchains
  2. The top 5 DeFi Assets
  3. The top 5 Decentralized Exchanges
  4. The top 5 Lending platforms

So, let’s start with the first: Valuing DeFi Blockchains.

Basic metrics

Total Value Locked (TVL) is the total amount of assets “locked” or secured in a DeFi blockchain or protocol.

Circulating Supply is the number of coins/tokens in public hands.

Market capitalization (Mcap) is calculated as the Current Price x Circulating Supply.

Mcap/ TVL Ratio (MTR) is calculated by dividing the Mcap by the TVL.

Based on my research, I consider 3 to be the ideal MTR for a public blockchain. If a blockchain’s MTR is above 3, it is overvalued and if it is below 3, it is undervalued.

The current metrics of the top 5 DeFi blockchains are:

Blockchain TVL MTR Value
Ethereum $169 billion 2.88 Undervalued
Binance $18.57 billion 5.37 Overvalued
Solana $13.46 billion 4.44 Overvalued
Avalanche $12.46 billion 1.99 Undervalued
Terra $9.52 billion 1.69 Undervalued

Source: DefiLlama

Valuing DeFi Blockchains

Step 1: Multiply the TVL of the Blockchain by 3. This is the ideal market capitalization of the blockchain.

Step 2: Divide the market capitalization by the circulating supply of the native token of the blockchain. This is the ideal price.

Let’s take an example.

The TVL of Ethereum is $169 billion (roughly Rs.12,68,768 crore) as of November 26, 2021.

Ethereum’s ideal market capitalization would be $169 x 3 = $507 billion (roughly Rs. 38,06,306 crore).

The circulating supply of Ethereum’s native crypto is ETH 118,499,066.

ETH ideal price would be 507 billion / 118,499,066 = $4278.5 (roughly Rs. 3.2 lakh).

At today’s price of $4,072 (roughly Rs. 3 lakh), ETH is slightly undervalued.

What next?

Now that you have understood the basics, calculate the ideal prices for the native tokens of Binance (BNB), Solana (SOL), Avalanche (AVAX), and Terra (LUNA).

This is the first in a series of articles exploring DeFi, with more to come next week.

Rohas Nagpal is the author of the Future Money Playbook and Chief Blockchain Architect at the Wrapped Asset Project. He is also an amateur boxer and a retired hacker. You can follow him on LinkedIn.


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