Is the DeFi carnival a bubble? Two Valuation Methods Tell You Why Investors Keep Buying
Editor's Note: This article comes fromBabbitt Information (ID: bitcoin8btc)Editor's Note: This article comes from
Babbitt Information (ID: bitcoin8btc)
Important points:
, by Ashwath Balakrishnan, translated by Kyle, published with permission.
Two valuation methods show that DeFi will continue to be hot, and it is not overvalued now. Innovative protocols such as Aave and Synthetix have higher demand than MakerDAO, commensurate with their underlying growth potential.
Important points:
One indicator that LEND is trading at a premium is the market's recognition of Aave's product innovation.
By the same innovative standards, SNX is also currently undervalued.
Is DeFi a huge bubble or is it justified? Two valuation methods can help provide some answers as to why protocols like Aave and Synthetix command a premium value relative to MakerDAO.
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Token Valuation Is an Art, Not a Science
Given the recent capitalization boom in DeFi, there are various opinions on whether DeFi is currently undervalued or overvalued. Some investors believe the smart move is to ride the momentum while it lasts. Joshua Frank of analytics service TheTie said DeFi was cited at an all-time high in the news media, becoming the fifth-most discussed topic related to cryptocurrencies in June. However, investors should be wary of putting their money into assets that have risen hundreds of percent in just a few months.
This article looks at Aave, Compound, Maker, and Synthetix from a fundamental perspective and evaluates them against each other via a rolling market cap/total value locked ratio.
It should be noted that the total value locked (TVL) algorithm is not consistent between different protocols. Compound’s TVL is a function of free collateral (total supply minus borrowing), while Synthetix’s TVL is the total value of SNX staked in the protocol. Still, this metric provides a broad overview of how the market is valuing tokens.
Evaluating the top four DeFi tokens
From an innovation standpoint, Aave (LEND) and Synthetix (SNX) are certainly ahead of MakerDAO (MKR) and Compound (COMP). However, Maker and Compound stand out in terms of the sheer size of assets on a protocol’s balance sheet. But which aspect is more valuable to the market: balance sheet size, or innovation?
Looking at market capitalization alone is not enough, as a larger balance sheet could reasonably indicate a higher absolute valuation. Dividing the market cap by the TVL helps to adjust for this, as this shows how a token’s market cap moves with the value locked in its protocol.
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Raw data sources: DeFi Pulse, CoinMarketCap
Both Maker and Compound have seen their share drop since Compound launched. The TVL of Maker and Compound has grown during this period. The ratio drops due to the poor performance of the token. After peaking at $400 in June, COMP has seen a strong downtrend, with prices stabilizing between $150 and $180 for most of the past two weeks.
The ratio favors Aave, which has recently launched new features and has strong token performance.
Aave, Compound, and Maker all belong to the DeFi lending track, but Aave and Compound belong to the same narrow category-the DeFi money market. However, for Aave, in addition to liquidity mining, there are more types of collateral that can be used on Aave. Flash loans, credit delegation, and the ability to lend against multiple assets, including the liquidity provider portion of Uniswap, justify the premium on LEND.
Since mid-June, Synthetix's share of market capitalization has been declining. Around this time, Synthetix's TVL began to grow rapidly, indicating that the capital locked in Synthetix was growing much faster than its market cap. There are two ways to explain this phenomenon. Either SNX is undervalued, or the market thinks that SNX doesn't have much upside in the protocol's growth.
