11. Valuation of DeFi Blockchains

Monday 21st February 2022

Now that we have covered the basics of Decentralized Finance (DeFi), let’s talk about the valuation of DeFi Blockchains.

Now that we have covered the basics of Decentralized Finance (DeFi), let’s talk about the valuation of DeFi Blockchains.

1. Core metrics

Total Value Locked (TVL)

I think that the most important metric for a DeFi Blockchain is Total Value Locked (TVL). This is the total amount of assets “locked” or secured in a DeFi blockchain.

Mcap / TVL Ratio (MTR)

To get the MTR, we start with the Circulating Supply of the native token of the Blockchain e.g. ETH in the case of the Ethereum Mainnet. The Circulating Supply is the number of coins/tokens in public hands.

Multiplying the Circulating Supply with the Current Price gives us the Market Capitalization (Mcap).

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

2. Golden ratio

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

3. Case study

Valuing the native token of a DeFi Blockchain is a 2-step process.

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.

As of today (15 February 2022), the TVL of the Ethereum Mainnet is $ 124.84 billion. So its ideal Mcap would be
= $124.84 billion x 3 = $ 374.52 billion

The circulating supply of ETH is 119,586,846 ETH. So the ideal price of ETH would be
= 374.52 billion / 119,586,846
= $ 3131.78

That means at the current price of $3,041.60, ETH is slightly undervalued.

To Do

Here’s an assignment for you. Calculate the ideal price for:

  • Terra (LUNA),
  • Binance Smart Chain (BNB), and
  • Avalanche (AVAX).

You can get the latest TVL data from https://defillama.com/chains and the other metrics from https://coinmarketcap.com/