⚡How to Use On-Chain Data the Right Way

Why liquidity matters, not all deposits are created equal, and more

The Dynamo Research newsletter summarizes on-chain analytics, with a focus on actionable insights, and provides cryptocurrency market analysis.

Welcome to the first issue of the Dynamo Research newsletter.

Normally these newsletters will focus on an in-depth look at some interesting phenomenon in the world of digital assets. I already have research reports in the works about the rebirth of Solana, content creators as early adopters of crypto consumer apps, and whether real world assets are ready for prime-time.

In this issue, I’ll talk about how to use on-chain data the right way.

You need to know how to use on-chain data right primarily for 3 reasons:

1. Using on-chain data wrong is worse than not using it at all

2. Using data correctly already puts in you in the top quartile of on-chain investors

3. Once you understand how to use it correctly, you’ll understand why I chose the indicators that I did for this newsletter

This post will be divided into 3 main sections, followed by an overview of on-chain data indicators from today.

1. Why liquidity matters

2. Don’t obsess over ratios

3. Not all deposits are created equal (fees matter!)

These are the on-chain data indicators I’ll be tracking to start. Use these to find emerging trends:

1. Chains breaking their ATH in Total Value Locked (TVL)

2. Chains with sustained TVL growth

3. Chains that are deviating from their historical MCap/TVL ratio

4. Stablecoin liquidity flows

5. Projects with sustained fee growth

6. Protocols with sustained TVL growth

Now, let’s talk on-chain data.

Why Liquidity Matters

The thing about liquidity is that it isn’t static. It’s constantly moving around and circulating. Let’s say that liquidity is water and a specific market is a barrel. Now imagine a barrel that’s full to the brim with water (liquidity). The barrel’s constantly moving around, causing water to splash over the edges. Plus it’s full of leaks. Things proximate to the barrel are going to get wet.

Image from TreasuryandRisk.com

To start, let’s look at an example from the real economy: