How to Value DeFi Projects
The Challenge with DeFi Valuations
One persistent problem in DeFi is how to properly value protocols. While DeFi protocols have some characteristics of businesses, they aren’t businesses. Moreover, as volatile and high growth startups, they aren’t well-suited to traditional valuation methods like discounted cash flows.
One common method employed by analysts is to look at the Market Cap/TVL ratio of a chain or protocol. This runs into a few problems:
Many other factors, such as growth, fees, on-chain activity, and speculation affect market cap.
Not all TVL is equally productive. Some protocols such as perp DEXes and socialfi dapps (when they were popular) earn very high fees compared to their TVL, while others, such as lending and services, earn low fees.
An ideal solution would take into account a protocol’s category and incorporate multiple metrics to triangulate on a fair valuation.
The Solution
My current solution is to pull a matrix of valuations for all protocols:
Market Cap/ TVL
Fully Diluted Valuation / TVL
Market Cap/ 30 Day Fees
Fully Diluted Valuation/ 30 Day Fees
I then calculated the 25th percentile, median, and 75th percentile for each metric by category. The idea is that for a given protocol, you can cross-reference its ratios against category benchmarks to tell whether it is over or undervalued.
The MVP of the tool exists in a spreadsheet and looks like this (I’ll be improving it over time based on readers’ feedback). TVL and Fee data was pulled from DefiLlama and Market Cap and FDV data was pulled from CoinGecko. The biggest shortcoming so far is that for smaller categories, there often are often only a few protocols for which fees are tracked.
To access the tool…
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