Exploring the Differences in DeFi Valuation: Which is More Important, Narrative or Data?

This article is from ChainNews, authored by Cai Yan (llamacorn), Managing Director of NGC Ventures.

Due to the black swan event of the Cover protocol being attacked last month, I suffered huge losses on Cover * (I had previously) *, which has left me in a state of confusion lately. In any case, I am very grateful for the comfort my friends have given me. Yes, life is always full of regrets.

First, I must admit that before this incident occurred, I did not conduct thorough research on most projects, which is a form of path dependence and overconfidence, and may lead to some judgments in this article being incorrect. All personal opinions are biased, so please focus more on the methodology rather than the final results.

Another disclaimer is that this methodology does not apply to the current crazy bull market. The current bull market's widespread rise is due to elevated emotions. At the same time, I found it difficult to make money by switching positions based on market trends, so I had time to write this article.

Thank you for patiently reading this article.

Narrative --- Data Axes

When we look back at the cryptocurrency era from 2016-2019 * (the so-called public chain era) *, we did not strictly judge public chain projects, as most chains were still in very early stages and lacked ecosystems worth analyzing. This is also the greatness of Ethereum: the rise of decentralized applications DApps in 2019 and the booming DeFi in 2020. The rapid growth of DeFi users allowed us to evaluate projects based on narratives and data. * (Perhaps there are other methods, but today I want to focus on these two aspects) *

Narrative refers to the project's concept and mechanism, while data directly represents the project's various performances. For me, I will use the narrative and data axes to categorize projects into four quadrants.

• Projects in Quadrant 1: Well-known projects * (market cap within the top 100) *

• Projects in Quadrants 2 and 4: Decent-performing projects * (market cap between 150-300) *

• Projects in Quadrant 3: Emerging projects, junk projects, or projects that are already dead * (market cap beyond 500) *

Value Narrative and Data Axes

You may be confused as to why some rankings do not exist in any quadrant; I would like to name this " Buffer Zone." A project may easily remain stable in Quadrants 2 and 4, but to enter Quadrant 1, it needs to pass through the "Buffer Zone."

The easiest projects to make money from come from Quadrant 3 to Quadrants 2 and 4 or the "Buffer Zone," where the project only needs one strength in either value narrative or data. However, if a project wants to enter Quadrant 1, both its value narrative and data need to be enhanced.

Honestly, this is difficult, and sometimes it requires a bit of luck.

The hardest part is pushing a project from Quadrant 3 to Quadrant 1; if you achieve this, you are a lucky person with a very keen investment sense.

I have tried but failed: I bought Cover tokens at a price of $150-300, with the project ranked 400th, peaking at 130, and ultimately it went to zero on Binance. This is very heartbreaking.

Detailed Examples Explained

I must clarify that the weight ratio between narrative and data is not 50/50; it depends on your personal preference. My personal view is as follows:

When is Value Narrative More Important?

As I mentioned earlier, the easiest projects to profit from come from Quadrant 3 projects entering Quadrants 2 and 4. Personally, at this stage, I prefer value narrative over data, with a weight ratio of about 90/10.

I provided a detailed case analysis of value narrative. I will also give a simple but clearer explanation in this article.

Taking the DeFi interest rate protocol sector as an example, many projects have emerged, some of which have received endorsements from well-known investors. Here, I will only compare protocols that have launched tokens, namely Saffron, 88mph, and Barnbridge. Currently, all three are in Quadrants 2 and 4, but they all started in Quadrant 3.

First, I recommend that you understand some concepts of fixed income or structured products in traditional finance. However, it's okay if you don't; you just need to know that it is a new field with few competitors.

These three projects do similar things, which is risk tranching. That is, how to provide people with fixed rates based on different risk tiers and how to leverage these rates to meet the needs of high-risk investors.

Saffron designed a three-tier risk system. Tier A provides normal rates under low risk, the AA part offers 100 times the rate under high risk, while the S part balances between these two tiers. The S tier is currently temporarily merged with the AA tier. The project does not explicitly tell us how to achieve this idea, but it is indeed an interesting attempt. The product is currently based on DAI/COMPOUND and DAI/RARI tiered architecture, with a total value locked (TVL) in deposit pools, staking pools, and liquidity mining pools of $37 million. Its value narrative and data are quite good.

88mph has a lovely user interface design and a name that pays homage to the classic sci-fi movie Back to the Future, which easily attracts attention. Looking back at the other products created by the team * (Bacon Labs) *, this style is very charming, and I cannot describe it with a very accurate word. Back to the point, 88mph quickly launched its product.

It initially did two things: one was integrating multiple protocols * (such as AAVE, Compound, and Harvest) * for fixed rate deposits. The other was floating rate bonds, representing bond buyers going long on interest rates. Its updates on products and collaborations are very frequent, and the team always has some new ideas. However, the TVL was not very ideal in the first two months; I remember it was stuck at $2 million. But fortunately, the TVL has been growing, and the current total TVL is $22 million, with $9 million in deposit TVL, $4 million in liquidity mining TVL, and $9 million in staking TVL. The value narrative itself is strong, and the data performance is improving.

Barnbridge had a very large TVL during its initial liquidity mining phase, but the project has not yet launched a product. However, it achieved a peak TVL of $577 million and still has $340 million now. The largest funding pool is the USDC/DAI/sUSD pool, which is a non-loss pool, and the token price guarantees a considerable annual percentage yield (APY). Even compared to other protocols, its data performance is also very impressive.

If I had the opportunity, I would have bought tokens from all three projects while they were still in Quadrant 3. But if I could only choose one project, I would mainly focus on its product's iterative capability. Because a high APY cannot be maintained in the long term, you can bet on their chances of moving from Quadrant 3 to Quadrants 2 and 4, but I bet on 88mph eventually reaching Quadrant 1 or the "Buffer Zone."

In any case, these protocols are still under construction, and you should closely monitor their progress.

When is Data More Important?

Data can be modified or fabricated. When we estimate projects in Quadrant 3, the authenticity of the data is not very crucial. However, when assessing the likelihood of a project moving from Quadrants 2 or 4 to Quadrant 1, its data becomes very important.

If I were a data scientist, I would obtain very rich and useful data from the blockchain for modeling and analysis. But I am not, and here I will only provide my simple approach.

1. Use third-party data to obtain comprehensive information

Many data websites are very helpful, such as Debank, Defipulse, Dune Analytics, etc. When a project's business enters explosive growth, obvious buying opportunities arise.

The biggest opportunity I missed last month was Sushiswap. Sushiswap is a decentralized exchange (DEX) that, as a complete fork of Uniswap, was previously in Quadrant 3. However, its initially extremely high APY attracted huge liquidity mining TVL, pushing it into Quadrant 4. With strong capital backing and developer power, Sushiswap partnered with Yearn in December 2020. Its product line then began to differentiate from Uniswap. The value narrative strengthened, and the project also gained the opportunity to enter the "Buffer Zone." From that point on, I should have recognized its potential to advance to Quadrant 1, but I did not.

The main general data for DEXs are trading volume, users, and transaction numbers, all of which can be found on Debank. Currently, Sushiswap ranks second in these three metrics, just behind Uniswap * (I won't include a page snapshot here; you can check it yourself) *. As shown, Sushiswap's business data has been growing impressively since last December.

Sushiswap Liquidity and Trading Volume

Other data, such as social media follower counts * (promotional effect) *, Github updates * (development capability) *, can help you assess the project's basic information. Below is a chart of social media follower counts and development capabilities created by Santiment.

Sushiswap Social Media Follower Counts and Development Capabilities

You can also refer to certain metrics or models created by data analysis websites like Nansen, Intotheblock, TokenTerminal, Santiment, etc. This is an example of a P/S metric designed by TokenTerminal, showing the ratio of token price to sales. As shown, both Uniswap and Sushiswap are undervalued.

DEX Token Price to Sales Ratio

2. Use your chosen data to find ideal projects

When comparing projects in Quadrant 1, I personally place more importance on whether the project has a relatively deep cultural background. Some data that you customize and select can help you make judgments.

For example, Sushiswap currently ranks 51st in market cap, which I personally feel is somewhat high. Sushiswap's trading volume is half that of Uniswap, but its number of users and the number of tokens traded is only one percent of Uniswap's. This huge gap makes me feel that Uniswap, as a pioneer in the DEX field, has much greater market influence and user dependency. The analysis article on Sushiswap written by Santiment is very objective.

Another example is that many projects currently use Snapshot for voting and utilize Discord/Telegram for community chatting. But I personally prefer projects that have forums. Forums may be outdated, but I believe that true project enthusiasts will open their computers and post long messages on forums to propose or discuss.

My personally favored project AAVE has a forum, and Yearn and Uniswap do as well. The data I list below can somewhat help you determine whether the forum is active. You can choose more indirect data and read forum discussion articles yourself to assess the quality of the forum.

In the future, when researching projects, I may find other interesting data, but I cannot model them. Data thinking is divergent; what I can feel far exceeds what I can understand.

Never Ignore Token Economics

It can help you determine the best price to buy.

If a project's token economics is not as poor as Curve, you can avoid this worry. Of course, this is an exaggerated joke of mine. Curve is an excellent stablecoin swap protocol, but it has a very large token supply, and 62% of the supply will be allocated to liquidity providers within 2 years, leading to a very low initial circulation but high daily token sell pressure. The price of Curve tokens peaked at $30 when it launched and is now at $1.5.

Normal token economics will not have a significant impact on price, especially in a bull market, but if its token economics can incentivize the project's performance to reflect in its token price, the situation will be better. Moreover, if you are a qualified cryptocurrency investor, you can certainly calculate its initial market cap, fully diluted total market cap, and some other parameters. If not, you can also check through Coingecko.

Conclusion

As a cryptocurrency investor, I am still a novice. In this article, I have written down almost all of my most important methodologies, hoping they can inspire you in some way. Any other comments are welcome.