๐๐ก๐๐ญ ๐ข๐ ๐ ๐ญ๐จ๐ฅ๐ ๐ฒ๐จ๐ฎ ๐ญ๐ก๐๐ซ๐โ๐ฌ ๐ ๐ฐ๐๐ฒ ๐ญ๐จ ๐ข๐๐๐ง๐ญ๐ข๐๐ฒ ๐จ๐ฏ๐๐ซ๐ก๐ฒ๐ฉ๐๐ ๐๐๐ ๐ข...
Ernest๐งฉ๐ค@Ernestofweb3
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Jan 21, 2025
~6 min read
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๐๐ก๐๐ญ ๐ข๐ ๐ ๐ญ๐จ๐ฅ๐ ๐ฒ๐จ๐ฎ ๐ญ๐ก๐๐ซ๐โ๐ฌ ๐ ๐ฐ๐๐ฒ ๐ญ๐จ ๐ข๐๐๐ง๐ญ๐ข๐๐ฒ ๐จ๐ฏ๐๐ซ๐ก๐ฒ๐ฉ๐๐ ๐๐๐
๐ข ๐ฉ๐ซ๐จ๐ฃ๐๐๐ญ๐ฌ ๐๐๐๐จ๐ซ๐ ๐ญ๐ก๐๐ฒ ๐๐ซ๐๐ฌ๐ก?
The Mcap/TVL ratio can be your secret weapon.
Lets dive in ๐ต๏ธโโ๏ธ๐
๐งต
The Mcap/TVL ratio can be your secret weapon.
Lets dive in ๐ต๏ธโโ๏ธ๐
๐งต
2
๐ ๐๐๐๐๐๐๐๐๐๐๐๐
Most people that are new to the space hear about Market Capitalization and Total value locked of a project but don't know what it means.
In today's Defi onboarding series, I'll be talking extensively on what MCap/TVL Ratio is all about and how you can leverage it to find undervalued projects.
Here's a breakdown of what MCap and TVL means so you understand them better...
Most people that are new to the space hear about Market Capitalization and Total value locked of a project but don't know what it means.
In today's Defi onboarding series, I'll be talking extensively on what MCap/TVL Ratio is all about and how you can leverage it to find undervalued projects.
Here's a breakdown of what MCap and TVL means so you understand them better...
3
๐ ๐๐๐ซ๐ค๐๐ญ ๐๐๐ฉ๐ข๐ญ๐๐ฅ๐ข๐ณ๐๐ญ๐ข๐จ๐ง (๐๐๐๐ฉ)
๐๐๐ซ๐ค๐๐ญ ๐๐๐ฉ๐ข๐ญ๐๐ฅ๐ข๐ณ๐๐ญ๐ข๐จ๐ง is the total value of all the tokens or coins in circulation for a specific cryptocurrency project.
It is calculated by multiplying the current price of the token by the total supply of tokens that are available in the market.
๐๐๐ซ๐ค๐๐ญ ๐๐๐ฉ๐ข๐ญ๐๐ฅ๐ข๐ณ๐๐ญ๐ข๐จ๐ง is the total value of all the tokens or coins in circulation for a specific cryptocurrency project.
It is calculated by multiplying the current price of the token by the total supply of tokens that are available in the market.
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โบ ๐๐๐ซ๐'๐ฌ ๐ญ๐ก๐ ๐
๐จ๐ซ๐ฆ๐ฎ๐ฅ๐;
Market capitalization
This can be gotten from the Current Price of Token รTotal Circulating Supply
Eg;
If the Current price of the token is 0.1$
And the total circulating supply is 1,000,000 tokens
That means the MCap is $100,000
๐๐: If you don't understand, go back to elementary mathematics class.
Let's continue....
Market capitalization
This can be gotten from the Current Price of Token รTotal Circulating Supply
Eg;
If the Current price of the token is 0.1$
And the total circulating supply is 1,000,000 tokens
That means the MCap is $100,000
๐๐: If you don't understand, go back to elementary mathematics class.
Let's continue....
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โบ ๐๐ข๐ ๐ง๐ข๐๐ข๐๐๐ง๐๐ ๐จ๐ ๐๐๐ซ๐ค๐๐ญ ๐๐๐ฉ๐ข๐ญ๐๐ฅ๐ข๐ณ๐๐ญ๐ข๐จ๐ง
The Market Cap gives a quick snapshot of a project's size and its relative value within the broader market.
A higher market cap generally indicates that a project is more established and may be considered less risky than smaller projects.
It helps researchers understand the scale of a project and compare it to others in the same space.
The Market Cap gives a quick snapshot of a project's size and its relative value within the broader market.
A higher market cap generally indicates that a project is more established and may be considered less risky than smaller projects.
It helps researchers understand the scale of a project and compare it to others in the same space.
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๐ ๐๐จ๐ญ๐๐ฅ ๐๐๐ฅ๐ฎ๐ ๐๐จ๐๐ค๐๐ (๐๐๐)
๐๐จ๐ญ๐๐ฅ ๐๐๐ฅ๐ฎ๐ ๐๐จ๐๐ค๐๐ refers to the total amount of assets that are currently staked, deposited, or locked into a DeFi protocol.
TVL represents the value of all the tokens that are being used in a platform's various financial activities, such as lending, staking, or providing liquidity.
๐๐จ๐ญ๐๐ฅ ๐๐๐ฅ๐ฎ๐ ๐๐จ๐๐ค๐๐ refers to the total amount of assets that are currently staked, deposited, or locked into a DeFi protocol.
TVL represents the value of all the tokens that are being used in a platform's various financial activities, such as lending, staking, or providing liquidity.
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โบ ๐๐ข๐ ๐ง๐ข๐๐ข๐๐๐ง๐๐ ๐จ๐ ๐ญ๐ก๐ ๐ญ๐จ๐ญ๐๐ฅ ๐ฏ๐๐ฅ๐ฎ๐ ๐ฅ๐จ๐๐ค๐๐ ๐จ๐ ๐ ๐ฉ๐ซ๐จ๐ฃ๐๐๐ญ
The TVL is a measure of the overall health and adoption of a DeFi protocol.
A higher TVL typically means more user trust and greater utility of the platform.
It reflects the total capital that users have committed to the platform, showing the level of participation and liquidity in the ecosystem.
TVL can be an indicator of the project's potential for growth, as it shows how much capital is being actively used in its services.
The TVL is a measure of the overall health and adoption of a DeFi protocol.
A higher TVL typically means more user trust and greater utility of the platform.
It reflects the total capital that users have committed to the platform, showing the level of participation and liquidity in the ecosystem.
TVL can be an indicator of the project's potential for growth, as it shows how much capital is being actively used in its services.
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๐ ๐๐จ๐ง๐ฎ๐ฌ ๐๐ข๐ฉ ๐๐จ๐ซ ๐ญ๐ก๐จ๐ฌ๐ ๐ฐ๐ก๐จ ๐ซ๐๐๐ ๐ฎ๐ง๐ญ๐ข๐ฅ๐ฅ ๐ง๐จ๐ฐ;
There's a formula callers the MCap/TVL Ratio formula.
The MCap/TVL ratio provides insight into how the market values the protocol relative to the amount of assets locked within it.
It can be an indicator of whether a DeFi project is potentially undervalued, overvalued, or fairly valued.
There's a formula callers the MCap/TVL Ratio formula.
The MCap/TVL ratio provides insight into how the market values the protocol relative to the amount of assets locked within it.
It can be an indicator of whether a DeFi project is potentially undervalued, overvalued, or fairly valued.
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โบ ๐๐ก๐ ๐๐๐๐ฉ/๐๐๐ ๐๐๐ญ๐ข๐จ ๐
๐จ๐ซ๐ฆ๐ฎ๐ฅ๐
MCap/TVL Ratio = Market Capitalization\Total Value Locked
๐ ๐จ๐ซ ๐๐ฑ๐๐ฆ๐ฉ๐ฅ๐;
If the Mcap is $100,000
And the TVL is $100,000
This means that the MCap/TVL Ratio is 100,000/100,000
Which is equals to 1.
Now let's interprete it's significance....
MCap/TVL Ratio = Market Capitalization\Total Value Locked
๐ ๐จ๐ซ ๐๐ฑ๐๐ฆ๐ฉ๐ฅ๐;
If the Mcap is $100,000
And the TVL is $100,000
This means that the MCap/TVL Ratio is 100,000/100,000
Which is equals to 1.
Now let's interprete it's significance....
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โบ ๐๐ก๐ ๐๐ง๐ญ๐๐ซ๐ฉ๐ซ๐๐ญ๐๐ญ๐ข๐จ๐ง๐ฌ ๐จ๐ ๐ญ๐ก๐ ๐๐๐๐ฉ/๐๐๐ ๐๐๐ญ๐ข๐จ:
โฌ๐๐ก๐๐ง ๐ญ๐ก๐ ๐๐๐๐ฉ/๐๐๐ ๐๐๐ญ๐ข๐จ < ๐:
โฏ It shows potential Undervaluation
If the ratio is less than 1, it suggests that the market capitalization is less than the total value locked in the protocol.
This could indicate that the project is potentially undervalued by the market.
โฏ It gives room for investment Opportunity
A ratio below 1 might attract investors looking for bargains, as they might believe that the market has not yet recognized the full potential or value of the protocol.
โฏ It can also show that caution is needed
A very low ratio could also indicate risks, such as inefficient use of capital, lack of profit generation, or issues with token utility and governance.
โฌ๐๐ก๐๐ง ๐ญ๐ก๐ ๐๐๐๐ฉ/๐๐๐ ๐๐๐ญ๐ข๐จ < ๐:
โฏ It shows potential Undervaluation
If the ratio is less than 1, it suggests that the market capitalization is less than the total value locked in the protocol.
This could indicate that the project is potentially undervalued by the market.
โฏ It gives room for investment Opportunity
A ratio below 1 might attract investors looking for bargains, as they might believe that the market has not yet recognized the full potential or value of the protocol.
โฏ It can also show that caution is needed
A very low ratio could also indicate risks, such as inefficient use of capital, lack of profit generation, or issues with token utility and governance.
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๐๐ก๐๐ง ๐ญ๐ก๐ ๐๐๐๐ฉ/๐๐๐ ๐๐๐ญ๐ข๐จ โ ๐:
โฏ It shows Fair Valuation
When the ratio is around 1, it suggests that the market cap is roughly equal to the TVL, implying that the market values the protocol at about the same level as the assets locked within it.
โฏ It shows balanced Market Perception
This balance indicates that the market has a neutral outlook on the project, suggesting that the valuation is neither too high nor too low relative to the assets secured.
โฏ It shows Fair Valuation
When the ratio is around 1, it suggests that the market cap is roughly equal to the TVL, implying that the market values the protocol at about the same level as the assets locked within it.
โฏ It shows balanced Market Perception
This balance indicates that the market has a neutral outlook on the project, suggesting that the valuation is neither too high nor too low relative to the assets secured.
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๐๐๐๐ฉ/๐๐๐ ๐๐๐ญ๐ข๐จ > ๐
โฏ It shows Potential Overvaluation
A ratio greater than 1 means that the market capitalization exceeds the total value locked.
This could indicate that the market is assigning a higher value to the project than the actual assets locked within it justify.
โฏ It can also show future growth expectations:
A high ratio might reflect market optimism, indicating expectations of future growth, increased adoption, or other value-adding developments.
โฏ It also shows risk of overvaluation:
However, an excessively high ratio can also be a warning sign that the project might be overvalued, particularly if there's no corresponding growth in TVL.
It could imply speculative trading or that the tokenโs price is driven by hype rather than fundamentals.
โฏ It shows Potential Overvaluation
A ratio greater than 1 means that the market capitalization exceeds the total value locked.
This could indicate that the market is assigning a higher value to the project than the actual assets locked within it justify.
โฏ It can also show future growth expectations:
A high ratio might reflect market optimism, indicating expectations of future growth, increased adoption, or other value-adding developments.
โฏ It also shows risk of overvaluation:
However, an excessively high ratio can also be a warning sign that the project might be overvalued, particularly if there's no corresponding growth in TVL.
It could imply speculative trading or that the tokenโs price is driven by hype rather than fundamentals.
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๐ ๐
๐๐๐ญ๐จ๐ซ๐ฌ ๐๐๐๐๐๐ญ๐ข๐ง๐ ๐ญ๐ก๐ ๐๐๐๐ฉ/๐๐๐ ๐๐๐ญ๐ข๐จ
โบ ๐๐จ๐ค๐๐ง๐จ๐ฆ๐ข๐๐ฌ
The design and distribution of a project's tokens can significantly impact the ratio.
A large circulating supply without corresponding utility or staking mechanisms may result in a higher market cap without increasing TVL.
โบ ๐๐ซ๐จ๐ญ๐จ๐๐จ๐ฅ ๐๐๐ฏ๐๐ง๐ฎ๐
Projects generating substantial fees or income can justify a higher MCap/TVL ratio, as the market anticipates future earnings growth and value accrual to token holders.
โบ ๐๐จ๐ค๐๐ง๐จ๐ฆ๐ข๐๐ฌ
The design and distribution of a project's tokens can significantly impact the ratio.
A large circulating supply without corresponding utility or staking mechanisms may result in a higher market cap without increasing TVL.
โบ ๐๐ซ๐จ๐ญ๐จ๐๐จ๐ฅ ๐๐๐ฏ๐๐ง๐ฎ๐
Projects generating substantial fees or income can justify a higher MCap/TVL ratio, as the market anticipates future earnings growth and value accrual to token holders.
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โบ ๐๐๐จ๐ฌ๐ฒ๐ฌ๐ญ๐๐ฆ ๐๐๐ฏ๐๐ฅ๐จ๐ฉ๐ฆ๐๐ง๐ญ
Projects that continually expand their ecosystem with new features, partnerships, or integrations may see their market cap grow faster than TVL as investors price in future potential.
โบ ๐๐๐ซ๐ค๐๐ญ ๐๐๐ง๐ญ๐ข๐ฆ๐๐ง๐ญ
Overall sentiment in the crypto market can influence the ratio.
In bullish markets, investors might be willing to pay a premium (higher ratio), while in bearish markets, they might become more conservative (lower ratio).
โบ ๐๐๐๐ฎ๐ซ๐ข๐ญ๐ฒ ๐๐ง๐ ๐๐ซ๐ฎ๐ฌ๐ญ
Projects with a solid track record of security and transparent governance are more likely to have a higher MCap/TVL ratio, as users and investors are more confident in the protocolโs longevity and reliability.
Projects that continually expand their ecosystem with new features, partnerships, or integrations may see their market cap grow faster than TVL as investors price in future potential.
โบ ๐๐๐ซ๐ค๐๐ญ ๐๐๐ง๐ญ๐ข๐ฆ๐๐ง๐ญ
Overall sentiment in the crypto market can influence the ratio.
In bullish markets, investors might be willing to pay a premium (higher ratio), while in bearish markets, they might become more conservative (lower ratio).
โบ ๐๐๐๐ฎ๐ซ๐ข๐ญ๐ฒ ๐๐ง๐ ๐๐ซ๐ฎ๐ฌ๐ญ
Projects with a solid track record of security and transparent governance are more likely to have a higher MCap/TVL ratio, as users and investors are more confident in the protocolโs longevity and reliability.
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๐ ๐๐ซ๐๐๐ญ๐ข๐๐๐ฅ ๐๐ฌ๐๐ฌ ๐จ๐ ๐ญ๐ก๐ ๐๐๐๐ฉ/๐๐๐ ๐๐๐ญ๐ข๐จ
โบ ๐๐จ๐ฆ๐ฉ๐๐ซ๐๐ญ๐ข๐ฏ๐ ๐๐๐ฌ๐๐๐ซ๐๐ก
The ratio is particularly useful when comparing different DeFi projects within the same category (e.g., lending platforms, DEXs, yield aggregators).
It helps researchers assess which projects might be undervalued or overvalued relative to their peers.
โบ ๐๐ข๐ฌ๐ค ๐๐ฌ๐ฌ๐๐ฌ๐ฌ๐ฆ๐๐ง๐ญ
A quick glance at the MCap/TVL ratio can provide insights into potential risks or investment opportunities.
For example, a low ratio could be a sign to investigate further for undervaluation, while a high ratio could warrant caution regarding overvaluation.
โบ ๐๐จ๐ฆ๐ฉ๐๐ซ๐๐ญ๐ข๐ฏ๐ ๐๐๐ฌ๐๐๐ซ๐๐ก
The ratio is particularly useful when comparing different DeFi projects within the same category (e.g., lending platforms, DEXs, yield aggregators).
It helps researchers assess which projects might be undervalued or overvalued relative to their peers.
โบ ๐๐ข๐ฌ๐ค ๐๐ฌ๐ฌ๐๐ฌ๐ฌ๐ฆ๐๐ง๐ญ
A quick glance at the MCap/TVL ratio can provide insights into potential risks or investment opportunities.
For example, a low ratio could be a sign to investigate further for undervaluation, while a high ratio could warrant caution regarding overvaluation.
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โบ ๐๐๐ซ๐ค๐๐ญ ๐๐ซ๐๐ง๐๐ฌ
Monitoring changes in the MCap/TVL ratio over time can provide clues about market sentiment and the evolving perception of a project's value.
A rising ratio might indicate growing market confidence, while a falling ratio could suggest declining interest or concerns.
Monitoring changes in the MCap/TVL ratio over time can provide clues about market sentiment and the evolving perception of a project's value.
A rising ratio might indicate growing market confidence, while a falling ratio could suggest declining interest or concerns.
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๐ ๐๐จ๐ง๐๐ฅ๐ฎ๐ฌ๐ข๐จ๐ง
The MCap/TVL ratio is a valuable metric for understanding how the market values a DeFi protocol relative to the assets locked within it.
By assessing this ratio in conjunction with other factors, such as;
โProtocol revenue
โTokenomics
โMarket sentiment
โEcosystem development
Researchers can gain deeper insights into the potential value and risks associated with a DeFi project.
The MCap/TVL ratio is a valuable metric for understanding how the market values a DeFi protocol relative to the assets locked within it.
By assessing this ratio in conjunction with other factors, such as;
โProtocol revenue
โTokenomics
โMarket sentiment
โEcosystem development
Researchers can gain deeper insights into the potential value and risks associated with a DeFi project.
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Finally, I know you just bookmarked this thread ๐
But no, that means you're dumping it
Go back and learn, learn so you do better.
You're destined for greatness
But no, that means you're dumping it
Go back and learn, learn so you do better.
You're destined for greatness