Author:Patrick Scott | Dynamo DeFi
Compile:Deep Tide TechFlow
In the past, analysis of crypto assets has largely revolved around charts, hype cycles, and narratives. However, as the industry matures, real performance matters more than empty promises. You need a filter to help you extract truly valuable signals from the noise.
Fortunately, this filter already exists, and it is called Onchain Fundamentals.
On-chain fundamentals provide structural advantages for DeFi (decentralized finance) over traditional finance (TradFi). This is not only one of the many reasons why "DeFi will prevail," but also a core concept that every investor looking to participate in this industry must understand.
Over the past four years, I have been deeply immersed in the research of DeFi data metrics, initially as a researcher and later by joining the DefiLlama team. This article summarizes some of the most useful analytical frameworks I have learned during this time, and I hope it helps you get started with these tools.
Why Are DeFi Metrics Important?
On-chain data is not just a breakthrough in evaluating crypto assets, but a revolution in the entire field of financial data.
Imagine how traditional investors evaluate companies: they have to wait for the quarterly financial reports. And now, some people are even suggesting changing the reporting frequency from quarterly to semi-annual.
In contrast, financial data for DeFi protocols is available in real time. Websites like DefiLlama update relevant data daily, and even hourly. If you want to track revenue on a minute-by-minute basis, you can even directly query blockchain data to achieve this (although overly granular data may not be very meaningful, the option is certainly available to you).
This is undoubtedly a revolutionary breakthrough in transparency. When you purchase shares in a publicly traded company, you rely on financial data released by the management after being audited by accountants, which often has a delay of several weeks or even months. However, when you evaluate a DeFi protocol, you directly access real-time transaction records occurring on an immutable ledger.
Of course, not every cryptocurrency project has fundamental data worth tracking. For example, many "memecoins" and "airdrop projects" that only have a whitepaper and a Telegram group don't benefit much from fundamental analysis (although other metrics like the number of holders might offer some insights).
However, for protocols that can generate revenue, accumulate reserves, and distribute value to token holders, their operations leave behind data trails that can be tracked and analyzed—often before market narratives form.
For example, Polymarket's liquidity has been growing for several years, a trend that began long before prediction markets became a hot topic.
The explosive growth in the price of the HYPE token last summer stemmed from its consistently high income performance.
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These indicators have long suggested the direction of the future; you just need to know where to look.
Core Metrics Analysis
Let's start with the key metrics you need to know about DeFi investments.
TVL (Total Value Locked)
TVL measures the total value of assets deposited into a protocol's smart contracts.
For lending platforms, TVL includes collateral and the assets provided.
For decentralized exchanges (DEX), TVL refers to the deposits in liquidity pools.
For a blockchain network, TVL is the total value locked across all protocols deployed on that network.
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In traditional finance (TradFi), Total Value Locked (TVL) is similar to Assets Under Management (AUM). Hedge funds demonstrate the total amount of capital entrusted to them by clients by reporting their AUM. TVL serves a similar purpose, reflecting the total amount of funds users have deposited into a protocol, indicating the level of trust users place in the protocol's smart contracts.
However, over the years, the TVL metric has also faced considerable criticism, some of which is well-founded.
TVL does not measure activity. A protocol may have billions of dollars in deposits but generate almost no fees.
TVL is highly correlated with token prices. If the price of ETH drops by 30%, the TVL of all protocols holding ETH will also decrease by approximately 30% year-over-year, even if no actual withdrawals occur.
Since most DeFi deposits are volatile tokens, Total Value Locked (TVL) is highly susceptible to price fluctuations. Therefore, astute observers combine USD inflows with TVL to distinguish between price changes and actual deposit activity. USD inflows are calculated by determining the change in balances of each asset between two consecutive days (multiplied by their prices) and then aggregating these changes. For example, a protocol that is 100% locked in ETH would see its TVL drop by 20% if the price of ETH falls by 20%, but its USD inflow would be $0.
Nevertheless, TVL still holds value when presented in both USD and token forms and used in conjunction with activity or productivity metrics. TVL remains an important tool for measuring protocol trust and the overall scale of DeFi. Just don't mistake it for a complete evaluation criterion.
Fees, Revenue, and Holder Income
In DeFi, the definitions of these terms differ from traditional accounting, which can be confusing.
Fees: From the user's perspective, fees refer to the cost you pay when using a protocol. For example, when you make a trade on a DEX, you need to pay a transaction fee. This fee may go entirely to liquidity providers or partially to the protocol. Fees represent the total amount paid by users, regardless of where the funds ultimately flow. In traditional finance, this is equivalent to gross revenue.
Revenue: Revenue refers to the share of income retained by the protocol. In other words, out of all the fees paid by users, how much is actually retained by the protocol? This income may flow to the protocol's treasury, team, or token holders. Revenue does not include fees distributed to liquidity providers and can be considered as the protocol's gross income.
Holder Revenue: This is a narrower definition that only tracks the portion of income distributed to token holders through buybacks, fee burning, or direct staking rewards. In traditional finance, this is analogous to a combination of dividends and stock buybacks.
These distinctions are critical in valuation. Some protocols may generate substantial fees, but since nearly all of these fees are distributed to liquidity providers, the resulting revenue can be very minimal.
DefiLlama has already released complete revenue reports for many protocols. These reports are automatically updated based on on-chain data, breaking down revenue into different categories and redefining these metrics in standard accounting terms.
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These income reports are also accompanied by visual flow charts that illustrate the entire process of how funds flow from users into the protocol and are then distributed to various stakeholders. If you want to gain deeper insights into a specific project's economic model, this information is well worth exploring.
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Volume
Volume is used to track the scale of trading activity.
DEX Volume: Statistics on token swaps across all trading pairs on decentralized exchanges (DEXs).
Perpetual Contract Trading Volume (Perp Volume): The total trading volume across all perpetual contract trading platforms.
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Trading volume is a key indicator of overall participation in the cryptocurrency market. When people are actively using digital assets, they engage in trading. A surge in trading volume is often associated with shifts in market interest, whether it's a euphoric rise or a panic-driven sell-off.
Compared to previous cycles, the trading volume of perpetual contracts has increased significantly. In 2021, the presence of perpetual contract exchanges was still very limited. Today, however, platforms like Hyperliquid, Aster, and Lighter have daily trading volumes reaching billions of dollars. Due to the rapid growth in this sector, comparisons with historical data from the past are somewhat limited in meaning. For example, comparing the current volume of perpetual contract trading with data from 2021 only indicates that the field has expanded, without providing more valuable insights.
Within a certain category, the trend of market share is more important than absolute trading volume. For example, if a perpetual contract DEX's market share increases from 5% to 15%, it indicates an actual improvement in its market position, even if its absolute trading volume has declined. DefiLlama's custom dashboard library provides many market share charts that are well worth exploring.
Open Interest
Open interest refers to the total value of derivative contracts that are not yet closed or liquidated. For a perpetual contract DEX, open interest represents all positions that have not yet been closed or liquidated.
Open Interest is an important indicator for measuring liquidity on derivatives platforms. It reflects the total amount of capital deployed in active perpetual contract positions.
During market volatility, this indicator can quickly deteriorate. A large-scale liquidation wave can wipe out open positions within hours. By tracking the recovery that follows such events, one can observe whether a platform is able to reattract liquidity or if funds have permanently shifted to other platforms.
Stablecoin Market Cap
For a blockchain network, stablecoin market capitalization refers to the total value of all stablecoins deployed on that network.
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The market capitalization of stablecoins is an important indicator for measuring capital inflows. Unlike TVL, which is affected by token price volatility, stablecoins represent actual U.S. dollars (or their equivalent) that users have truly injected onto the chain via cross-chain bridges. For example, if the stablecoin market cap on a certain chain grows from $3 billion to $8 billion, this means that $5 billion in real capital has flowed into that ecosystem.
Since October 2023, about $180 billion in stablecoins has flowed into the crypto market. A portion of this inevitably entered DeFi, driving TVL growth, increased trading volume, and fee generation. The flow of stablecoins is similar to capital inflows in a national economy. An increase in stablecoin supply indicates new capital entering, while a decrease in supply suggests capital exiting.
Application Revenue and Application Fees (App Revenue & App Fees)
Application revenue and application costs are chain-level metrics that aggregate the revenue and costs generated by all applications deployed on a particular blockchain. However, they do not include stablecoins, liquid staking protocols, or gas fees.
I view it as the "GDP" of blockchain, showcasing the scale of actual economic activities taking place within this ecosystem.
Revenue metrics are among the hardest data to fabricate, as they require users to actually spend money. This makes them a high-signal indicator for assessing the level of activity in a DeFi ecosystem.
It is important to note that you should not value an application based on its revenue, as valuing something based on income that is not directly tied to assets is meaningless. Application revenue and application fees are better suited for diagnosing whether a chain is growing, rather than for evaluating its value.
How to effectively interpret these metrics?
Understanding individual metrics is the first step, but to effectively utilize them, you need an analytical framework. I tend to use the following three-step analytical approach:
Prioritize sustained and stable growth.
Track both stock indicators and flow indicators simultaneously.
Consider the impact of token unlocks and incentive mechanisms.
1. Prioritize sustained and stable growth.
Protocols that experience brief spikes in revenue followed by rapid collapses in their charts cannot demonstrate sustainable value creation. I have seen countless protocols set revenue records in a particular week, only to disappear completely a month later.
What truly matters is steady growth over a longer time horizon. For example, if a protocol's monthly revenue gradually increases from $500,000 to $2 million over six months, this indicates sustainable growth. However, if a protocol's income suddenly surges to $5 million in a week but then quickly drops to $300,000, it may simply be a fleeting anomaly.
In the crypto industry, time moves much faster than in traditional markets. Here, a month of sustained growth roughly equates to a quarter in traditional markets. If a protocol's revenue continues to grow for six months, it can be considered equivalent to a company with six consecutive quarters of earnings growth. Such performance is definitely worth noting.
2. Track both stock and flow metrics simultaneously.
Stock Metrics: Such as TVL (Total Value Locked), open interest, stablecoin market cap, treasury reserves, etc., which tell you how much capital is deposited into the protocol.
Flow Metrics: Such as fees, revenue, volume, etc., they tell you the actual level of activity within the protocol.
Both are equally important.
Trading volume is more easily manipulated. For example, a protocol can artificially inflate trading volume through incentives or wash trading, and such temporary spikes are not uncommon. However, liquidity is much harder to fabricate. To get users to genuinely deposit funds and retain them over the long term, the protocol must offer real utility or attractive returns.
When evaluating any protocol, be sure to select at least one stock indicator and one flow indicator for analysis. For example:
For perpetual contract DEX, you can choose open contracts and trading volume.
For lending and borrowing protocols, TVL and fees can be selected.
For blockchain, you can choose stablecoin market capitalization and application revenue.
If both types of metrics show growth, it indicates that the protocol is indeed expanding. If only the volume metrics are growing while liquidity remains stagnant, further analysis is needed, as there might be signs of manipulation. If only liquidity is increasing while volume remains stagnant, it may suggest that deposits are primarily coming from a small number of "whales."
3. Consider token unlocks and incentive measures
Token unlocks can create selling pressure. A portion of the vested tokens released weekly by the protocol is always sold. If there is no other source of demand to offset this selling, the token price will decline.
Before investing, please check the token's unlock schedule. A protocol with 90% of its supply already in circulation will face minimal future dilution pressure. In contrast, a protocol with only 20% circulating supply that is about to experience a large unlock in three months presents a completely different level of investment risk.
Similarly, high-income figures for a protocol may look less impressive if the token incentives it distributes exceed the income it generates from users. DefiLlama tracks this through its "Earnings" metric, which deducts incentive costs from revenue. For example, a protocol might generate $10 million in annual revenue but distribute $15 million in token rewards.
Although incentives are an effective strategy for driving protocol growth in the early stages and are often necessary during the initial phase of a protocol's lifecycle, they do create selling pressure, which needs to be offset by other demand sources.