Decentralized
- Greenfield says three key indicators better explain why valuations move in any direction.
- The fundamentals meta has gained ground as institutional investors have entered this niche.
- These changes highlight the maturity of DeFi over the past four years.
A version of this article appeared in our Decentralized newsletter of December 2. Register here.
Hi everyone, this is Liam.
Decentralized finance has a reputation for pulling project valuations out of nowhere, but new research suggests these values aren’t mere fugazi.
Greenfield, a Berlin-based venture capital firm, says three key indicators provide far more explanatory power for why valuations move in one direction than any other variable.
By closely tracking the fees generated by a protocol, its total value locked, and its revenue, Greenfield concludes that investors can generally bet better on which projects will succeed.
Additionally, a model that uses these metrics typically outperforms analytical models that track the performance of Bitcoin and Ethereum, as well as models that incorporate social sentiment, such as followers on X.
This thesis is held over time horizons of three and six months.
But more importantly, it shows that the so-called fundamentals narrative that has been spread around X this year is much more than a meme.
“The more you let the market play, the more you see that there is divergent performance based on fundamentals, when everything is correlated to broader market movements,” said Felix Machart, a partner at Greenfield and co-author of the paper. DL News.
This is of course not a miracle solution.
Investors should also be aware of temporary spikes in activity related to token incentives, as well as the defensibility of a product amid increasing competition.
And unstable social sentiment can create a noisy investing landscape, at least in the short term.
Over a month, for example, fundamental metrics offer less explanatory power over valuations than the model that only tracks the price of Bitcoin and Ether, according to Greenfield’s analysis.
Analysts also point to the importance of a token’s volume on decentralized exchanges, active users, daily transactions, and a protocol’s treasury value as additional metrics, albeit with less explanatory power.
Markets in full maturity
For those outside the crypto space, the analysis seems quite intuitive. A company’s stock will generally rise if its revenue increases quarter after quarter.
So why wouldn’t DeFi protocols do this?
On the one hand, protocols are not businesses. Their decentralized nature and how they create value for investors may differ.
Machart says, for example, that one can consider token redemptions and staking returns as revenue, since the value accrues to token holders regardless.
DeFi protocols are also much younger than traditional capital markets.
Greenfield’s analysis, covering the period 2021 to 2025, is also not the final word on the matter.
Far from it.
The report concludes with additional research questions aimed at expanding the dataset used, incorporating even more on-chain analytics, and extending the thesis measurement timeline.
Still, the analysis is significant, especially as institutional investors begin to tiptoe into the sector.
“It just proves that you can invest based on expectations about future fundamentals,” Machart said. “Market results are not just random and purely media-driven. »
“We can actually see trends that show the market is maturing. »
Liam Kelly is DL News’ DeFi correspondent based in Berlin. Do you have any advice? Contact us at liam@dlnews.com.
