This is a follow-up to our top rated article How to Invest in DeFi. Here is the TL version; DR:
- Instead of putting your money into all of those DeFi platforms, just buy the tokens instead (e.g. instead of locking in the value in Compound just buy and keep COMP)
- Tokens can be thought of as “shares” in these “companies” (for example, buying UNI is like buying “shares” in the “company” Uniswap)
- To quickly validate which tokens might be a good buy, look at user growth (graph here)
- Any rapidly growing projects (but the token price isn’t) are probably good buys
- As always, do additional research and don’t invest more than what you’re willing to lose.
Once you have identified a good DeFi investment, here is the 3 step method to invest in these tokens:
I’ve tested this approach with some of DeFi’s smartest investors and traders, inviting them to punch holes in it (I invite you to punch holes in it too). They agreed that this was a good approach for long-term investors in this area. In my mind, it’s like buying GOOG shares in 2004.
Today I want to add a little more nuance to this approach, to help you find good long-term DeFi buys. And it starts with something I heard from a Binance insider.
Blockchain is transparent
DeFi is built on public blockchains, which means you can see everything that is going on, in real time.
It’s a huge difference of investing in public companies. Let’s say you own FB stocks: you know that the number of people using Facebook is an extremely important factor in the value of your investment. But you don’t know how many people use Facebook until they publish their quarterly reports, which is when the data is old.
In the blockchain (where user growth is everything), you can see this data in real time. (Again, here’s the graph.) Because blockchains have network effects, fast-growing blockchains can have quadratic growth curves. Discover for example this growth in the DeFi Compound protocol:
This type of data is the secret weapon of the blockchain investor. It’s just not available to regular investors in regular markets: it shows you how many people there are actually using a blockchain, not just passing it on.
Public blockchains are transparent. This is not theory: it is a fact. And it looks you in the face.
I recently attended the Harvard Blockchain Club Meetup, where they had on Flora Sun from Binance X, which is the innovation arm of Binance (think Google X). She spoke about Binance Smart Chain, which is Binance’s new blockchain for building DeFi projects (their answer to Ethereum, where virtually all DeFi projects are built today).
She pointed out that one of the key metrics they use for Binance Smart Chain’s success is how many developers are building things there. It was a light bulb switch, a click of a button, an “a-ha moment” for me.
Think about it logically: when you have more developers on a DeFi blockchain, more dapps are released. Dapps attract users. More users, in turn, attract more developers. Ideally, you have a virtuous circle that we are looking for as investors:
That is why the easiest way to invest in DeFi is to simply buy and hold Ethereum. ETH is the city’s main game, the blockchain that all of these dapps are built on. It’s like investing in FB stock (the platform) instead of ZNGA (an app distributed on this platform).
Thus, the “number of developers” is a good metric to measure the value of the blockchain. platforms, like Ethereum, Cardano, Polkadot, and Binance Smart Chain.
Note that this does not work for DeFi protocols, but only for DeFi platforms. But there is a similar metric for DeFi protocols: POWER USERS.
Measure Powerful Users with Discord
For example, Discord is the instant messaging platform of choice for the crypto community. (I’m not a fan, but my kids love it.) Discord is geeky and difficult to use – think of the early Usenet newsgroups – which makes it a good “barrier to entry” for power users to measure. a DeFi protocol.
|Investment opportunity||Measured by||Where to find it|
|DeFi platforms||# of developers||Active GitHub users|
|DeFi protocols||# of experienced users||Active Discord users|
Why Discord? Why not Telegram, Reddit and Twitter?
First, there’s the issue of counting the same user multiple times: if you’re a “power user” on Discord you’re probably also on Twitter, so let’s keep it simple and just use one channel.
Twitter is a different animal, too: it’s easy for anyone to tweet about anything; it’s much harder to find and join a Discord server. Also, Twitter activity roughly matches price movements, so it doesn’t tell you anything useful about or or when invest:
In the graph above, the green line is the price of bitcoin; the blue tips are a social activity around “bitcoin”. I find it hard to see a pattern except that social activity increases when the price of bitcoin climbs. Twitter activity, in other words, is not very useful for valuing a blockchain.
Think of it this way: Twitter is low engagement. Discord is a higher commitment. Using the platform is a very high commitment. Buying the token is the biggest commitment.
In summary, we can assess the major DeFi protocols by summing their active users (most important) and experienced users (secondary importance) to get a rough “value per user”.
|DeFi Protocol||Token||Active users||Power users||Market capitalization||Value per user|
|Uniswap||United||519 362||34,051||$ 778,615,944||$ 1,407|
|Compound||COMP||186,439||12,340||$ 447,022,015||$ 2,249|
|Aave||TO LEND||28 872||10,573||$ 731,212,920||$ 18,538|
|Balance||BALL||23,020||7,490||$ 87,855,542||$ 2,880|
|Ren||REN||5 466||562||$ 283,680,758||$ 47,061|
Looking at these numbers, we would say that Uniswap may be somewhat undervalued, while Ren and Aave appear to be overvalued. While no one knows what a blockchain user “should” be worth, this early data would suggest something like $ 2,000 per user. The graph makes it even clearer:
It doesn’t tell us all, but that tells us a lot – especially when it’s tracked over time. Due to the network effects of blockchain, when we see the total number of users and power users skyrocket (with no subsequent increase in price), we potentially have success.
- Watch total number of users and advanced users to see which DeFi projects are experiencing rocket growth.
- Find where the the price of the token is low, compared to the growth of users.
- Make your qualitative research, Furthermore quantitative research (use our Blockchain Investor’s dashboard).
- When you are satisfied, simply invest in the underlying token, which amounts to buying “shares” in “the company”.
These numbers are the secret weapon of the blockchain investor. And because this space is so new, it’s like we solve The Da Vinci Code before Robert Langdon gets out of bed. It’s a long-term game, but we are long-term investors.
It’s like buying GOOG shares in 2004.
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