The Best Way to Invest in DeFi in 2024
This is a follow-up to our top-rated DeFi investing methods article. TL; The DR version is:
- Instead of investing your money in all these DeFi platforms, buy tokens (e.g. buy and hold COMP instead of locking the value in Compound).
- Tokens can be considered “stocks” in these “companies” (e.g. buying UNI is like buying “stocks” in a Uniswap “company”).
- To quickly see which token is a good one to buy, look at user growth (chart here).
- Any project that is growing quickly but its token price is not is likely to be a good buy.
- As always, do additional research and never invest more than you are prepared to lose.
Once you’ve identified a good DeFi investment, here’s a three-step method to investing in these tokens:
I tested this approach with some of the smartest investors and traders in DeFi, inviting them to try their luck (and invite you to try your hand at it too). They agreed that this is a good approach for long-term investors in this sector. In my opinion, it’s like buying GOOG stock 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 a story from a Binance insider.
Blockchain is transparent
DeFi is built on public blockchains, so you can see everything happening in real time.
this is giant It is different from investing in public enterprises. Let’s say you own FB stock. We know that the number of people using Facebook is a very important factor in the value of your investment. But we won’t know how many people are using Facebook until they release their quarterly reports. At this point, your data is out of date.
On blockchain (where user growth is everything), this data can be viewed in real time. (Here’s the chart.) Because blockchains have network effects, fast-growing blockchains can have quadratic growth curves. For example, check out the growth of DeFi protocol Compound.
This kind of data is a blockchain investor’s secret weapon. It is not available to ordinary investors in the general market. It shows how many people are actually participating. using Blockchain isn’t just hype.
Public blockchains are transparent. This is not a theory. It’s true. And it’s staring you in the face.
I recently attended the Harvard Blockchain Club Meetup to talk about Flora Sun of Binance X (think Google X), the innovation arm of Binance. She talked about Binance’s new blockchain for building DeFi projects, Binance Smart Chain (the answer to Ethereum on which almost all DeFi projects are built today).
She pointed out that one of the key metrics Binance Smart Chain uses for success is: How many developers are building something on top of it?. This was a lightbulb switch, a key click, an “aha moment” for me.
Think logically. The more developers there are on a DeFi blockchain, the more Dapps will be launched. Dapps attract users. More users attract more developers. At its best, this is the virtuous cycle we seek as investors:
This is why The easiest way to invest in DeFi is to simply buy and hold Ethereum.. ETH is the city’s main gaming and blockchain on which all dapps are built. This is like investing in FB stock (the platform) instead of ZNGA (the apps distributed on that platform).
Therefore, the ‘number of developers’ is a good measure of the value of blockchain. platformLike Ethereum, Cardano, Polkadot, and Binance Smart Chain.
This does not work with DeFi protocols, only with DeFi platforms. However, DeFi protocols also have similar metrics. In other words, they are POWER USERS.
Measure Power Users with Discord
For example, Discord is the instant messaging platform of choice for the cryptocurrency community. (I’m not a fan, but my kids love it.) Discord is geeky and difficult to use. Think of early Usenet newsgroups. This makes it a good “barrier to entry” to gauge advanced users of DeFi protocols.
| investment opportunity | measurement standard | Where can I find it? |
|---|---|---|
| DeFi platform | Number of developers | Active GitHub user |
| DeFi Protocol | Number of “power users” | Active Discord user |
Why Discord? What about Telegram, Reddit, and Twitter?
Firstly, there is the problem of counting the same user multiple times. If you’re a “power user” on Discord, you’re probably also on Twitter, so I’ll keep it simple and only use one channel.
Twitter is also a different animal. It’s easy for anyone to tweet anything. Finding and joining a Discord server is much more difficult. Moreover, Twitter activity closely coincides with price movements, so it doesn’t tell us anything useful. where or when Invest:
In the chart above, the green line is the Bitcoin price. The blue spikes are social activity centered around “Bitcoin.” It’s hard to see a pattern, other than that when the price of Bitcoin surges, social activity surges. In other words, Twitter activity is not very useful in assessing the value of a blockchain.
Think of it this way. Twitter has low commitment. Discord is a higher devotion. Using the platform is a very high commitment. Purchasing tokens is the ultimate commitment.
put together
In summary, we can assess the value of major DeFi protocols by adding up their active users (most important) and power users (second most important) to get approximate “value per user.”
| DeFi Protocol | token | active user | advanced user | market capitalization | value per user |
|---|---|---|---|---|---|
| Uniswap | UNI | 519,362 | 34,051 | $778,615,944 | $1,407 |
| compound | COMP | 186,439 | 12,340 | $447,022,015 | $2,249 |
| ghost | Lend | 28,872 | 10,573 | $731,212,920 | $18,538 |
| balancer | foot | 23,020 | 7,490 | $87,855,542 | $2,880 |
| wren | wren | 5,466 | 562 | $283,680,758 | $47,061 |
Looking at these numbers, Uniswap appears to be somewhat undervalued, while Ren and Aave appear to be overvalued. No one knows how much a blockchain user is “worth,” but this early data suggests around $2,000 per user. Looking at the chart, it becomes even clearer:
This doesn’t tell us everything, but it tells you a lot, especially when you track it over time. As blockchain’s network effects see a surge in both total and power users (without subsequent price increases), it could potentially take a toll.
to sum up:
- see total users and advanced user See which DeFi projects are experiencing “rocket ship” growth.
- Find out where Token price is cheapProportional to user growth.
- your qualitative researchBesides quantitative Research (using the Blockchain Investor Scorecard).
- If you are satisfied, simply invest in default tokenThis is like buying “stock” in a “company.”
This number is a blockchain investor’s secret weapon. And because this space is so new, it’s like solving the Da Vinci Code before Robert Langdon gets out of bed. It’s a long-term play, but we’re long-term investors.
This is like buying GOOG stock in 2004.
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