Past analyses of crypto assets mostly focused on charts and hype cycles. However, as the industry matures, on-chain fundamentals become the key. This article shares four years of DeFi data research experience, analyzing core indicators such as TVL, revenue, trading volume, and more, teaching you how to master a real-time, transparent protocol evaluation framework. This article is based on an original piece by Patrick Scott, organized, translated, and written by TechFlow.
(Background recap: US banks jointly submitted a “Genius Bill loophole” to Congress: stablecoin interest payments violate financial regulations, $6.6 trillion in deposits turn to dust)
(Additional background: Wall Street first sells crypto! BlackRock leads the sell-off, Ethereum ETF loses $225 million in a single day)

Table of Contents

• Why are DeFi indicators important?
• Core indicator analysis
  • TVL (Total Value Locked)
  • Fees, revenue, and holder income
  • Trading volume (Volume)
  • Open interest (Open Interest)
  • Stablecoin market cap (Stablecoin Market Cap)
  • Application revenue and fees (App Revenue & App Fees)
• How to effectively interpret these indicators?
  • 1. Prioritize sustained, stable growth
  • 2. Track both stock and flow metrics
  • 3. Consider token unlocks and incentive mechanisms

In the past, crypto asset analysis mainly revolved around charts, hype cycles, and narratives. However, as the industry matures, actual performance is more important than empty promises. You need a filter to extract truly valuable signals from the overwhelming information.

Fortunately, such a filter already exists: it’s called on-chain fundamentals (Onchain Fundamentals).

On-chain fundamentals offer structural advantages for DeFi (Decentralized Finance) compared to traditional finance (TradFi). This is not only one of the reasons why “DeFi will win,” but also a core understanding every investor in this space must grasp.

Over the past four years, I have immersed myself in DeFi data indicators, initially as a researcher, later joining the DefiLlama team. This article summarizes some of the most useful analytical frameworks I’ve learned, hoping to help you start using these tools.

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Why are DeFi indicators important?

On-chain data is not just a breakthrough in evaluating crypto assets; it’s a revolution in the entire financial data field.

Imagine how traditional investors evaluate companies: they wait for quarterly earnings reports. Now, some even suggest changing reporting frequency from quarterly to semi-annual.

In contrast, DeFi protocol financial data is available instantly. Websites like DefiLlama update relevant data daily or even hourly. If you want to track revenue by the minute, you can directly query blockchain data (Although overly granular data may have limited significance, you do have this option).

This is undoubtedly a revolutionary breakthrough in transparency. When you buy stock in a listed company, you rely on financial data audited by accountants, often delayed by weeks or months. When evaluating a DeFi protocol, you read transaction records directly from an immutable ledger in real time.

Of course, not every crypto project has meaningful fundamental data. For example, many “meme coins” (Memecoins) or “air projects” with only a white paper and a Telegram group, in these cases, fundamental analysis offers little help (Although other indicators like holder count may provide some reference).

But for protocols that generate fees, accumulate deposits, and distribute value to token holders, their operations leave data traces that can be tracked and analyzed, often before market narratives form.

For example, Polymarket’s liquidity has been growing for years, a trend that appeared before prediction markets became a hot topic.

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HYPE tokens experienced explosive price growth last summer, driven by their sustained high revenue performance.

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These indicators have long hinted at future trends; you just need to know where to look.

Core Indicator Analysis

Let’s start with the core indicators you need to understand in DeFi investing.

TVL (Total Value Locked)

TVL measures the total value of assets deposited in a protocol’s smart contracts.

• For lending platforms, TVL includes collateral and supplied assets.
• For decentralized exchanges (DEX), TVL refers to deposits in liquidity pools.
• For blockchain networks, TVL is the total locked value across all protocols deployed on that network.

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In traditional finance (TradFi), TVL is similar to assets under management (AUM). Hedge funds report AUM to show the total assets entrusted to them. Similarly, TVL reflects the total funds deposited into a protocol, indicating user trust in its smart contracts.

However, over the years, TVL has faced criticism, some of which is valid:

• TVL does not measure activity volume. A protocol may hold billions in deposits but generate almost no fees.
• TVL is highly correlated with token prices. If ETH drops 30%, all protocols holding ETH see a similar decline in TVL, even if no actual withdrawals occur.

Since most DeFi deposits are volatile tokens, TVL is easily affected by price swings. Savvy observers combine USD inflows (USD Inflows) with TVL to distinguish between price changes and actual deposit activity. USD inflows are calculated by multiplying the change in asset balances over two days (times the price) and summing across assets. For example, a protocol with 100% ETH deposits will see its TVL drop 20% if ETH price falls 20%, but USD inflows remain zero.

Nevertheless, when TVL is presented in both USD and token terms, and combined with activity or productivity metrics, it remains valuable. TVL continues to be an important measure of protocol trust and overall DeFi scale. Just don’t treat it as a complete valuation metric.

Fees, Revenue, and Holder Income

In DeFi, these terms differ from traditional accounting, which can be confusing.

• Fees (Fees): From the user’s perspective, fees are the costs paid when using a protocol. For example, trading on a DEX incurs a trading fee. This fee may go entirely to liquidity providers or partly to the protocol. Fees represent the total amount paid by users, regardless of where it ends up. In traditional finance, this is similar to gross revenue (Gross Revenue).
• Revenue (Revenue): The protocol’s share of the fees. In other words, how much of the total paid by users does the protocol actually keep? These revenues may flow into the protocol’s treasury, team, or token holders. Revenue excludes fees distributed to liquidity providers; it can be viewed as the protocol’s gross income (Gross Income).
• Holder income (Holders Revenue): A narrower definition, tracking only the portion of income distributed to token holders via buybacks, burn fees, or direct staking dividends. In traditional finance, this is similar to dividends and share buybacks combined.

These distinctions are crucial for valuation. Some protocols may generate large fees but distribute almost all to liquidity providers, resulting in minimal actual income.

DefiLlama now provides full income reports for many protocols. These reports are automatically updated from on-chain data, breaking down income into different components, and redefining these indicators in standard accounting language.

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These income reports also include visualizations of fund flows, showing the entire process from user inflows to protocol and stakeholder distributions. If you want to understand a project’s economic model deeply, these insights are very valuable.

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Trading Volume (Volume)

Trading volume tracks the scale of trading activity.

• DEX trading volume: sums all trading pairs on decentralized exchanges (DEX).
• Perpetual contract volume (Perp Volume): sums all trading activity across perpetual futures platforms.

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Trading volume is a key indicator of overall crypto market participation. When people actively use digital assets, they trade. Surges in trading volume often correlate with shifts in market interest, whether bullish exuberance or panic selling.

Compared to previous cycles, perpetual contract trading volume has grown significantly. In 2021, perpetual exchanges were still relatively niche. Today, platforms like Hyperliquid, Aster, and Lighter see daily volumes in the billions of dollars. Due to rapid growth, comparing current perpetual trading volume with 2021 data has limited value. It only shows expansion, not deeper insights.

Within a category, trend changes in market share are more important than absolute volume. For example, if a perpetual DEX’s market share increases from 5% to 15%, even if its absolute volume declines, its market position is improving. DefiLlama’s customizable dashboards include many market share charts worth exploring.

Open Interest (Open Interest)

Open interest refers to the total value of open or uncleared derivatives contracts. For perpetual DEXs, it represents all open or liquidated positions.

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Open interest (Open Interest) is an important liquidity indicator for derivatives platforms. It reflects the total capital deployed in active perpetual positions.

During market volatility, this indicator can collapse rapidly. A large forced liquidation wave can wipe out open interest within hours. Tracking recovery after such events helps assess whether a platform can regain liquidity or if funds have permanently migrated elsewhere.

Stablecoin Market Cap (Stablecoin Market Cap)

For blockchain networks, stablecoin market cap is the total value of all stablecoins deployed on that network.

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Stablecoin market cap is an important capital inflow indicator. Unlike TVL, which is affected by token price swings, stablecoin market cap reflects actual USD or USD-equivalent deposits via cross-chain bridges. For example, if a chain’s stablecoin market cap grows from $3 billion to $8 billion, it indicates a real capital inflow of $5 billion into that ecosystem.

Since October 2023, about $180 billion has flowed into crypto markets in stablecoins. Some of this inevitably entered DeFi, boosting TVL, trading volume, and fee generation. Stablecoin flows are akin to capital inflows in a country’s economy: increasing supply signals new funds entering, decreasing supply indicates capital outflows.

(# Application Revenue & Application Fees )App Revenue & App Fees###

Application revenue and fees are chain-level metrics, representing the total income and fees generated by all applications deployed on that chain, excluding stablecoins, liquidity staking protocols, and gas fees.

I view this as the blockchain’s “GDP,” showing the scale of actual economic activity within the ecosystem.

Revenue metrics are among the hardest data to fake, as they require real user spending. This makes them high-signal indicators of DeFi ecosystem activity.

Note that you cannot value a chain based solely on application revenue, as valuation based on income unrelated to assets is meaningless. Application revenue and fees are better suited for diagnosing whether a chain is growing, not for valuation.

(How to effectively interpret these indicators?

Understanding individual indicators is the first step, but to use them effectively, you need an analytical framework. I tend to follow these three steps:

• Prioritize sustained, stable growth.
• Track both stock and flow metrics.
• Consider token unlocks and incentive mechanisms.

)# 1. Prioritize sustained, stable growth

Protocols that show short-term spikes in revenue followed by rapid collapse do not reflect sustainable value creation. I’ve seen many protocols hit revenue records in one week but disappear within a month.

What truly matters is stable growth over a longer period. For example, a protocol’s monthly revenue rising from $500,000 to $2 million over six months indicates sustainable growth. Conversely, if a protocol’s revenue jumps to $5 million in one week but then drops to $300,000, it’s likely a transient anomaly.

In crypto, time passes much faster than in traditional markets. One month of continuous growth roughly equals a quarter in traditional markets. If a protocol’s revenue grows steadily over six months, it can be seen as a company with six consecutive quarters of revenue growth. Such performance is worth noting.

2. Track both stock and flow metrics

• Stock metrics ###Stock Metrics###: such as TVL (Total Value Locked), open interest (Open Interest), stablecoin market cap, treasury size, etc., tell you how much capital is stored in the protocol.
• Flow metrics (Flow Metrics): such as fees (Fees), revenue (Revenue), trading volume (Volume), etc., tell you about actual activity levels.

Both are equally important.

Activity volume is easier to manipulate. For example, a protocol can artificially inflate trading volume through incentives or wash trading (Wash Trading), which is common. Liquidity, however, is harder to fake. To attract real user deposits and retain them long-term, a protocol must have genuine utility or attractive yields.

When evaluating any protocol, analyze at least one stock and one flow indicator. For example:

• For perpetual DEXs, choose open interest and trading volume.
• For lending protocols, choose TVL and fees.
• For blockchains, choose stablecoin market cap and application revenue.

If both indicators show growth, the protocol is genuinely expanding. If activity volume grows but liquidity stagnates, deeper analysis is needed—possible manipulation. If liquidity grows but activity stagnates, it may indicate deposits mainly from a few “whales.”

(# 3. Consider token unlocks and incentives

Token unlocks create selling pressure. Protocols release vested tokens weekly, and some are sold immediately. Without other demand sources to offset this selling, token prices decline.

Before investing, check the token unlock schedule. A protocol with 90% circulating supply has minimal future dilution risk. Conversely, a protocol with only 20% circulating supply and large unlocks in three months faces higher risk.

Similarly, a high-revenue protocol that issues more tokens as incentives than it earns from users appears less impressive. DefiLlama tracks this via “Earnings” )Earnings###, which deducts incentive costs from revenue. For example, a protocol earning $10 million annually but issuing $15 million in token rewards.

While incentives are effective early growth drivers and often necessary in initial phases, they create sell pressure that must be offset by other demand.

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