Decentralized exchanges (DEXs) are a core Web3 infrastructure with a confirmed use case. People will want a spot to trade tokens with out intermediaries or centralized entities in the event that they proceed taking part within the blockchain economic system.
However, evaluating the handfuls of platforms for sustainability and potential is tougher than making a case for the expertise as a complete. It’s unclear which of them can be round for a number of years.
For instance, Uniswap has turn into a blue-chip establishment in DeFi. But how can we examine the worth of tokens of smaller DEXs, like TraderJoe and Biswap?
Since crucial metric for an trade platform’s well being is that persons are utilizing it, this text will have a look at a metric that can be utilized alongside others to assess DEXes: Share of commerce quantity to market capitalization ratio, or SOTV/MC. This can be utilized to analyze DEXs’ market efficiency.
What Is a DEX?
A DEX is a cryptocurrency buying and selling platform that doesn’t depend on third-party companies for custody. All trades are accomplished immediately on the blockchain by way of sensible contracts and off-chain protocols. Unlike most centralized exchanges, which require customers to present private info, DEXs allows customers to stay nameless whereas conducting trades. All different customers can see is your pockets’s “public address” — within the case of Ethereum, that’s the 42-character hexadecimal tackle that begins with 0x.
Why Does Market Cap Matter for DEXs?
Market cap is one of essentially the most vital components to have a look at when analyzing a cryptocurrency. The market cap is calculated by multiplying the circulating provide of the asset with its present worth. For instance, if 100,000 items of a specific crypto asset are valued at $1, its market cap could be $100,000.
Market cap tells us how massive a cryptocurrency is relative to others in its trade and is commonly used as a benchmark of the recognition and desirability of the crypto asset.
An organization with a excessive market cap may be thought-about extra beneficial than one with a low market cap — however that’s not all the time the case. By evaluating the market cap of a DEX with its utilization (utilizing SOTV as a proxy), we could have the ability to assess whether or not a protocol is over or undervalued. Or we could spot another discrepancy, not extensively recognized to market contributors, pointing to a function or bug.
As we calculate the market cap, it’s necessary to do not forget that there are differing types of DEX tokens and that their use instances have significant implications for customers. For instance, CAKE (PancakeSwap) is a basic utility token with governance makes use of, whereas CRV (Curve) is completely governance.
What Is the Share of Trade Volume (SOTV) Metric?
We can calculate SOTV by dividing the entire day by day transaction quantity on DEXs by the entire day by day transaction quantity on all exchanges.
The SOTV offers us perception into how a lot exercise occurs inside a given ecosystem and might function an indicator for the relative well being of the ecosystem — and the prospects of its native token, if relevant.
By SOTV/MC, we are able to additionally discover how the market costs in numerous tokenomics have important implications for tasks and builders. For instance, we are able to examine 2 DEXs with comparable ecosystems, options, and buying and selling volumes however totally different provides and token mechanics, to see if these variations have an effect on the market cap and quantity of speculative funding into these tasks.
Finding Hypotheses Based on SOTV/MC
SOTV/MC ratio is a contextual metric, i.e., it should be utilized to the restricted pattern of protocols you intend to analyze collectively. That’s as a result of there’s a lot range amongst DEXs that casting too large a web could lead on to errant findings. Data out is just pretty much as good as knowledge in.
In this batch, we analyzed 7 main DEXs moreover Uniswap which have the usual suite of DEX options, as Uniswap is in a category of its personal as a market chief. Such an outlier skews the information. We additionally eliminated Sunswap and VVS as they’re completely inside their respective ecosystems. An instance of one other hypothetical batch that might make sense is “DEXs with futures trading”—dYdX, MCDEX, Perpetual Protocol, and so on.
The larger the SOTV/MC, the extra overvalued a DEX’s market cap is relative to its buying and selling quantity.
For instance, analyzing the 2 largest DEXs for one ecosystem: DEX A has a buying and selling quantity of $600 per day and a market cap of $400. DEX B solely trades $400 per day however—for no matter purpose—has a market cap of $600.
To calculate the SOTV/MC of DEX A, you divide the share of buying and selling quantity, 60, by the proportion of market cap, 40. The result’s 1.5. For DEX B, you divide 40 by 60, getting 0.6. In principle, DEX A is undervalued, but it surely’s necessary to do not forget that this metric solely exhibits one small half of the story.
Here are some findings from working a SOTV/MC evaluation on Balancer, Pancakeswap, Sushiswap, Curve, DODO, Quickswap, and TraderJoe. The entire dashboard can be found here.
Is CRV at the moment undervalued?
Curve SOTV/MC: 1.2
Pancakeswap SOTV/MC: 0.9
Curve and Pancakeswap are the 2 main DEXs after Uniswap. Even although Curve has practically over 6% extra SOTV than Pancakeswap, the market caps of CRV and CAKE are practically neck-and-neck (although CRV is on an upward trajectory whereas CAKE is declining.) While their major use instances are vastly totally different, it may be argued that Curve’s, i.e. facilitating stablecoin DeFi, is a safer wager than Pancakeswap’s, i.e. the DEX of a Layer 1 with an unlimited quantity of low cap “memecoins” listed. However, CAKE has wider utility than CRV.
Is DODO a hidden gem?
DODO SOTV/MC: 4.5
DODO’s SOTV is at 17% as of July 27 — making it the third largest DEX within the group. However, its market cap is comparatively miniscule, at 3.7%. For traders bullish on DEXs, DODO is a protocol value wanting into.
How beneficial is branding for a DEX?
TraderJoe SOTV/MC: 0.4
Quickswap SOTV/MC: 1.3
Two new DEXs with comparable SOTV are TraderJoe, at 2.7%, and Quickswap, at 3%. But whereas TraderJoe’s market cap is 6.7% of the group, Quickswap is considerably decrease at 2.2%. Immediately, TraderJoe’s robust branding and advertising soar out as the one factor distinguishing it from Quickswap, which is sort of comparable to different DEXs in phrases of look. Or, is the important thing takeaway that Quickswap has some critically slept-on performance that may enable it to develop sooner or later?
We consider it’s important to observe a number of metrics when analyzing the trade panorama; SOTV/MC is one of these metrics.
Date: August 23, 2022
Data supply: www.footprint.network
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