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Decentralized Finance (DeFi) Projects: A Study of Key Performance Indicators in Terms of DeFi Protocols’ Valuations

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  • Dominik Metelski

    (Department of International and Spanish Economics, Faculty of Economics and Business Sciences, University of Granada, 18071 Granada, Spain)

  • Janusz Sobieraj

    (Department of Building Engineering, Warsaw University of Technology, 00-637 Warsaw, Poland)

Abstract

Decentralized finance (DeFi) protocols use blockchain-based tools to mimic banking, investment and trading solutions and provide a viable framework that creates incentives and conditions for the development of an alternative financial services market. In this respect, they can be seen as alternative financial vehicles that mitigate portfolio risk, which is particularly important at a time of increasing uncertainty in financial markets. In particular, some DeFi protocols offer an automated, low-risk way to generate returns through a “delta-neutral” trading strategy that reduces volatility. The main financial operations of DeFi protocols are implemented using appropriate algorithms, but unlike traditional finance, where issues of value and valuation are commonplace, DeFis lack a similar value-based analysis. The aim of this study is to evaluate relevant DeFi performance metrics related to the valuations of these protocols through a thorough analysis based on various scientific methods and to show what influences the valuations of these protocols. More specifically, the study identifies how DeFi protocol valuations depend on the total value locked and other performance variables, such as protocol revenue, total revenue, gross merchandise volume and inflation factor, and assesses these relationships. The study analyzes the valuations of 30 selected protocols representing three different classes of DeFi (i.e., decentralized exchanges, lending protocols and asset management) in relation to their respective performance measures. The analysis presented in the article is quantitative in nature and relies on Granger causality tests as well as the results of a fixed effects panel regression model. The results show that the valuations of DeFi protocols depend to some extent on the performance measures of these protocols under study, although the magnitude of the relationships and their directions differ for the different variables. The Granger causality test could not confirm that future DeFi protocol valuations can be effectively predicted by the TVLs of these protocols, while other directions of causality (one-way and two-way) were confirmed, e.g., a two-way causal relationship between DeFi protocol valuations and gross merchandise volume, which turned out to be the only variable that Granger-causes future DeFi protocol valuations.

Suggested Citation

  • Dominik Metelski & Janusz Sobieraj, 2022. "Decentralized Finance (DeFi) Projects: A Study of Key Performance Indicators in Terms of DeFi Protocols’ Valuations," IJFS, MDPI, vol. 10(4), pages 1-23, November.
    • Handle: RePEc:gam:jijfss:v:10:y:2022:i:4:p:108-:d:984670
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    References listed on IDEAS

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    Cited by:

    1. Ioannis Karakostas & Konstantinos Pantelidis, 2024. "DAO Dynamics: Treasury and Market Cap Interaction," JRFM, MDPI, vol. 17(5), pages 1-23, April.
    2. Thomas Bourveau & Janja Brendel & Jordan Schoenfeld, 2024. "Decentralized Finance (DeFi) assurance: early evidence," Review of Accounting Studies, Springer, vol. 29(3), pages 2209-2253, September.
    3. Yichen Luo & Yebo Feng & Jiahua Xu & Paolo Tasca, 2024. "Piercing the Veil of TVL: DeFi Reappraised," Papers 2404.11745, arXiv.org, revised May 2024.
    4. Dominik Metelski & Janusz Sobieraj, 2024. "Trading Volume Concentration across S&P 500 Index Constituents—A Gini-Based Analysis and Concentration-Driven (Daily Rebalanced) Portfolio Performance Evaluation: Is Chasing Concentration Profitable?," JRFM, MDPI, vol. 17(8), pages 1-25, July.

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