A commonly used on-chain valuation metric to value DeFi protocols is the MCap/TVL ratio, which can help determine whether or not a DeFi token is undervalued or overvalued.
While this valuation metric is great and all, it doesn’t tell the whole story. It’s missing something; mainly it doesn’t take the Fully Diluted Valuation (FDV) into consideration, which can give us a different perspective on undervalued projects.
For instance, a DeFi protocol might have a low MCap/TVL ratio (close to 0 or less than 1), indicating it may be undervalued and has more room to grow.
While at the same time, this protocol might have a high FDV/TVL ratio (close to 1 or over 1), indicating it may be overvalued/not a good long-term investment.
Therefore, it’s important to analyze both the MCap/TVL ratio along with the FDV/TVL ratio to gain a better understanding of the long-term growth potential of a particular asset and whether or not it’s undervalued or overvalued. You want to see both of these ratios below 1 or close to 0 for them to be considered the most undervalued DeFi projects.
See below, the FDV/TVL ratio for the top projects in this metric:
Understanding Fully Diluted Valuation (FDV)
The Fully Diluted Valuation of a cryptocurrency or token is what the digital asset's market cap would be if all the coins or tokens in its total supply were issued. It’s calculated by multiplying the current market price of a particular coin or token with the maximum number of coins there will be.
FDV = Max Supply x Current Market Price
Understanding Market Cap (MCap)
The term ‘Market Cap’ in regards to cryptocurrency is what a project is currently valued at. It’s calculated by multiplying the current market price of a particular coin or token with the total number of coins in circulation.
MCap = Circulating Supply x Current Market Price
FDV / TVL = Ratio
Let's examine that ratio of the projects many consider undervalued using the MCap/TVL Ratio and see if they remain undervalued when looking at their FDV/TVL Ratio.
Remember, we want both ratios to be close to 0 or less than 1 for the DeFi project to be considered the most undervalued.
Let’s dive in:
1. Harvest Finance (FARM)
Harvest.Finance website homepage
FDV/TVL Ratio: 0.27
MCap/TVL Ratio: 0.19
Harvest has very low FDV/TVL and MCap/TVL ratios, indicating the project may currently be undervalued and has long-term growth potential.
What is Harvest Finance?
Harvest Finance is the largest automated yield-farming aggregator in DeFi with $675M TVL as of February 25, 2021. The Harvest protocol consistently delivers the most yield-farming strategies in DeFi and has some of the highest yields available. Harvest also features an innovative Profit Sharing Pool that auto-compounds $FARM rewards to maximize profits for Harvest farmers.
2. Badger DAO (BADGER)
Badger.Finance website homepage
FDV/TVL Ratio: 0.60
MCap/TVL Ratio: 0.21
Badger DAO has a relatively low FDV/TVL ratio and a very low MCap/TVL ratio, indicating the project may currently be undervalued and has long-term growth potential.
What is Badger Dao?
BadgerDAO is a decentralized autonomous organization (DAO) dedicated to building products and infrastructure to bring Bitcoin to DeFi. Its primary focus is to accelerate the use of Bitcoin as a collateral asset across blockchains through its DeFi products. BadgerDAO has thus far released two products; Setts – an automated DeFi aggregator focused on tokenized BTC assets, and Digg – a non-custodial synthetic Bitcoin on Ethereum with an elastic supply that’s pegged to the price of Bitcoin.
3. Pickle Finance (PICKLE)
Pickle.Finance dapp interface
FDV/TVL Ratio: 0.65
MCap/TVL Ratio: 0.46
Pickle Finance has a low FDV/TVL ratio and a lower MCap/TVL ratio, indicating the project may currently be undervalued and has long-term growth potential, albeit not as much as the others covered here.
What is Pickle Finance?
Pickle Finance is a yet another yield farming protocol built on Ethereum that makes it easy for users to earn compounding yields on their deposits. The two products of Pickle Finance are; Pickle Jars – yield farming robots that earn returns on user deposits, and Pickle Farm – liquidity mining pools to earn $PICKLE tokens.
4. Value DeFi (VALUE)
Value DeFi website homepage
FDV/TVL Ratio: 0.92
MCap/TVL Ratio: 0.92
Value DeFi’s FDV/TVL and MCap/TVL ratios are the same because its total supply is in circulation. The ratios are slightly less than 1, indicating the project may be fairly valued right now.
What is Value Defi?
The Value DeFi protocol offers a suite of products that aim to bring fairness, true value, and innovation to Decentralized Finance. Value DeFi products include; Value Vaults – earn passive income from your idle assets, Value Liquid Exchange – earn fees from asset swaps based on your share of the liquidity pool, and Farming-as-a-Service (FaaS) – deposit assets to start earning rewards.
5. BarnBridge (BOND)
Barnbridge website homepage
FDV/TVL Ratio: 1.2
MCap/TVL Ratio: 0.16
BarnBridge has a relatively high FDV/TVL ratio and a very low MCap/TVL ratio, indicating the project may currently be undervalued but may not have as much long-term growth potential.
What is BarnBridge?
BarnBridge is a tokenized risk protocol for hedging yield sensitivity and market price. The protocol offers two products; SMART Yield – interest rate volatility risk mitigation using debt-based derivatives, and SMART Alpha – market price exposure risk mitigation using tranched volatility derivatives.