Decentralized Exchanges (DEXs) are a core Web3 infrastructure with proven uses. If people continue to participate in the blockchain economy, they will need an organization without middlemen or centralized entities to exchange corresponding tokens.
However, comparing the sustainability and potential of dozens of platforms is more challenging than providing the case for the entire technology. It’s unclear which platforms will still thrive in a few years.
Uniswap, for example, has become a blue-chip protocol for DeFi. But how do we compare the value of smaller DEX tokens like TraderJoe and Biswap?
Since the most important metric for trading platform health is user engagement, this article will introduce one metric that can be used along with other metrics to evaluate DEXs: the share of volume-to-market cap ratio, or SOTV/MC. This indicator can be used to analyze the market performance of the DEX.
What is DEX?
DEXs are trading platforms for cryptocurrencies that do not rely on third-party services for custody. All transactions are done directly on the blockchain through smart contracts and off-chain protocols. Unlike most centralized exchanges that require users to provide personal information, DEXs allow anonymous transactions. What other users can see is the wallet “public address” – in Ethereum’s case, the 42 characters starting with 0x are the hexadecimal addresses.
Footprint Analytics – Top 20 DEXsand their TVL in Different Chains
Why is market capitalization important to DEXs?
Market capitalization is one of the most critical metrics when analyzing cryptocurrencies. Market capitalization is calculated by multiplying the circulating supply of an asset by its current price. For example, if 100,000 units of a cryptoasset are worth $1, then its market cap is $100,000.
Market capitalization tells us how big a cryptocurrency is relative to other cryptocurrencies in its industry, and they are often used as a benchmark for the popularity and desirability of cryptoassets.
Companies with high market caps are generally considered more valuable than those with low market caps—but not always. By comparing the market cap of a DEX to its usage (using SOTV as a proxy), we can assess whether the protocol is overvalued or undervalued. Or, we might find differences between projects and projects with types, and see some of the pros and cons of projects.
When we calculate market cap, it is important to remember that different types of DEX tokens represent different purposes. For example, CAKE (PancakeSwap) has the purpose of decentralized governance and general purposes such as staking, while CRV (Curve) is purely for governance purposes.
Footprint Analytics -A chartshowing a basket of 7 DEXs and their share of market cap.
What is the Share of Volume (SOTV) metric?
We can calculate SOTV by dividing the total daily volume of the DEX by the total daily volume of all exchanges.
SOTV can give us an idea of how many transactions have taken place in a particular ecosystem, and can serve as an indicator of the relative health of the ecosystem, as well as visualize the prospect of its token (if applicable).
Through SOTV/MC, it is also possible to explore the ups and downs of the market under different token economic systems, which has an important impact on projects and developers. For example, we can compare 2 DEXs with similar ecosystems, features, and trading volumes to see if these differences affect the market cap and the amount of speculative investment in these projects.
Footprint Analytics -A chart showing a basket of 7 DEXs and their share of trading volume.
Looking for SOTV/MC based assumptions
The SOTV/MC ratio is a contextual metric that only applies to the limited sample of protocols you analyze simultaneously. Because there is a lot of variability between DEXs, casting too wide a net can lead to false discovery. Data output is as important as data input.
We use 7 major DEX platforms other than Uniswap as analysis cases because they have standard DEX functionality. Because Uniswap is the leader in the DEX market among its peers, Uniswap’s data will cause the overall data to deviate significantly from the real market conditions. We also removed Sunswap and VVS because they belonged entirely to their respective ecosystems. Another meaningful sample of limited protocols is “DEXs with futures trading” – dYdX, MCDEX, Perpetual protocols, etc.
The higher the SOTV/MC, the more overvalued the DEX’s market cap relative to its trading volume.
For example, analyze the two largest DEXes in an ecosystem. DEX A has a daily trading volume of $600 and a market cap of $400. DEX B only trades $400 a day, but for whatever reason, its market cap is $600.
To calculate SOTV/MC for DEX A, you divide 60 as a share of volume by 40 as a percentage of market cap. The result is 1.5. For DEX B, you divide 40 by 60 and you get 0.6. In theory, DEX A is undervalued, but it is important to remember that this indicator is only one part of the overall data analysis.
Here are some findings from a SOTV/MC analysis of Balancer, Pancakeswap, Sushiswap, Curve, DODO, Quickswap, and TraderJoe. The corresponding Dashboard view can be found here.
Is the value of CRV currently undervalued?
Curve and Pancakeswap are the two main DEXs after Uniswap. Although Curve’s SOTV is nearly 6% higher than Pancakeswap’s, CRV and CAKE are nearly tied in market cap (though CRV is rising and CAKE is falling). While their primary uses are quite different, it can be argued that Curve, which facilitates stablecoin DeFi, is more secure than Pancakeswap’s. Pancakeswap is a Layer 1 DEX that lists a large number of low-cap “memecoins”. However, CAKE has wider uses than CRV.
DODO is a hidden gem?
As of July 27, DODO’s SOTV was 17%, making it the third largest DEX in the group. However, its market cap is relatively small at 3.7%. For investors who are bullish on DEX, DODO is a protocol worth watching.
How valuable is brand building to DEX?
Two new DEXs with similar SOTVs are TraderJoe with 2.7% and Quickswap with 3%. However, TraderJoe’s market cap accounts for 6.7% of the entire portfolio, while Quickswap’s market cap is much lower at 2.2%. TraderJoe’s strong branding and marketing serve as the only difference from Quickswap, which is very similar in appearance to other DEXs. However, Quickswap has some other potential features that may make it more promising in the future.
We believe it is important to track multiple metrics when analyzing exchanges; SOTV/MC is one of them.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/use-volume-shares-to-evaluate-dexs/
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