Data analysis and technical analysis on the DeFi chain
Data analysis is an emerging field of encryption technology designed to help traders improve their strategies. Using the information on the public chain, data analysts can better predict future market trends.These analysts carefully analyze blockchain data, such as transaction details, block details, and smart contract information, to obtain valuable clues.
Transaction details include information such as sending and receiving addresses and sending amount. The block details include miner rewards, timestamps, and fees. For smart contracts, analyze and study the basic code of token issuance and transfer.
On-chain analysis and technical analysis
Early cryptocurrency traders brought a whole set of technical analysis tools from the stock exchange market. Now, technical analysis is largely considered to consist of price behavior research, even in cryptocurrencies, this is still the most important form of analysis. However, as a large amount of available data appears on the blockchain, a new type of analysis method is emerging.
While technical analysis tracks price trends, on-chain analysis provides a deeper perspective. Analysts can drill down to find out the “who”, “what” and “how”. In short, who is using digital assets? What are they using? How are they used?
Take Bitcoin as an example. With the help of on-chain analysis, it is possible to check user adoption and miner activity. In this way, they can determine whether the market price is reasonable. This is just a small use case. Although on-chain analysis enthusiasts believe that it will completely replace technical analysis, many believe that it will at least complement and enhance technical analysis.
So, what does all this have to do with DeFi? We will explore this. First, let’s look at the history of on-chain analysis and some of its current use cases.
The history of on-chain analysis
On-chain analysis started with the Coin Days Destroyed indicator in 2011, which is the first indicator of the lifespan of Bitcoin addresses.
Next, CoinMetrics created the Network Transaction Value Ratio (NVT) as a method for evaluating Bitcoin. The NVT ratio divides the total network value by the daily USD transaction volume. This ratio determines whether Bitcoin is overvalued or undervalued. NVT became one of the first popular cryptocurrency on-chain indicators, and it is also considered to be similar to the P/E ratio.
CoinMetrics has improved the NVT ratio to provide a more accurate assessment of the value of the network. The NVT signal (NVTS) includes a 90-day moving average of trading volume.
It is because of dissatisfaction with indicators such as market capitalization (market capitalization) that other indicators were created. Some people think that traditional market capitalization is more misleading. That’s because cryptocurrencies behave more like money than stocks.
For example, if 1 billion tokens are issued for 1 USD and 5 tokens are sold, the market value may reach 1 billion USD, even if the transaction volume is only 5 USD. The consensus among early on-chain analysts is that incorporating traditional indicators into the crypto market is not the best solution. New indicators are also needed.
Other on-chain indicators
Now, there are many indicators on the chain, and there are more analysis methods.
Unused transaction output (UTXO)
UTXO is an accounting system used to track transactions on the blockchain, of which Bitcoin is the most popular. Many on-chain analysis indicators rely on them. They track UTXO to determine when the wallet last moved tokens. By looking at the time, size, and number of UTXOs transmitted on the blockchain, analysts developed new on-chain indicators. One is called actual market value. There are other on-chain indicators, such as SOPR or Coin Days Destroyed, which also rely on UTXO to determine on-chain economic activity.
Actual market value
CoinMetrics created this indicator to overcome the limitations of traditional market capitalization. It operates by summarizing all UTXOs. And it distributes the price based on the time of the last transaction of the coin.
For example, suppose that the current price of Bitcoin is $12k and the current supply is 18 million Bitcoins. The traditional market value analysis will multiply by $ 12k x 18 million to get a total value of $ 216 billion. However, using the actual market value metric, each coin will be valued based on the time of the last transfer. Therefore, if one bitcoin was traded at a price of $5k for the last time, it was its price.
On-chain analysis calculates each coin in this way to determine the actual market value. And, when it is considered, it is an excellent way to determine a lost coin. Assume that the last 100 bitcoins moved was in 2011. If the Bitcoin price at that time was 1 USD, then the value of these 100 Bitcoins would be 100 USD. However, traditional market capitalization valued it at 12,000 x 100 or $1.2 million. Unless these coins belong to the “tuners”, they are likely to be lost. If they are lost, then the $100 valuation will be more accurate.
Market actual market value (MVRV)
MVRV incorporates both market value and actual market value into the formula. CoinMetrics describes MVRV as “the ratio of the market value of encrypted assets to the realized market value.” You can think of MVRV as a comparison between tokenists and speculators. This indicator has evolved into multiple variants such as MVRVz.
Ethereum on-chain analysis
UTXO is the key to measuring Bitcoin. But what about Ethereum? It is based on the account model, not the UTXO model.
UTXO and account-based blockchain are two different accounting methods. However, they can all determine the source and ownership of the tokens on the chain. Using an account-based model, users can spend part of their balance. However, UTXO cannot.
For example, if the user has 10 ETH in his wallet, he can send 3.5 ETH to someone through a transaction. The result will be 6.5 ETH in the user’s account and 3.5 ETH in the beneficiary’s account. On the UTXO chain, users must send a full 10 BTC and get 6.5 BTC as change, which is a separate transaction. Therefore, using on-chain analytics to track these transactions requires different ways.
On-chain data provider
There are two ways to collect data on the chain. 1. You can complete the operation yourself by running the node. Or 2. You can contact the provider.
DeFi’s on-chain indicators
DEX needs liquidity to provide minimal slippage. Therefore, the best indicators are:
Total value of locked position (TVL)
DeFi needs liquidity to function properly. Therefore, TVL has always been a supplier’s indicator, and it has limitations. For example, TVL does not necessarily mean more users or more adoption, it may be that the same number of users provide more collateral. Likewise, the need for incentives may be far greater than the need for agreements. In other words, users may flock to it because it provides them with more airdrop rewards, not because they like it, which will only motivate short-term behavior.
Outstanding loan
This is a more relevant indicator than TVL. That’s because it shows the demand for protocol services. For example, the total amount of loans is important to the end user.
Transaction volume (USD and tokens)
The supply of tokens is important because it tracks not only the dollar price but also the supply. As a volatile asset, the price of the US dollar may fluctuate significantly.
trade
The more transactions, the more flexible the agreement. The more flexible the agreement, the smoother the transaction;
The number of weekly and monthly active users;
Unique address, a unique address for using these services over time;
conclusion
DeFi is changing the nature of finance, and it may be in the early stages of global financial restructuring. DeFi has just started to be used, and expectations are high. Of course, there will be setbacks, bubble bursts, and even Vitalik Buterin has doubts about the sustainability of liquidity mining incentives. But in essence, decentralized finance may change the traditional financial sector.
With the imminent change of potential, a better set of analysis tools is needed. The new on-chain indicators will undoubtedly change the way the market is measured. For these reasons alone, on-chain analysis has great prospects.
