Decentralized Finance (DeFi) illustration

DeFi Decoded: Is Decentralized Finance Really Worth the Hype?

Soraya Malik in Business & Economy August 2025 • 4 min read.

"Unlocking the potential and pitfalls of DeFi in today's crypto landscape."

Decentralized Finance (DeFi) has emerged as a fascinating frontier in the financial world, leveraging blockchain technology to offer services like lending, borrowing, and trading without traditional intermediaries. Imagine a financial system where algorithms replace banks, and smart contracts ensure transparency and security. That’s the promise of DeFi.

But with any new technology comes questions. Is DeFi truly revolutionary, or is it just a passing trend fueled by hype and speculation? What factors drive the value of DeFi tokens, and can we predict their future performance? These are the questions that researchers are starting to tackle, and the answers could reshape how we think about finance.

This article dives into a recent study that examined the key drivers of DeFi token returns, exploring the influence of cryptocurrency markets, network effects, investor attention, and unique valuation metrics. By understanding these factors, we can gain a clearer picture of whether DeFi is a sustainable force or simply a flash in the pan.

The Four Pillars of DeFi Returns: What Really Matters?

Decentralized Finance (DeFi) illustration

The study meticulously investigated four potential drivers of DeFi token returns, each offering a unique perspective on the market's dynamics:

First, cryptocurrency market, DeFi tokens operate within the broader crypto ecosystem, making them susceptible to the movements of Bitcoin, Ethereum, and other major cryptocurrencies. The study used the CRIX index, a broad measure of the crypto market, to gauge this influence.

Network Effect: The value of many technologies increases as more people use them. The research explored whether this “network effect” also applies to DeFi, examining metrics like the number of users, active addresses, and total value locked (TVL)—the total amount of assets deposited in DeFi protocols.
Investor Attention: What investors search can directly impact trends. By tracking Google search trends for terms like "decentralized finance" and "DeFi," the study aimed to capture the impact of public interest on DeFi token prices.
Valuation Ratio: In traditional finance, metrics like the book-to-market ratio help investors assess whether a company is overvalued or undervalued. The researchers created a similar metric for DeFi, dividing the total value locked (TVL) by the market capitalization (MC) to assess the market's valuation.

To conduct the analysis, the researchers constructed a new market index called DeFiX, designed to track the overall performance of the DeFi market. Using data from 2017 to 2022, they analyzed the relationship between DeFiX returns and the four key drivers.

The Verdict: Is DeFi Here to Stay?

The study's findings offer a nuanced perspective on the DeFi market. While the cryptocurrency market exerts a strong influence on DeFi returns, investor attention and network effects also play a significant role. However, the study did not find strong support for the TVL/MC ratio as a predictor of DeFi performance.

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This article is based on research published under:

DOI-LINK: 10.1016/j.intfin.2023.101786,

Title: The Return Of (I)Defix

Subject: q-fin.cp

Authors: Florentina Şoiman, Guillaume Dumas, Sonia Jimenez-Garces

Published: 01-04-2022

Everything You Need To Know

What is Decentralized Finance (DeFi), and how does it differ from traditional finance?

Decentralized Finance (DeFi) utilizes blockchain technology to provide financial services like lending, borrowing, and trading, but without traditional intermediaries such as banks. Instead of relying on institutions, DeFi uses algorithms and smart contracts to ensure transparency and security. This contrasts sharply with traditional finance, where centralized entities control transactions and access to financial products.

What key factors influence the returns of DeFi tokens, according to the study?

The study identified several factors influencing DeFi token returns. These include the broader cryptocurrency market, particularly the movements of major cryptocurrencies like Bitcoin and Ethereum, as measured by the CRIX index. Additionally, network effects, gauged by metrics like the number of users, active addresses, and total value locked (TVL), and investor attention, tracked through Google search trends for terms like "decentralized finance", significantly impact DeFi returns. However, the TVL/MC ratio did not show strong predictive power in the study.

How does the 'network effect' impact DeFi, and what metrics are used to measure it?

The network effect posits that the value of a technology increases as more people use it. In DeFi, this means that as more users participate in DeFi protocols, the value of those protocols and their associated tokens may increase. The study examined metrics like the number of users, active addresses, and total value locked (TVL) to assess the presence and impact of this network effect within the DeFi ecosystem. A significant increase in these metrics often correlates with increased interest and investment in DeFi.

What is the significance of the DeFiX index, and how was it used in the study?

The DeFiX index is a market index constructed to track the overall performance of the DeFi market. Researchers used the DeFiX index to analyze the relationship between DeFi market returns and various factors, such as the cryptocurrency market, network effects, investor attention, and valuation ratios. By using the DeFiX index, the study could assess the overall health and performance of the DeFi market as a whole, rather than focusing on individual tokens or protocols.

The study used a valuation ratio of TVL/MC, what was this for and what does it imply if the ratio is high or low, and what were the study's findings about the TVL/MC ratio?

The Total Value Locked (TVL) to Market Capitalization (MC) ratio was created as a valuation metric for DeFi. If the ratio is high, it indicates the DeFi project is undervalued because a large amount of assets are locked in the protocol relative to its market cap, suggesting growth potential. Conversely, a low ratio suggests overvaluation because the market cap is high compared to the assets locked. The study did not find strong support for the TVL/MC ratio as a reliable predictor of DeFi performance, indicating that other factors may be more influential in determining DeFi token returns.