How to Use ApeSwap’s Liquidity Health Dashboard For Fundamental Analysis
The ApeSwap Liquidity Health Dashboard (“LHD”) was carefully designed to empower users to perform a new level of detailed research and self-directed analysis.
As DeFi evolves, ApeSwap believes that the tools available to users should evolve along with it. DeFi is still a maturing industry that only recently developed detailed charting — basic technical analysis has only been possible for a few years. Because of this, with the help of our users and partners, ApeSwap is launching the LHD with the hopes of opening the door to a more in-depth category of research: fundamental analysis. ApeSwap sees this as a huge step forward for the space, allowing all types of users to feel more secure when evaluating their options. The purpose of this outline is to show how users can perform fundamental analysis using the LHD to give users an edge when analyzing a token.
What To Look For to Gain the Upper Hand
Savvy DeFi users seek projects that not only have a catchy, dog-based name, but also exhibit well-structured tokenomics implemented on-chain. Furthermore, they seek out projects that ensure ample liquidity and maintain a transparent emissions schedule that contributes meaningfully to the project’s ecosystem. While such projects may be rare, the ultimate aim is to identify those that fulfill all the criteria for both technical and fundamental analysis.
Using The LHD For Fundamental Analysis
- Search the smart contract, token ticker, or project name on ApeSwaps LHD. If you aren’t looking for a specific project, you have the flexibility to adjust the filters according to the type and size of the project you’re interested in.
Note: If your token doesn’t appear, it means that it’s not on an EVM-compatible chain, or that they have a market capitalization below $500,000.
2. When you click on the token to see the Project View, here are some key aspects to consider when familiarizing yourself with the token:
a. MCAP: Market capitalization can help you understand the size of the project, relative to others you’re evaluating.
b. Tags: Many projects are tagged by business vertical, allowing you to compare projects in the same field.
c. Price: The LHD is designed to be used in conjunction with other tools. In a second tab/window, pull up your favorite price chart and take note of the general direction of the token.
3. Look at the overall Liquidity Health subscores located in the upper right section to gain a general understanding of the token’s current status
a. Make sure you understand the purpose of each score (Liquidity Strength, Liquidity Ownership, and Liquidity Concentration) and how they contribute to the overall score. Check out the Liquidity Health Formula page in the documentation for a more detailed breakdown.
b. If you’re stuck on any terminology, make sure to review the Glossary in the documentation.
4. Start with Liquidity Strength, which simply measures whether a project has adequate DeFi liquidity based on its market cap. You will see one dot representing owned liquidity (purple outline) and another above it for total liquidity (blue outline). The closer together the dots are, the more liquidity the project owns, the further apart they are, the more liquidity they rent from users.
a. Under the Liquidity Strength Summary, take note of the Total Extractable Liquidity. This tells you how the token is actually capitalized. Or specifically, the value of hard assets that are paired with the token.
b. On the Token Liquidity Strength chart, look at the Total Extractable liquidity plot point (in blue).
Ask yourself: where is this project compared to the sustainability range? If it’s above or inside the range, that’s a good sign that the token has strong liquidity for it’s size.
If it’s below the sustainability range, that could be an indicator that the project has insufficient liquidity for it’s size. The further below the range, the more the token will respond to sell pressure.
c. Keep in mind, this is just the first piece of the puzzle! If a token’s total extractable liquidity (blue dot) is comfortably in the green but all of the liquidity is rented (e.g., yield farms), that liquidity can disappear at any time, which is very risky for a token holder.
It also means the project is likely inflating their tokens to incentivize that rented liquidity. Renting liquidity is a zero sum game!
5. Next, consider Liquidity Ownership, which measures the amount of liquidity that a project owns (protocol owned liquidity, or POL).
a. ApeSwap scans top liquidity provider (LP) token holders to see if any LP tokens are held in a locking contract, a gnosis safe, or a burn address. These are best practices, and every project should be doing one of these two things with their POL.
b. If the project shows a “0” in Liquidity Ownership, it could indicate one of two things:
i. Option 1: The project actually has zero POL. This is bad! This means all their liquidity is rented, which is VERY risky. It also means they are putting the responsibility of providing liquidity on the token holders, which misaligns incentives between those holders and the project.
ii. Option 2: They have not reported their POL, and the POL is not locked in a locking contract or a gnosis safe. This isn’t ideal, but it is fixable. These projects will be marked with a “Data needed”
iii. If a project has a liquidity ownership score of “0”, reach out to the project and ask them why they have no POL, or what wallets hold the project’s POL. It’s simple: jump into the project’s official Telegram or Discord and ask! Every project should be able to EASILY answer this. If not, that could be a negative indicator.
If they do have POL, encourage the project to submit a pull request to ApeSwap to officially update the data — projects can do this using the Submit Data Update button on the bottom of the Project View.
c. If the project does have a Liquidity Ownership score, then look to the Liquidity Strength chart at the Owned Extractable Liquidity (OEL) plot point (in purple).
i. Understand the relationship between OEL, Liquidity Debt, and the lower bound of the sustainability range. It’s quite simple: OEL + Liquidity Debt = sustainability range (lower).
ii. Take a look: how much OEL does the project have? If they have little or none, that’s a negative indicator. If their OEL plot point is between the x-axis and the lower sustainability range boundary, that indicates room for improvement. If their OEL is at or above the lower bound of the sustainability range, that’s a positive indicator.
iii. Check to see if the project has any Liquidity Debt. The lower the amount of Liquidity Debt, the more positive it is for the project.
d. Based on your analysis above, more negative indicators show that the project needs to build up POL, as there is nothing permanent backing the token. This indicates a higher risk of a negative price action on the token, and raises concerns about the confidence the project has in the token, since they aren’t backing it with anything.
e. Ask yourself: what happens if you try and liquidate that asset? If there is low liquidity, you won’t be able to actually sell the asset — rendering it worthless. This tweet from CZ illustrates that point.
6. Next, review the Liquidity Concentration section at the bottom of the Project View.
a. Take note of how many liquidity pools there are — ideally, projects should have fewer pools with deeper liquidity than many shallow ones.
b. If a project has more than one liquidity pool with less than $250k of EL in it, it receives a penalty towards its Liquidity Concentration score. It is better to grow one liquidity pool to a comfortable trading depth before splitting it off into two.
For example, if a project has $400k of EL in one pool, they should keep building that pool till they have at least $500k, at which they could consider bifurcating into two pools with $250k each, as a best practice.
c. Be mindful of invalid pairs. This is when a token pairs their token with another alt coin. That’s not true liquidity! Invalid pair liquidity is excluded from the Liquidity Concentration score.
Using Other Resources
7. Now that you have a solid understanding of the liquidity health, go ahead and dig into some other on chain metrics.
Pull up the smart contract view on the block explorer by clicking on the below link for the token:
From there go to the Token view:
Then navigate to the ‘Holders’ tab:
a. Look carefully: Are the top holders smart contracts, or wallets (externally owned accounts, or EOA for short)?
Smart contract addresses have this icon next to them:
If they are smart contracts, that’s likely a positive indicator. If you’re comfortable analyzing a smart contract, you can dig further into each contract to understand its purpose. Simply open the contract in a new tab, and click on the contract address again in the ‘filtered’ section.
From there, click on the contract tab. If the contract is verified (green check mark) navigate to the contract tab and see what the name is.
If the contract does not have a green check mark it means the contact is unverified and that is a red flag. Otherwise the contract will have a name which likely can clue you into what the purpose of the contract is.
If the top holders are externally owned accounts (EOAs), that’s also a negative indicator. Click into the EOA and try and understand what it is — if it looks like a random wallet, then it’s probably a random large holder of the token.
b. Consider the percentage of the total token supply that is held among the top ten holders of the token. If a high percentage is in a single EOA, that’s a negative indicator. Conversely, if a high percentage is in a smart contract, that’s generally a positive indicator. An evenly distributed concentration of the token between EOAs and smart contracts is generally neither negative nor positive. If you have a premium Bubblemaps subscription, you can look up any token and review their top holders in a similar fashion, as well as see the connections between wallets.
8. Pull up the project’s documentation and navigate to the tokenomics section. You should be able to see a vesting schedule somewhere.
a. Check to see if their whitepaper tokenomics match their on chain tokenomics. Find the day the token launched (which should roughly match the deployment date from the smart contract’s page on the applicable block explorer), and figure out if tokens should be vesting on chain.
For example, if the deployment date was a year ago, and the whitepaper says they have tokens vesting for three years, you should expect to see that on chain in the block explorer.
b. If there’s a mismatch between what the project is saying about their vesting and what the on chain data illustrates, that’s a negative indicator. Also, if tokens are supposed to be locked up, but they are not actually locked on chain, then the project can emit tokens whenever they want, or their whitepaper is out of date!
9. Pull up the project’s website (link is on the LHD).
a. Read through the info on the website and see if you can identify the purpose/utility of the token. If this is not easily accessible on the website, open up the documentation.
b. Find the current token utility — does the token have real demand, and can you actively use it for something that clearly has tangible value? Note that “utility” and “tangible value” are up for interpretation.
For example, a memecoin is likely not going to have real utility or tangible value, but that’s to be expected. If the only use case is governance, ask yourself about the value of governance, and if that seems like a strong enough utility. If the token ‘will be used for x’ in the future, that’s poor utility as it is nonexistent as of today.
A live product with tangible utility is a positive indicator. If it looks to be progression towards a live project or specific, tangible utility, that’s something to keep a close eye on. If the project has no live product with zero real (only promised) use cases for the token, that’s a negative indicator. We know that you don’t invest in memecoins for the utility, so buy at your own risk :)
10. Pull up the project’s social media accounts (links are on the LHD).
a. Do they post regularly? More than once a day is a positive indicator, although top projects usually post at least 3–4 times a day. If they post less often, that could indicate inactivity within the project and its community. If they post less than once a week, or haven’t posted anything in a long time, that’s a negative indicator.
b. Does their engagement (likes, retweets) seem in line with their follower count?
11. Find the project’s token emissions data to better understand their Return on Emissions (ROE), a new fundamental analysis ratio that ApeSwap has been using internally for over a year. Simply put, ROE measures the return on every $1 of tokens emitted.
a. How many tokens is the project emitting into circulation? What does the project’s token inflation rate look like? Go dig into where they emit tokens and why.
Are they incentivizing specific behavior by giving out tokens? This could be play to-earn rewards, liquidity mining rewards, or staking rewards.
b. Are there large token unlocks coming from investors? If there was a seed/private round in the tokenomics, check the vesting schedule and calculate if investor unlocks are coming. If you cannot see this on chain, ask the project to disclose their investor wallets or where those tokens are locked up. If a project is uncomfortable answering questions about their token emissions schedule, that’s a negative indicator!
c. How are those emissions being used? Projects should ALWAYS seek to get a tangible return on their token emissions. Many common crypto practices have a near zero ROE. After you understand where tokens are being emitted, then analyze the return on those emissions. Common token emissions to watch out for include:
i. Liquidity Mining / Yield Farming = 0% ROE.
ii. Staking the token to earn more of the token = 0% ROE.
iii. Giving the token out on the platform to incentivize a behavior = mixed ROE. You’ll need to dig into the tangible value received in return for every token given out. If the project does not receive a tangible return, then the ROE is likely near zero.
iv. Airdrops = typically near 0% ROE.
v. Marketing = mixed ROE.
Bringing It All Together
Projects with overall low liquidity profiles are inherently risky tokens to hold. If they have zero owned liquidity, that is also risky, and shows that the project does not want to back their own asset.
No live product and/or zero token utility indicates elevated risk in holding that token — if the price starts to decrease and users sell the token against limited liquidity, that decrease in price can start to accelerate.
If a project is lying in their whitepaper and not vesting on chain, then they have unlimited control over emissions and can inflate the token whenever they want, diluting your holdings, and decreasing the value of your tokens.
If a project doesn’t have tokens and liquidity locked or in a gnosis safe, that’s very risky. It’s easy to hack as it’s a honeypot in an EOA. Serious projects don’t do this.
If a project exhibits zero social media or community activity, it is possible that it is no longer being supported by the team and the risk of holding the token of that project is likely elevated.
Finally, if a project has low ROE expenditures, the project’s business model is likely unsustainable, and the risk of holding that token is likely elevated as a result.
At the end of the day, users should try to ensure that projects that have the proper amount of POL to support their token and the upcoming emissions. The project is not renting any liquidity and does not have any liquidity debt. All liquidity pools have at least $250k of EL in them and are valid pairs. POL is held in a locking contract or a gnosis safe so your holders can trust you on chain. Your tokens are locked up per your vesting schedule on chain. The token can be used for something right now.
Be sure to check the Liquidity Health Dashboard regularly to stay up to date on the liquidity profiles of your favorite projects and tokens!