Total Value Locked: Measuring DeFi growth correctly

Total Value Locked: Measuring DeFi growth correctly

Decentralised Finance (DeFi) has provided users with new avenues to enhance returns on their holdings. By locking their crypto assets into various protocols, they can earn rewards, generate interest, or access liquidity for various crypto-related activities. This can be measured by the so-called Total Value Locked (TVL), a key metric to measure the amount of crypto assets locked into blockchains over time. But it can sometimes be misinterpreted.

What is TVL?

Total Value Locked (TVL) represents the aggregate value of all crypto assets held (or locked) within a DeFi protocol for a certain period of time. In return, these tokens generate utility and economic activity for users, like staking rewards, lending, borrowing, and insurance options, to name a few.

There is a collegial incentive to lock up tokens. For users, the more tokens locked, the more rewards they can accrue. For the protocol, the more tokens locked, the more usable and secure its ecosystem becomes.

A valuable benchmark for DeFi

As a metric, TVL holds significant importance in understanding the overall health of the DeFi ecosystem. It serves as a quantitative confidence indicator, reflecting the level of trust and reliability in each protocol. Here’s a few factors to consider:

  • Adoption and trust: TVL serves as a key metric for measuring the adoption rates of DeFi protocols, and by extension, the DeFi ecosystem. Higher TVL levels may indicate a growing user base, and the success and popularity of the protocol. By observing TVL over time, investors can also measure the level of trust, as a higher TVL may indicate a greater belief and support in the protocol’s functionality.
  • Liquidity and proceeds: TVL can help assess liquidity levels (together with slippage) within the ecosystem. Higher liquidity means better yields, as well as improved trading, swapping, borrowing, and lending opportunities for users. TVL in crypto bridges can also illustrate the amount of crypto flowing out of protocols and onto target blockchains (like Ether outflows to L1 competitors and L2 scaling solutions), and vice versa.
  • Performance and security: Monitoring TVL allows users to track the performance of protocols over time. This can also be helpful to identify the level of security for various Proof-of-Stake (PoS) blockchains.
  • Comparative analysis: Comparing TVL allows users to assess the quality of different protocols. For instance, by comparing the growth rates between novel and established ones, and TVL-to-circulating supply ratios.

Today, there are over USD 70 billion worth of crypto assets locked in over 1800 DeFi protocols, ranging from staking, lending to liquidity applications. For instance, popular Ether staking provider Lido Finance has over USD 14.15 billion worth of staking deposits locked on its platform, which accounts for almost 20 percent of the entire DeFi TVL market share. Other notable protocols like Aave (USD 8.61 billion), MakerDAO (USD 6.31 billion) and Curve (USD 6.32 billion) also hold a large proportion of the market share.

Ethereum Layer 2 (L2) rollups are gaining traction, with TVL figures experiencing an impressive 300 percent growth since the beginning of the year. The current TVL across all rollups stands at USD 9.73 billion (ETH 5.14 million). Arbitrum One holds over 60 percent of the market share with a TVL of USD 5.89 billion. Optimism follows with USD 2.32 billion, while the recently launched zkSync Era has reached USD 584 million, showing similar growth.

Avoiding TVL as a vanity metric – token amounts and other growth indicators

Considering the price volatility of cryptocurrencies, relying solely on fiat-denominated TVL can be misleading at times. This is an important aspect for users to consider when evaluating protocol growth, as the fluctuating nature of Bitcoin and Ether can lead to significant price changes that may obscure other critical growth indicators. Furthermore, it can also be used as a marketing instrument to inflate a protocol’s real value or as a means to exaggerate the impact of various market events – both positive and negative. In other words, TVL in USD is simply a vanity metric.

Below you will find an example of the TVL in Cardano, where during periods of price decline, the USD-denominated TVL decreases, but the amount of ADA tokens locked (Cardano’s native currency) continues to rise. This actually suggests growing user confidence and activity, as the rise in locked ADA tokens now outpaces the increase in ADA’s dollar value. Now, if both the TVL in ADA and USD declined simultaneously, this would indicate a more negative scenario.

Total Value Locked
Source: DeFiLlama, Cardano’s TVL in USD vs. ADA

That said, using fiat-denominated measurements alone may fail to capture other valuable metrics that are key to determining its long-term success. These metrics include things like user activity, the amount of crypto tokens locked, transaction count and unique wallet addresses interacting with the protocol.

Consider a scenario where Ether’s (ETH) dollar value drops by 50 percent, which means the USD-denominated TVL on a DeFi protocol will also decrease by the same USD amount. However, the protocol could still be growing, performing well, and increasing in other areas, regardless of price decline. A protocol should still be considered a high-potential prospect if:

  • The total number of crypto tokens locked continues to rise
  • The total number of processed transactions continues to rise
  • The creation of new wallet addresses and smart contracts interacting with the protocol continues to rise
  • Trading and transfer volumes (measured in the crypto tokens) continues to rise

A great example to illustrate this discrepancy can be seen when comparing the value of ETH staking deposits in ETH vs in USD. In short, there was a noticeable drop in the USD value, but the number of new staking deposits continues to rise.

Source: Sygnum Bank, Data: Glassnode

Despite Ether’s current price (USD 1,917) being well below its previous all-time high (USD 4,878) back in November 2021, the recent surge in staking deposits implies that its USD-denominated value “should” be considerably higher, especially in the event of a new market rally or recovery.

By shifting focus on the actual token amounts, users can prioritise more reliable metrics that offer a clearer assessment of a protocol’s overall progress and performance.

Factoring out the price effect can also be done by something called adjusted TVL, which fixes all assets in a protocol at their price from 90 days before. This means that any growth or loss in this adjusted TVL value is solely dependent on the token balance totals (inflow or outflow of assets). Still, it is important to couple this with other relevant metrics to gain a more accurate picture of overall performance.

The underlying trend

With an increasing number of new investment options, interoperability features and product launches, DeFi will continue to attract users to its doors. And, with the Bitcoin halving and Ethereum’s “Surge” upgrade approaching, there are strong (historical) signs indicating that the bearish market environment may slowly begin to fade, with the possibility that an even greater acceleration and influx of activity will reach DeFi and the broader crypto ecosystem.

That being said, integrating the right monitoring strategies will be vital to identifying and selecting the best-of-class protocols. This should also lead to less volatility and may address sentiment-biased swing that would otherwise distort the picture of the underlying, long-term trend.

Of course, the speed and scale of this transition also hinge on the alignment of regulatory compliance needs with the DeFi ecosystem, and the ability of various protocols to adapt and accommodate these requirements accordingly.


Disclaimer: The information in this publication pertaining to Sygnum Bank AG (“Sygnum”) is for general information purposes only, as per date of publication, and should not be considered exhaustive. This publication does not consider the financial situation of any natural or legal person, nor does it provide any tax, legal or investment advice. This publication does not constitute any advice or recommendation, an offer or invitation by or on behalf of Sygnum to purchase or sell any assets. No elements of precontractual or contractual relationship are intended. While the information is believed to be from accurate and reliable sources, Sygnum makes no representation or warranties, expressed or implied, as to the accuracy of the information. Sygnum expressly disclaims any and all liability that may be based on such information, omissions, or errors thereof. Any statements contained in this publication attributed to a third party represent Sygnum‘s interpretation of the data, information and/or opinions provided by that third party either publicly or through a subscription service, and such use and interpretation have not been reviewed by the third party. Sygnum reserves the right to amend or replace the information, in part or entirely, at any time, and without any obligation to notify the recipient of such amendment / replacement or to provide the recipient with access to the information. Simultaneously, there is no obligation of Sygnum to inform recipients of information, if before provided information later becomes outdated, inaccurate or obsolete, unless otherwise provided by applicable law. The information provided is not intended for use by or distributed to any individual or legal entity in any jurisdiction or country where such distribution, publication or use would be contrary to the law or regulatory provisions or in which Sygnum does not hold the necessary registration, approval authorisation or license. Except as otherwise provided by Sygnum, it is not allowed to modify, copy, distribute or reproduce, display, license, or otherwise use any content for commercial purposes.

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