The rapid growth of the DeFi industry How to avoid misleading TVL indicators

With the DeFi industry driving the current boom in the crypto industry, TVL has almost become an iconic indicator. The headlines were filled with mind-boggling numbers: $4 billion, $6 billion, $7 billion, and it felt like new records were being broken every week.

This metric is used to highlight the growth of the DeFi space, but it may grossly overstate the rate of growth. In a bull market, it exaggerates asset growth, and in a bear market it exaggerates asset outflows. When the impact of rising prices is taken out of the equation, the true picture of the market will show itself.

TVL (i.e. Total Value Locked) measures how much money has emerged in a project's smart contract, similar to deposits and reserves in traditional industries. Its metric is TVL = A * P, which is the number of tokens multiplied by the current price of those tokens.

Crypto.com DeFi Wallet has launched SPA, USDs and other tokens: According to official news, the cryptocurrency exchange Crypto.com has listed Sperax (SPA), Sperax USD (USDs) and other Arbitrum ecological project tokens on its DeFi Wallet, as well as Dai (DAI), Tether (USDT) and other stable coins. [2022/6/18 4:36:42]

Therefore, we can easily imagine a situation when the number of tokens remains the same or even decreases, but the TVL increases due to the price increase. That's why this metric can be so misleading.

Goldman Sachs applied to the US SEC to launch DeFi and blockchain stock ETFs: Jinse Finance reported that the investment banking giant Goldman Sachs has submitted an application for an exchange-traded fund (ETF) to the US Securities and Exchange Commission, called "Goldman Sachs Innovation DeFi and Blockchain" Blockchain Stock ETF”, which will provide exposure to decentralized finance (DeFi) and blockchain listed companies. The document states that the fund will invest at least 80 percent of its assets in companies advancing blockchain technology and financial digitization. [2021/7/27 1:17:12]

CoinW will launch YAMV3 in the DeFi zone at 16:00 on October 13: According to official news, CoinW will launch the YAMV3/USDT trading pair in the DeFi zone at 16:00 on October 13.

It is reported that the core of YAM is an elastic supply cryptocurrency that can expand and contract supply according to market conditions. In the future, yam.fiance will completely manage the community by YAM holders. Coin holders can migrate from YAMV2 to YAMV3, and YAMV3 will be a standard ERC-20 token. [2020/10/13]

Take Ethereum as an example. It is accepted as collateral by many DeFi dapps and accounts for a significant portion of their TVL. In the past 90 days, the price of Ethereum has increased significantly.

This in turn is reflected in the TVL of the projects that accept it. So is the increase in TVL the result of increased activity, or is it a reflection of surging prices?

To get a clearer picture, we can lock in the price from 90 days ago. This reveals that the change of TVL depends entirely on the total balance, which paints a more realistic picture of dynamic evolution.

Consider the difference between TVL and adjusted TVL. TVL still shows growth, but not as steeply as before. In fact, around 45% of the TVL growth can be attributed to price changes.

Of the top five dapps in the TVL ranking, only Curve showed relatively similar values between its pre-adjustment TVL and adjusted TVL, and even then, price changes accounted for nearly 15% of the increase.

For Synthetix, price movements accounted for more than 80% of the growth. These differences highlight the misleading nature of the TVL metric itself.

It is important to consider the implications of adjusted TVL for industry analysis. It reveals the true state of growth and, combined with relevant metrics, can accurately describe the state of activity in the ecosystem.

For example, as can be seen from the chart, UAW (active unique wallets) growth has been stagnant since mid-August. Coupled with the slowing growth rate of TVL, this shows a very different perspective on the development of DeFi.

Additionally, understanding the impact of price changes on project assets is critical for risk analysis. For example, for a project like Uniswap, the TVL consists of assets in the liquidity pool. During price spikes, this value can grow so rapidly that it can even mislead users into false expectations about asset inflows and available liquidity.

A growing market spurs development efforts. Many projects have raised or are in the process of raising funds for their DeFi sector. However, if expectations for market growth are based on pre-adjusted TVL, there may be a serious disconnect with actual actual demand.

That's not to say that DeFi isn't growing at an incredible rate. Adjusted TVL has tripled over the past 90 days. However, the impact of pre-adjustment TVL price changes, the data itself misinterprets the actual growth rate and even contributes to its frothy growth.

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