The trouble with TVL

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TVL was once the DeFi sectors standard metric – not anymore

Back when DeFi was simple and MakerDAO was the only game in town, TVL – or Total Value Locked – was a meaningful performance metric. 

After all, to use MakerDAO, users would lock up their ETH and then generate a loan by minting a smaller amount of the DAI stablecoin. 

They were – literally – locking up their value.

In this manner, measuring TVL was a good measure of how valuable MakerDAO was as a decentralized financial instrument, and how much real-world value it was attracting into the blockchain ecosystem. 

Things didn’t remain simple for long, however. MakerDAO enabled multi-collateralization so users could deposit value other than just ETH (although loans remained limited to DAI), and then more complex financial dapps such as Compound and Aave launched.

These operated in a similar but different way to MakerDAO as users could lock in various tokens as a deposit and then take out loans in the same wide range of tokens.

This started to fragment the concept of TVL. 

Certainly, there was value was being locked into these dapps, but because a wide range of token types could be borrowed, users could then take these tokens and use – or recycle – them to lock up more value in other financial dapps.

Jon Jordan explains the Compound Dashboard and metrics used

Of course, previously users could have behaved in a similar manner with DAI, but there were far fewer opportunities to recycle their ‘locked value’.

Fast forward to 2020

Fast forward to a present dominated by hyperactive levels of circular trading encouraged by Yield Farming and the situation is looking untenable for this simple version of TVL. 

Users can now lock value into one dapp, take the output into another dapp (or back into the same dapp) and continue this recycling process multiple times, generating more value via the reward of tokens such as COMP and BAL. 

In this way, a principal of $100 originally deposited could easily result in over $200 of TVL being measured. 

Also, throw into the equation the fact that the TVL metric is typically recorded in USD and the USD price of ETH is up over 60% this month, and it becomes very clear that TVL – while still useful – is not as attached to reality as it originally was.

So what to do about it?

Clearly the first thing is for the industry to admit that we’ve been somewhat suckered into the overuse – even the glorification – of a metric, particularly given its current characteristic to fulfill our favorite meme – ‘number go up’.

Instead, we need to think about how the DeFi sector has radically changed in recent months and focus on a holistic approach that can encompass everything from user numbers to levels of composability and – yes – value as well. 

As the industry evolves there is a need for the metrics and data used to assess those protocols to change.

That is where our efforts at DappRadar, are currently engaged. In the coming days, weeks, and months we will be displaying not only a dedicated DeFi page on but also a host of deeper metrics such as those already available on our industry-leading Compound dashboard.

Access the Compound Dashboard and explore metrics outside TVL

It won’t be easy, but it will be more informative than what we currently have. As always, make sure to bookmark to stay relevant and sign up for our newsletter below to receive updates directly to your inbox.

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