THELOGICALINDIAN - Investors application absolute amount bound to analyze DeFi protocols are application the amiss metric to appraise growth
Total amount locked (TVL) is the best accepted metric to clue DeFi and its agnate growth. There’s aloof one problem: It doesn’t administer to every protocol.
Here’s why crypto needs to acquisition an alternative.
One Metric Does Not Fit All of DeFi
Within the DeFi ecosystem, there are several sub-niches like DEXes, money markets, asset aggregators, and synthetic asset issuers. With so abundant variety, attempting to administer one, cookie-cutter metric to appraise success bound becomes problematic.
For an automated bazaar maker, TVL is the absolute bulk of clamminess accessible adjoin which traders can swap. But for a lending and borrowing marketplace, the metric represents the bulk of funds accessible to borrow.
Let’s appraise addition example.
If Aave is advanced of Compound in absolute amount locked, does that beggarly that it’s growing faster than Compound?
Compound currently has $1.64 billion of basic supplied, with $913 actor in borrowings. This implies a basic appliance amount of 55.5% and almost $730 actor of accumulation that can be broke by approaching borrowers.
Aave, however, has $1.3 billion in accumulation and $154 actor in alive borrowings, with a aberration of $1.15 billion accessible for borrowers.
Capital appliance on Aave is a bald 11.76%
Compound’s advance stems from liquidity mining, while Aave has accomplished success after any allusive badge incentive. Regardless of whether the advance is induced by crop farming, Compound’s numbers affirmation it has a beyond and added activated bazaar than Aave.
Essentially, if Compound has $100 billion in accumulation and $99 billion was taken by borrowers, but Aave has $10 billion in accumulation and borrowers activated $ 1 billion, TVL would still rank Aave aloft Compound.
The TVL metric penalizes Compound for accepting added accommodation originations – the primary use case of the platform. This is affiliated to adage one coffer is bigger than the added because it has issued beneath loans and appropriately has added clamminess to baby to approaching borrowers.
With Synthetix, TVL is the artefact of SNX staked in the agreement and the bazaar amount of SNX.
If action on Synthetix was stagnant, but the bulk of SNX rose by 30%, TVL would additionally access by 30%, bold the bulk of SNX staked remained the same. Similarly, if the allotment of SNX staked decreased, TVL would abatement by a agnate figure.
Growth in the Synthetix agreement is not primarily bent by how abundant accessory is in the ecosystem, but rather the bulk of synths that accept been minted and trading aggregate on the exchange.
While accessory bound is capital because it inherently increases the bulk of synths that can be issued, TVL is the amiss metric to clue advance and acceptance of the protocol.
For automatic bazaar makers like Uniswap, Curve, and Balancer, TVL measures the bulk of clamminess traders can utilize. While this is important, it does not inherently admeasurement amount created.
TokenTerminal shows annualized acquirement (based on the aftermost 30 days) for Uniswap at $111 actor against $30.8 actor for Balancer. This is admitting Balancer accepting 33% added TVL than Uniswap.
Further, clamminess aggregators, like Kyber Network that are active into a ample cardinal of DeFi dApps, draw clamminess from these sources, so the clamminess isn’t bound in the protocol.
But Kyber commonly facilitates added aggregate and generates added acquirement than Bancor, whose TVL is 3x that of Kyber.
On a absolute note, TVL does characterize agreement advance in a few abandoned cases.
Asset aggregators like yEarn Finance are a prime example. YFI holders abduction a fee from yVault investors back they exit, so the project’s acquirement breeze and TVL are anon correlated. Still, there are alone a few DeFi primitives can abduction amount from TVL.
Synthetix badge holders are adored with fee assets back there is added trading aggregate on the protocol, and Aave’s stakers are issued fees becoming by the agreement similarly.
The basal band is that TVL is extraneous unless it indicates advance and amount capture.
Potential Alternatives
Instead of TVL, application a added common banking metric, like revenue, offers abundant added clarity.
All protocols accomplish revenue, whether for badge holders, validators, or added participants. The absolute acquirement a agreement generates is a absolute indicator of how abundant amount it is creating for people.
For about valuations, one can about-face to the amount to sales ratio, which is the token’s bazaar cap disconnected by annualized revenue.
Whether one should use the accepted bazaar cap or absolutely adulterated is addition aspect to consider. But alike this varies from broker to investor.
Despite the aloft evaluation, the TVL metric can still be acclimated to evaluate liquidity in an AMM or accessory from which clamminess can be generated for a constructed asset arising platform.
When acclimated carelessly, however, TVL fails to action an authentic representation of advance in a DeFi protocol. And until an another emerges, users should booty amount bound in with a ample atom of salt.
