Total Value Locked (TVL) – A Misleading Metric in DeFi

Total Value Locked (TVL) – A Misleading Metric in DeFi

Crypto News – Investors are constantly in pursuit of valuable metrics that can guide their financial decisions. In the realm of Decentralized Finance (DeFi), Total Value Locked (TVL) has emerged as the predominant measure for evaluating the health of an ecosystem. However, Tushar Jain, Managing Partner at Multicoin Capital, contends that TVL is not only an inadequate metric but can be detrimental when overemphasized.

Speaking on the Lightspeed podcast by Blockworks, Jain makes a compelling case against TVL, referring to it as a misleading and potentially harmful gauge. He argues that TVL provides a deceptive sense of precision, as it can be easily manipulated in numerous ways. In certain instances, TVL figures are inflated through multiple counting, where assets are deposited into one smart contract, yielding receipt tokens, which are then reinvested in subsequent contracts. This creates an artificial snowball effect, distorting the statistics.

One of Jain’s primary concerns is that TVL fails to consider the liquidity of assets. This oversight can lead to the creation of blockchain projects with seemingly high TVL, yet limited market impact. Jain warns against relying on TVL as a reliable metric for serious investors, asserting that it creates a false sense of confidence.

Jain concedes that TVL does possess a single advantage – its simplicity. Measuring TVL is straightforward; it only requires a query to generate a number. However, he emphasizes that investors should not settle for the easiest metric but rather focus on those that truly matter.

Jain proposes that the ultimate metric of significance is the level of innovation and user engagement within a blockchain ecosystem. He contends that the fundamental indicators of a blockchain’s success are the number of new projects being developed and the user interactions with these projects. TVL, he believes, is merely a derivative of these core activities.

For a blockchain to thrive, it needs to attract users who actively engage with assets and services on the platform. Whether users are participating in activities like HiveMapper mapping, rendering with GPU resources, or utilizing USDC payments, DeFi will flourish not solely due to a high TVL, but because it offers a cost-effective and convenient solution.

Jain concludes by urging the investment community to shift its focus away from TVL, emphasizing that it’s time to stop relying on this metric. He believes that the true essence of a blockchain’s success lies in the activities of its users and developers, not in artificially inflated TVL figures.