Fundamental growth is not so impressive when you factor out the bull run.
A new metric published by DappRadar wants to paint a more reliable picture of how the decentralized finance ecosystem is growing.
Called “Adjusted TVL,” the metric attempts to clean total value locked readings from any external influence — primarily price increases.
Total value locked is often considered a measure of the popularity of a DeFi protocol and the sector as a whole. However, measuring it in U.S. dollars means that any token price increase will also drive TVL up — even though no new assets were committed to the protocol. Researchers noted that while this may inflate the metric in bull markets, it would also underestimate it unfairly during bear cycles.
DeFi statistics website Defipulse allows viewing the amount of Ether (ETH), Bitcoin (BTC) and Dai (DAI) locked in a protocol, but this fails to take into account any other asset that may contribute to the metric. On Aave, for example, the majority of the value locked is made of LEND, Chainlink (LINK), and centralized stablecoins like TUSD and USDC.
DappRadar’s adjusted TVL fixes all assets in a protocol at their price from 90 days before. Any growth or loss in this adjusted value in a 90 day period can thus only come from net flows of assets, and not their price change.
Adjusted TVL paints a slightly less optimistic picture than a face-value reading would suggest. Out of the $7.3 billion in nominal TVL, adjusted TVL only accounts for $3.9 billion. This suggests that the remaining $3.4 billion simply came from price rallies of existing assets in the last three months.
On a project-by-project view, the protocol with the least discrepancy between adjusted and nominal TVL is Curve, a stablecoin-focused exchange. Nevertheless, a discrepancy of 15% still exists, likely explained by another category of Curve pools — swaps between different wrapped versions of Bitcoin and Ethereum.
Maker and Aave have a discrepancy of about 30% each due to their reliance on Ether and other tokens. By far the highest discrepancies can be seen on Synthetix and mStable. The former counts $108 million in adjusted TVL compared to a nominal figure of $931 million. The latter’s proportion is $900,000 to $50 million.
Adjusting for price growth can help put DeFi’s expansion into perspective. While the total amount of assets flowing into the sector has indeed grown, it was much less than raw numbers would suggest.
Some argued that the prevalence of the TVL metric helps drive prices up as well, based on the misconception that it signifies growing popularity. Examples like Synthetix and mStable suggest that the price growth of their native tokens drove the vast majority of their TVL increase, which could be the result of a positive feedback loop.
But even discounting price growth does not necessarily mean that adjusted TVL paints a completely fair picture of protocol popularity and fundamentals. In the case of Compound, Curve and others, for example, new assets may come in solely for the purpose of yield farming their tokens.
From a fundamental standpoint these assets are also inflating true TVL, as without the token distribution, the assets would likely leave the protocol en masse.
Ilya Abugov, project manager at DappRadar, told Cointelegraph that “one metric is insufficient to describe what is happening in the industry.”
The website also features a Unique Active Wallets category, which paints a fuller picture of how many wallets — and most likely people — are using a protocol at a specific point in time. But the adjusted TVL is not the end of the story, he said: “We will continue to expand our suite [so] that the community may have a more complete picture of the state of events in the sector.”
