DeFi | What is TVL (Total Value Locked)? Is it the measure of success for DeFi?

"TVL is no longer the indicator of the DeFi industry." This is a statement put forward by the well-known Lithuanian Dapp data company Dapp Radar. The term TVL refers to Total Value Locked, which broadly refers to the value of digital assets that users have collateralized and locked in a DeFi platform. We often see headlines stating, "Total value of DeFi locked assets exceeds XX billion," to refer to the successful growth of DeFi.

For example, DeFi Pulse, a DeFi data website, uses TVL as a ranking metric in categories such as lending, decentralized exchanges (DEX), and derivatives. The website indicates that it refreshes the smart contract-locked digital assets of various DeFi platforms every hour.

In a previous feature titled "Which nationality loves DeFi the most?" the selection of samples was also based on TVL. However, according to the survey results, TVL does not necessarily correlate with website traffic. For example, the website visit numbers of Maker and Compound, Instadapp and dydx, are opposite to their TVL rankings.

So what should we pay attention to when using TVL as an indicator for DeFi?

Dapp Radar: TVL is no longer the measure of DeFi industry

Dapp Radar stated that when MakerDAO was the only application in DeFi, TVL was a significant performance indicator. After all, to use MakerDAO, one had to lock up ETH to borrow the stablecoin DAI, making it a tangible value lock. Therefore, TVL could be used to measure how much value MakerDAO attracted in the blockchain ecosystem.

According to Dapp Radar, after MakerDAO enabled various asset collaterals, users could deposit currencies other than ETH, but the interface typically only allowed borrowing DAI. Subsequently, more complex financial applications like Compound and Aave emerged, which operated similarly to MakerDAO but allowed borrowing a wider range of digital assets after locking different collaterals.

Dapp Radar believes this has fragmented the concept of TVL because these platforms have locked in some value, but users can use the borrowed tokens on other financial platforms to lock in even more value.

Previously, when only DAI could be borrowed, the operating space was very limited.

Liquidity mining prevails, making TVL insufficient

Dapp Radar stated that with the trend of liquidity mining in DeFi, cyclic trading has become highly active, rendering simple TVL inadequate for use.

For example, in the case of Compound, the process of repeated collateralization and borrowing to maximize COMP liquidity mining benefits easily drove TVL higher. Consequently, Compound showed that the locked DAI far exceeded the actual total circulation of DAI.

So are there other methods?

Dapp Radar naturally advertised its own website, which, in the DeFi category, offers user numbers, transaction volume, on-chain activity charts, and other indicators as more diverse ranking criteria.

What's interesting is that they have done more detailed data statistics (currently only for Compound), where they track which currencies were locked as collateral each month, how much was locked, and which currencies' loans were borrowed.

Regarding the leveraged repeated borrowing mentioned earlier, Dapp Radar seems to want to provide a more objective reference by using the usage status of "non-repeating addresses."

By using "non-repeating addresses" (defined by Dapp Radar as MAUW) to track Compound's suppliers and borrowers, it can be observed that the number of supplier addresses sharply decreased each month after peaking in June, almost returning to May levels by August. The number of borrower addresses also decreased, but not as drastically as the suppliers. (Note: Dapp Radar states that the number of non-repeating addresses does not necessarily represent the actual number of users.)

Whether this more detailed statistical method can accurately measure the success of DeFi remains to be seen, but it at least proves that TVL is no longer sufficient to grasp the true development of DeFi. However, people tend to like seeing rising numbers, and the steadily increasing ETH price has naturally inflated TVL significantly.