The value of 1 USD in TVL does not equal 1 USD. How are the market cap and TVL in the crypto market exaggerated?

DeFi analyst Ignas wrote "Cryptocurrency is a fascinating money printing machine", describing the situation where TVL benefits from the excessive issuance of new coins on public chains, stating, "We are creating currencies that even central banks would envy out of thin air."

Token Value Locked (TVL) Overestimation

Cryptocurrency Market Value Oversimplification

Ignas stated that he could issue a total of 1 billion tokens for a project and sell each token for $1, thus making the token market value reach $1 billion.

This is how market value is calculated, and TVL is similar. Even if no USD flows into the ecosystem, TVL can rapidly inflate due to the issuance and appreciation of tokens within the ecosystem.

How Does Issuing New Coins Double TVL on Public Chains?

Ignas pointed out that decentralized exchanges (DEX) in the DeFi space operate similarly to Uniswap's mechanism. When users provide liquidity for new coins, they need to provide 50% new coins and 50% ETH, USDT, etc.

Therefore, if there are attractive new coins listed on a public chain, a DEX only needs to prepare 50% of the assets to double the TVL.

With tokens such as $PYTH, $JUP, $DRIF, $JITO going live, exchanges like Orca and public chains like Solana will benefit from this.

DeFi Fraud Prevention: What Are Liquidity Pools? How Do They Operate?

Examining Asset Composition Ratios in TVL

Ignas warned that new coins may have high market value due to rapid surges but cannot be compared to hard assets like BTC, ETH, or SOL.

New coins have lower liquidity and are more prone to dropping to zero, which is why two DEX platforms with the same TVL may have vastly different real values. For example, DEX1 should be more valuable:

• DEX1: ETH/USDT trading pool with $1 million TVL

• DEX2: SHITCOIN/USDT trading pool with $1 million TVL

$1 in TVL ≠ $1

Ignas concluded that issuing new coins can quickly boost metrics like TVL and trading volume in the public chain ecosystem, but they also shrink the fastest in bear markets. For instance, Alameda's balance sheet saw this during the past bull market, significantly increasing SOL's valuation.

Solana is just one of the recent ecosystems introducing new coins, with others like Injective, Celestia, Kujira, and BRC20 on Bitcoin, as well as ecosystems like SEI, SUI, APTOS expanding similarly, as they all offer mainstream DeFi applications on Ethereum. Overall, $1 in TVL does not equal $1, and the proportion of hard assets should still be considered.

The founder of the indicative data platform DefiLlama, @0xngmi, promptly responded to Ignas, mentioning the removal of illiquid tokens to prevent erroneous inflation of TVL.

Ignas added that the speed of capital flow, such as the trading volume per dollar in TVL, should also be taken into account.